What can we learn from Keynes?

The CFA Institute blog recently featured an excellent post on the investment track record of John Maynard Keynes entitled Keynes the Investor: Lessons to Be Learned.

The post features comments by Elroy Dimson, co-director for the Centre for Endowment Asset Management at Cambridge Judge Business School, from his presentation at the 2014 European Investment Conference.

David, Chambers, Elroy Dimson and Justin Foo were given access to the archives covering Keynes’s management of the endowment portfolio at King’s College, Cambridge. Over the period 1922–1946, the annual performance of this portfolio averaged a return of 16%, compared with 10.4%.

Very impressive when you consider that this period contained both the Great Depression and the Second World War.

Keynes outperformance did not come without commensurate risk (that is, if you measure risk as preforming differently to market benchmark): The tracking error was 13.9%, reflecting high levels of concentration. The resulting Sharpe ratio (reward to risk) of 0.73 seems like a good outcome for an active investor.

How did Keynes achieve such impressive results? Dimson listed 8 features of Keynes approach in his presentation. They were:

  • Active Management
  • Long Termism
  • Stocks over Bonds
  • International Investing
  • Bottom-Up Stock Selection
  • Concentrated Portfolios
  • Value Orientation
  • Contrarianism

A key factor behind his success was the fact that Keynes had total control over the King’s College investment portfolio:

When Keynes assumed authority over the endowment fund at King’s College in 1921, the fund was severely constrained by the Trustee Act, so he persuaded the College Fellows to separate a part of it into a discretionary portfolio over which he had complete control.

In other words, there were no conflicts of interest between principal and agent because Keynes was the principal. There were no external fund managers, trustee boards, consultants, etc. This allowed Keynes the freedom to think long-term and to concentrate his portfolio on a handful of best ideas. Importantly it also allowed him to invest differently from the crowd.

Without this freedom, beating the market is next to impossible. As legendary investor Sir John Templeton wrote in his 16 rules for investment success:

But, if you buy the same securities everyone else is buying, you will have the same results as everyone else. By definition, you can’t outperform the market if you buy the market. And chances are if you buy what everyone is buying you will do so only after it is already overpriced.

The sad reality is that very few institutional investors have this freedom*, which is why we shouldn’t be surprised by the poor track record of most actively managed investment strategies.

A more detailed examination of Keynes performance as an investor can be found in Keynes the Stock Market Investor: A Quantitative Analysis by David, Chambers, Elroy Dimson and Justin Foo.

* You could also argue that they don’t want the freedom – since in many cases they are being paid very handsomely for mediocre results.



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