I recently read the book Keynes and the Market, by Justyn Walsh. My personal view of Keynes is that he was a rare genius, and that if he were alive today, the facts having changed, he would hold a somewhat different set of views on the economy than most of today's self-described Keynsians. That's not to say that he had everything right about the depression, but he consistently took on the hardest problems of his time and always moved the ball down the field. Besides, if the Europeans had listened to Keynes about Versailles, there most likely would not have been a great depression.
Walsh's book is extremely well written and provides a pleasant overview of Keynes' life and career as an economist and government official, in addition to a credible account of his exploits as an investor. Keynes made and lost a couple of fortunes as a speculator trying to guess the mind of the market before turning to what is now described as the value approach. After his conversion, Keynes was able to multiply the 8,000 British pounds in net assets he held in 1929 to more than 500,000 pounds in 1936. Many of his friends, associates, enemies and admirers were stunned to learn the size of his estate on his death in 1946. Keynes' six key investment principles are presented on page 164 of Walsh's book. Some of these are paraphrased but I think that they capture the essence of the principles:
1. Focus on intrinsic value, which is derived from earnings power value (EPV), and not on market trends.
2. Look for investments that have a margin of safety. The book does not mention if it is known whether Keynes studied Ben Graham's early work, but Keyne's clearly looked for stocks that were significantly undervalued.
3. Use independent judgement, even if you have to be contrarian.
4. Limit transactions costs and turnover.
5. Run a concentrated portfolio, focused on what Keyne's called "stunners."
6. Maintain the appropriate temperament by balancing "equanimity and patience" with the ability to act decisively. On this last one, Charlie Munger could not have said it better.
Here is a revealing quote from Keynes:
"It is the long-term investor, he who most promotes the public interest, who will in practice come in for the most criticism, wherever investment funds are managed by committees or boards or banks. For it is in the essence of his behavior that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy."
This quote illustrates some of the practical difficulties in operating like a value investor, which explains why relatively few individuals who control significant pools of money are able to use the value approach, which explains in part why the rewards available from the value approach have not been and are unlikely to ever be competed away.
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I am an individual investor who occasionally shares opinions about investments and other matters on the internet. I am not a registered investment adviser or investment adviser representative. I did pass the series 65 exam in 2011, but I have never been registered as an investment adviser or investment adviser representative in any jurisdiction. I will not respond to any inquiries about investment management services. Nothing posted on this blog should be interpreted as actionable investment advice, financial planning advice, tax advice, or legal advice. I do not derive or seek to derive any income from my blogging activities. This blog is intended solely for the entertainment of the reader, and the author.
Walsh's book is extremely well written and provides a pleasant overview of Keynes' life and career as an economist and government official, in addition to a credible account of his exploits as an investor. Keynes made and lost a couple of fortunes as a speculator trying to guess the mind of the market before turning to what is now described as the value approach. After his conversion, Keynes was able to multiply the 8,000 British pounds in net assets he held in 1929 to more than 500,000 pounds in 1936. Many of his friends, associates, enemies and admirers were stunned to learn the size of his estate on his death in 1946. Keynes' six key investment principles are presented on page 164 of Walsh's book. Some of these are paraphrased but I think that they capture the essence of the principles:
1. Focus on intrinsic value, which is derived from earnings power value (EPV), and not on market trends.
2. Look for investments that have a margin of safety. The book does not mention if it is known whether Keynes studied Ben Graham's early work, but Keyne's clearly looked for stocks that were significantly undervalued.
3. Use independent judgement, even if you have to be contrarian.
4. Limit transactions costs and turnover.
5. Run a concentrated portfolio, focused on what Keyne's called "stunners."
6. Maintain the appropriate temperament by balancing "equanimity and patience" with the ability to act decisively. On this last one, Charlie Munger could not have said it better.
Here is a revealing quote from Keynes:
"It is the long-term investor, he who most promotes the public interest, who will in practice come in for the most criticism, wherever investment funds are managed by committees or boards or banks. For it is in the essence of his behavior that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy."
This quote illustrates some of the practical difficulties in operating like a value investor, which explains why relatively few individuals who control significant pools of money are able to use the value approach, which explains in part why the rewards available from the value approach have not been and are unlikely to ever be competed away.
******************************************************************************************************************
I am an individual investor who occasionally shares opinions about investments and other matters on the internet. I am not a registered investment adviser or investment adviser representative. I did pass the series 65 exam in 2011, but I have never been registered as an investment adviser or investment adviser representative in any jurisdiction. I will not respond to any inquiries about investment management services. Nothing posted on this blog should be interpreted as actionable investment advice, financial planning advice, tax advice, or legal advice. I do not derive or seek to derive any income from my blogging activities. This blog is intended solely for the entertainment of the reader, and the author.
