What Keynes Can Teach You About The Stock Market – ValueWalk Premium
John Maynard Keynes

What Keynes Can Teach You About The Stock Market

Many people are familiar with John Maynard Keynes – the famous economist for his contributions to economics.

Q1 hedge fund letters, conference, scoops etc

John Maynard Keynes

What is little known is that Keynes had plenty of ups and downs as an investor. Early on in his career, he was an active global trader that actively leveraged his portfolio.

Unfortunately, his brilliance in economics did not translate to his early investing activities. He discovered first-hand the difficulty of timing the market when the market crashed in 1929.

He was close to being wiped out multiple times and had to be bailed out by his parents at one point.

Thereafter, he changed his approach abandoning the previous top-down approach in favour of a bottom-up stock picking approach

The evolution to buy and hold investing

He explained in a letter dated 1934 to the chairman of Provincial Insurance:

“As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about.

There are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence.”

He went on to manage the investment portfolio for Kings College (Cambridge) utilizing the same approach and shifted the asset allocation of the college from real estate into equities.

He traded far less and annual turnover in the portfolio dropped over the decades.

Interestingly enough Keynes was a global investor with the international portfolio reaching up to 75% portfolio in the mid 1930s, an incredible figure considering this was the 1930s.

His results were impressive, and he was able to deliver a return in excess of +16% annually vs the UK market (where he was living) which returned +10% annually during same time period.

The dangers of market timing

One of the things I like Keynes reflected on after decades of experiences in the market was the sheer difficulty in timing the market.

In his own words

“[Earlier] I believed that profits could be made by… holding shares in slumps and disposing of them in booms.

But there have been two occasions when the whole body of our holding of such investments has depreciated by 20 to 25 per cent within a few months and we have not been able to escape the movement.

As a result of these experiences, I am clear that the idea of wholesale shifts is for various reasons impractical and indeed undesirable.

Most of those who attempt it sell too late and buy too late, and do both too often, incurring heavy expenses and developing too unsettled and speculative a state of mind.

My Own Thoughts

The stock market tends to draw out the gambling instinct in many investors who consistently try to weave in and out of the market to catch the lows or highs.

And yet such active trading puts investors a bad mental state when they should be thinking like long term investors. Many investors fail to reap the returns of the stock market because of this mentality.

In the worst case, they have suffered huge losses in wealth when they get margin called during sudden sharp downturns.

The right way to invest in stocks is the same way you would invest in property. Focus on the right fundamental reasons and hold for the long term.

Article by Jun Hao, The Asia Report


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