Download The Investment Principles of John Maynard Keynes

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From the Editor, Issue 07. 22/1/09
The Investment Principles of
John Maynard Keynes
Eighty years on, the policies of John Maynard Keynes are
being called upon by governments around the world to rectify
imbalances caused by the global financial system breakdown.
I love reading about history, investing
and successful people. The topic
of John Maynard Keynes perfectly
combines all three loves and provides
powerful investment principles for
modern day investors.
Keynes is most widely acclaimed
for his economic policies commonly
known as ‘Keynesian economics’,
which rest on a relatively simple
proposition: during periods of
economic downturn, governments
should intervene to borrow and
spend their way out of trouble.
Understandably, Keynesian policy
is not without criticism; but as we
speak the US, UK and, to a lesser
extent the Australian governments
are all injecting money into their economies to provide
liquidity, encourage consumption and combat recession.
Anyone who received the $1,000 Christmas bonus from
the government should in some small way pay thanks to
Keynes.
So much more than an economist, Keynes was part
of the London ‘Bloomsbury’ set – a collection of young
British artists, writers and thinkers whose works went on
to deeply influence and shape many aspects of British
society. Its most famous members included authors
Virginia Woolf, Lytton Strachey and E.M Forster, as well
as Keynes himself. Keynes is considered by many to
be somewhat of a ‘savior’ after his economic theory
completely revolutionised the way the economy was
viewed in the early part of the 20th century. His theories
were largely based on aggregate demand, unlike his
predecessors, most of whom had built their economic
models on the principles of supply. It was his theory
‘Consider the opposite
argument to popular
consensus and beliefs’
that most of the Western world
adopted in order to move out of The
Great Depression. He was a major
contributor to Roosevelt’s “New
Deal” as well as being England’s
head delegate at the Bretton Woods
Agreement in 1944. It was here
where Keynes was instrumental in
formulating policy to rebuild the global
economy after World War II.
It is Keynes’s investment history that I find most
fascinating, for it provides strong, simple principles to
follow and is also highly motivating: Keynes made a
fortune despite an awful long term bear market.
Keynes managed the King’s College finances through
the Chest Fund, which earned a compound annual return
of 12% p.a. from the years 1924 to 1946. Keynes had to
invest through the Great Crash of 1929 and World War II.
And to think we have it bad! What makes this return even
more impressive is that the British stock market fell 15%.
Keynes literally trounced the market.
After practically being wiped out from the Great Crash,
Keynes gave up on the pursuit of trying to pick the
markets, instead converting to a bottom-up style of simply
looking for undervalued stocks and being prepared to
weather short-term volatility. Warren Buffett’s investment
Continued ➤
The Investment principles of John Maynard Keynes. cont...
style has splashes of Keynes, which is acknowledged in
the 1991 Berkshire Hathaway shareholder letter:
John Maynard Keynes, whose brilliance as a practicing
investor matched his brilliance in thought, wrote a letter
to a business associate, F. C. Scott, on August 15, 1934
that says it all: “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. It is a mistake to think that
one limits one’s risk by spreading too much between
enterprises about which one knows little and has no
reason for special confidence. . . . One’s knowledge
and experience are definitely limited and there are
seldom more than two or three enterprises at any given
time in which I personally feel myself entitled to put full
confidence.”
Keynes preached the importance of holding a
concentrated and balanced portfolio. The key was
identifying stocks that were trading at less than intrinsic
worth and holding onto those stocks until the value was
fully met, or circumstances had changed.
Keynes was one of the great pioneers of the importance
of contrarian thinking in the pursuit of investment returns,
boldly saying:
“It is the one sphere of life and activity where victory,
security and success is always to the minority and never
to the majority. When you find anyone agreeing with you,
change your mind. When I can persuade the Board of my
Insurance Company to buy a share, that, I am learning
from experience, is the right moment for selling it.”
These are strong words, and the conviction needed to
actually follow them, even stronger. It is one thing reading
about tough times, but living through them as we indeed
do right now is another thing altogether.
However, I believe it is these times that our conviction,
research and clear logic needs to be at its greatest.
While we read a great deal about many different stocks,
we can only truly understand a handful of situations at any
given time. Most members understand that we can’t be
all things to all people and that good money can be made
by understanding a few areas of the market. The saying
“Jack of all trades, master of none” applies here.
Although, we must say investing in only a few enterprises
is far too concentrated for us! Some diversification is
important.
Principle 2: Think from the bottom up and leave
guessing the general direction of the stock market
and economy to others
Obsessing over the direction of equity markets, interest
rates, currency pairs and commodity prices is, at times,
necessary for an analyst to keep his or her job. Not so for
Rivkin analysts, who look for predictable investments with
return profiles that are ‘low beta’ or not highly correlated
with the movements of broader markets.
Principle 3: Look for assets that are trading far below
their true value
While the current market is rewarding event-driven trades,
markets will trend again, once asset prices and growth
forecasts are reliable enough to formulate the foundation
of deep-value recommendations. While our investment
style is too organic to adhere purely to value investing, it
will once again become a part of the mix when volatility
dies down.
Principle 4: Consider the opposite argument to
popular consensus and beliefs
Proactively playing devil’s advocate in our Investment
Team meetings is a necessary process to keep analysts
second-guessing themselves until they are strong
enough with their convictions to discredit any contrarian
views. If one analyst recommends XYZ as a buy, other
team members will literally search the press for negative
articles on XYZ to oppose the recommendation until it is
watertight.
Is Keynes investment style similar to The Rivkin
Report?
There are quite a few areas of similarity, and certainly
there are some areas we can learn from.
Principle 1: Don’t worry about trying to understand
too many stocks – it’s just not possible
Kristian Dibble
CEO, The Rivkin Report
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