John Maynard Keynes, Investment master

Keynes

Why is Keynes worth studying?

Keynes is the most respected master of overall economy in modern times. The main economic policies of modern countries are almost all implementing Keynes’s theory, but few people know that he is also a very successful investor. When he was young, Keynes was proud of his talents and adopted a speculative investment method, and did not accept long-term investment or value investment. After many years of losses, he learned from the pain, determined to completely change the arrogant and indiscreet investment methods in his youth, and moved closer to the long-term value-added investment methods that he thought were more reasonable and proved through his own practical experience.

Buffett’s evaluation of Keynes

In his 1988 Letter to Berkshire Hathaway’s shareholders, Buffett stated that “Keynes … began as a market-timer (leaning on business and credit-cycle theory) and converted, after much thought, to value investing.” In his 1991 Letter, Buffett enthused that Keynes’s “brilliance as a practicing investor matched his brilliance in thought.”  Buffett also suggested that investors must read Keynes’s famous book “The General Theory of Employment, Interest, and Money” Chapter 12. Buffett believes that the importance and weight of this chapter is comparable to Chapters 8 and 20 of Graham’s “The Intelligent Investor” book.

Keynes’s famous quote

Regarding investment, Keynes has made countless famous sayings. The following are some of the most admired golden sentences:

  • “It is better to be roughly correct than to be precise.”
  • About forecast, he said “We simply don’t know.”
  • “In the long run we are all dead,”
  • There are two major uncertainties in the market: speculation and the animal instincts of human nature, that is, people’s “involuntary impulses”. They are not determined by basic rationality and knowledge, and cannot be calculated by mathematical formulas.
  • “Successful investing is anticipating the anticipations of others.”
  • “A careful selection of a few investments (or a few types of investment) having regard to their cheapness in relation to their probable actual and potential intrinsic value over a period of years ahead and in relation to alternative investments at the time.”
  •  “Well-managed industrial companies do not, as a rule, distribute to the shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back into the business. Thus, there is an element of compound interest operating in favor of a sound industrial investment. Over a period of years, the real value of the property of a sound industrial is increasing at compound interest, quite apart from the dividends paid out to the shareholders.”
  • “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.”
  • “The difficulty lies not in the new ideas but in escaping from the old ones.”
  • “When the facts change, I change my mind. What do you do?”
  • “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic.”

Find stunners

In the final phase of his investment career, Keynes focused on identifying “stunners ” — those stocks which offered “intrinsic values . . .enormously in excess of market price.”

Financial investment is like a beauty pageant. In a beauty pageant where many beautiful women participate, if you guess who can win the championship, you can get a big prize. According he wrote “It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”

One of my most respected investment guru

I myself admire Keynes very much, especially his investment history and the transformation process of investment methods from early speculation to later value investing. It is extremely rare that he is one of the few academic person who can achieve outstanding results in investment; it is worthwhile for interested investment friends to spend some time to learn about Keynes’ investment methods.

Keynes
Credit: Wikimedia

Related Works by Keynes

There are some books related to Keynes’ investment in the market, which are listed below for your reference:

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