I recently read the research paper “Keynes the Stock Market Investor.” It’s worth a read. Keynes is a legend and Chapter 12 of Keynes’General Theory is one of the most important passages in the history of investment. The funny thing is he was awful at the beginning of his trading career. According to the paper, his alpha was 7.74% from 1922 to 1946; nothing to sneeze at, but really? I would think the Great Keynes could do better than that. He was 83% long going into The Great Crash (1929) and got crushed. Where did he make his alpha? He loaded up 2/3 of his portfolio in gold mining stocks starting in 1933…when FDR took the U.S. off the gold standard. Obviously, Keynes was in cahoots with FDR and the former had always pushed for the end of the gold standard. In late 1933, Keynes wrote “An Open Letter to President Roosevelt” to push FDR to enter the gold markets, which he did, and Keynes made a killing on his mining positions. Before this period, his returns were atrocious. Insider trading, per se, did not exist in the way it does today and he made most of his money from knowing FDR and his plan to push up the price of gold. He was a much better writer, thinker, and pioneer than he was a speculator.
Here are some highlights from the paper:
Having started out as a strategic macro manager, we show that Keynes changed into a bottom-up stock picker in the early 1930s, from which point his purchases of his long-term holdings began to outperform the market on a consistent basis.
When an undergraduate, he had written in 1905 to his friend, Lytton Strachey, "I want to manage a railway or organize a Trust, or at least swindle the investing public; it is so easy and fascinating to master the principles of these things” (Moggridge, 1992: 95).
When subsequently reflecting on his investment record for King’s, Keynes confessed that: “We have not proved able to take much advantage of a general systematic movement out of and into ordinary shares as a whole at different phases of the trade cycle” (CWK XII: 106). The difficulty he felt he faced as a macro manager was that: “Credit cycling means in practice selling market leaders on a falling market and buying them on a rising one and, allowing for expenses and loss of interest, it needs phenomenal skill to make much out of it” (CWK XII: 100).
In August 1934, Keynes wrote to Francis Scott, the Provincial Insurance chairman, clearly stating his change of view: “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 and in the management of which one thoroughly believes” (CWK XII: 57). He attributed his subsequent success managing the College investments to his decision to concentrate on a few core holdings, considered cheap relative to their intrinsic value and held for several years (CWK XII: 107).
Keynes was obviously well connected but was he an insider? The investment community then did not have the same view of insider trading that we have today. Other than directors who owed fiduciary duties to their company not to trade on price-sensitive information, insider trading by investors in general was not subject to regulation until 1980 in the UK (Cheffins, 2008: 39–40). It is certain that Keynes was in receipt of what today would be deemed price-sensitive information – he was, for example, aware of a change in the UK bank rate before it occurred in 1925 (Mini, 1995).
Keynes displayed contrarian behavior over all intervals and all investment horizons.
Keynes did not chart an unhindered course of investment success from beginning to end, as has been previously assumed. His initial setbacks buttressed his influential metaphor of financial markets resembling a beauty contest, and led him to bemoan the seeming inability of the “serious-minded” investor “to purchase investments on the best genuine long-term expectations he can frame” (Keynes, 1936: 156). In such a market, smart investing is not necessarily rewarded.