C&B Notes

Keynes The Investor

John Maynard Keynes’ success through a turbulent market environment brought to mind a Bill Bernstein quote we saw recently: “[An investor] must have patience, cash, and courage — in that order.”

The next time the stock market crashes, we will all step forward and buy stocks boldly — at least in our imaginations.  But buying stocks when the market collapses is far harder to do than to imagine. New research looks at how the great economist — and equally great investor — John Maynard Keynes waded into the wake of the Great Crash of 1929, when U.S. stocks fell by more than 80% from peak to trough.  His experience should teach all investors the importance of preparation, courage and patience.  Between the early 1920s and his death in 1946, Keynes wrote several books, revolutionized economic policy and helped devise the modern global monetary system.  In his spare time, he managed the endowment of King’s College at the University of Cambridge.  From 1922 through 1946, Keynes’ stock portfolio outperformed the U.K. stock market by an average of nearly six percentage points annually — over a period covering the worst market crash, the worst economic depression and the worst war in modern history.

Keynes didn’t look like a great investor all the time.  As what we today call a value investor, focused on buying stocks at bargain prices, he got left behind in the torrid bull market of the 1920s.  Keynes didn’t see the Great Depression coming; he went into the Crash of 1929 with roughly 90% of the college’s funds in stocks even though, at the time, most other endowments overwhelmingly preferred bonds.  By late 1929 Keynes had cumulatively underperformed the British stock market by 40 percentage points over the preceding five years.  But he was already turning his performance around.

In a new research paper in Business History Review, an academic journal, finance professor David Chambers of Cambridge’s Judge Business School and economist Ali Kabiri of the University of Buckingham analyze how Keynes mustered the courage to invest heavily in U.S. stocks devastated by the crash and the ensuing depression.  Keynes had almost entirely ignored U.S. stocks in the college’s endowment until September 1930.  What a time to get interested!  The U.S. stock market had fallen 38.4% over the preceding 12 months.  But Keynes was so excited by the bargains he saw opening up in the U.S. that he worked with a small New York brokerage, Case Pomeroy & Co., to research the market and his own stock ideas.  In 1931, when U.S. stocks fell a bloodcurdling 47.1%, and again in 1934, when they dropped another 5.9%, Keynes traveled to the U.S., spending much of his time meeting people on Wall Street, in government and in business who could help him research his investment ideas.

He bought U.S. stocks throughout the depression.  When they fell another 38.6% in 1937, Keynes, undaunted, bought still more.  By 1939, he had put half his main portfolio for the college in U.S. companies, favoring high-dividend-paying preferred stocks, investment trusts (diversified stock portfolios similar to today’s mutual funds) and, later on, public utilities.  He focused on a small number of stocks trading at low multiples of their value as businesses, often hanging on for eight years or more until their stock prices finally rose to reflect those asset values.

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