Today, John Maynard Keynes is best known as an economist. His leading economic theory argued that governments should act as a backstop for economies in times of crisis, increasing spending to stimulate demand and pull an economy out of the depression. Over the past few decades, this way of thinking has clearly gained traction.
Economic theory
Keynes developed his theory after the Great Depression in the 1930s, but governments have only really just now started taking notice.
Over the past 12 months, the world has experienced some of the most extensive government economic stimulus plans in history. They've been far more extensive than the stimulus plans introduced after the financial crisis. This is precisely what Keynes argued for nearly a century ago.
Investing
However, economics is not the topic of this article. As well as being an economist, Keynes was also an investor, diplomat, philosopher, mathematician, politician and avid supporter of literacy, theatrical and art societies.
If one had to compare him to a modern-day figure, he had many similar traits to Charlie Munger (Trades, Portfolio) in my view, although he was perhaps more interested in art and politics.
Keynes' investing career might not be as well known as that of Benjamin Graham, but one could argue he was the British version of this legendary American investor. He developed an investment strategy based on the principle of buying stocks cheaply in the 1930's. Even though Graham was practicing the same technique simultaneously, it's widely believed Keynes developed his investment style independently.
Between 1921 and 1946, Keynes's investment portfolio returned 14.4% per annum compared to a return of 9% per annum for the UK stock market over the same period.
Unproductive noise
The investor's strategy was based on his economic and political ideas. Keynes believed that most of the activity on the stock market was nothing more than unproductive noise.
He argued that to stop excessive stock trading, which did nothing but transfer wealth from one individual to another without creating any tangible benefit, was to introduce a transfer tax on all transactions.
However, he also believed that some level of stock market activity was essential for companies to raise capital:
"The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage…might be a useful remedy of our contemporary evils. For this would force the investor to direct his mind to the long term prospects..."
These principles lead Keynes to the conclusion that investors should seek out only the best companies, hold them for extended periods and ignore market noise.
According to a document laying out his investment principles in 1938, the economist's strategy was based on three core ideas:
- A careful selection of a few investments,
- A steadfast holding of these in fairly large units through thick and thin,
- A balanced investment position.
Between 1930 and 1939, Keynes had 21% of his assets invested in just one stock. The turnover in his portfolio between 1940 and 1946 was just 14%. In 1934 he summed up his investment style as follows:
"As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprise which one thinks one knows something about and in the management of which one thoroughly believes."
I think it's a mistake to overlook Keynes' success as an investor. His investment style is incredibly similar to the style other investors have used with great success.
His success is also a fantastic example of how a multidisciplinary approach can produce differentiated results as the investor's stock market strategy was designed around his economic and political principles.
Disclosure: The author owns no share mentioned.
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
