John M. Keynes is known for being a groundbreaking economist, but few know that he was also a talented value investor.
He achieved an average return of 12% per year from 1927 to 1947, which is an impressive performance considering that the overall stock market declined by 15 percent during those years.
It was a period in history marked by the crash of 1929, the Great Depression of the 1930s, and a world war. Despite these challenges, Keynes managed to achieve phenomenal returns.
Before 1929, he was a macro speculator, always trying to figure out if the market was moving up or down. He did suffer losses during the big crash – losses that led him to transform his investment approach.
He shifted his focus from speculating on overall market trends to analyzing the businesses he invested in.
Keynes lost 80% of his personal wealth after the 1929 crash but learned a valuable lesson from it. He realized that attempting to predict market trends as a whole was too difficult because the market is inherently unpredictable and capricious.
Once he understood this, he changed his investment philosophy and transformed his personal wealth, as well as the fund he managed.
Keynes Became a Value Investor
When he died, he left behind $30 million (adjusted for today’s value). He neither inherited anything nor received payment during the last six years of his life. He sponsored art and different events.
The Financial Times commented on his death:
“Some surprise has been expressed about the large fortune left by Lord Keynes. Yet Lord Keynes was one of the few economists with the practical ability to make money.”
In addition to his personal wealth, he managed the Cambridge King’s College Chest Fund, which achieved an average return of 12% annually during that period.
How did he do it?
The following quote summarizes his investment style well:
“My purpose is to buy securities where I am satisfied as to assets and ultimate earnings power, and where the market price seems cheap in relation to these,” Keynes said.
Well, hello. That’s the essence of value investing.
In a memorandum from May 1938, he summarized his own investment philosophy.
Here are the three pillars of his style:
1. Careful selection
He carefully selected a few investments, considering whether they were cheap relative to both the current intrinsic value and the potential intrinsic value in the future. He also compared each investment to alternatives.
In other words, he only bought stocks when the company’s actual value (intrinsic value) was significantly higher than the stock market price.
2. Holding on steadfast
Keynes was a patient long-term investor.
Stocks sometimes crash, and Keynes learned to remain calm in the face of such situations.
As he famously said, “The markets are moved by animal spirits, not reason.”
After 1929, he understood that there was no logic to how high stocks could rise or how deep they could fall.
This is because the stock market behaves irrationally at times, driven by greed or fear. As an investor, you need to endure these fluctuations and hold onto your investments based on reason.
“I should say it is from time to time the duty of a serious investor to accept the depreciation of his holdings with equanimity and without reproaching himself,” Keynes said.
3. Portfolio balancing
Keynes had a few large investments, but they were well balanced against each other, exposing him to different types of risks.
He invested internationally, leaned towards mid-cap and small-cap stocks and avoided technology IPOs (at that time, technology typically referred to the automobile industry).
After 1930, he typically held positions for at least three years (you can read about this in the essay “Keynes the Stock Market Investor” by David Chambers and Elroy Dimson, which you can find online).
He was sometimes criticized for having too few and large positions.
To this, he apologized with the sarcastic response, “I was suffering from a chronic delusion that one good share is safer than 10 bad ones.”
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