Meet Keynes in the stock market

Meet Keynes in the Stock Market

Keynes was a great economist of the 20th century,

and also a remarkable investor of the 20th century.

He once believed that he could rely on “extraordinary knowledge” and “superior future prediction methods” to speculate in currencies and commodities,

but this led him to lose everything twice.

Eventually, Keynes realized that,

market trends are highly uncertain due to the presence of “animal spirits,”

and the unquantifiable uncertainty is the enemy of speculation,

while well-informed investors who do their homework can seize buying opportunities arising from this.

In the early 1930s,

Keynes had already transformed from a speculator into a “bottom-up” stock picker.

He said: “Over time,

I have come to believe that the correct investment approach should be to invest large sums in companies you understand,

and fully trust their management models.

Choosing companies about which you know very little and have no particular reason to trust,

as a way to control risk, is wrong.”

From 1925 to 1946,

the fully discretionary investment portfolio managed by Keynes at King’s College achieved an annualized return of 15.21%,

far outperforming the UK stock index’s annualized return of 8.08 during the same period.

When Keynes passed away in 1946, he left a net worth of about £500,000 (equivalent to tens of millions of dollars today),

along with a collection of valuable books and artworks worth £80,000.

Keynes’s Two Financial Ruins

In 1920, Keynes used his knowledge of international finance to enter the currency markets,

believing he possessed “extraordinary knowledge.”

He predicted post-war inflation would devalue the French franc,

German mark, and Italian lira,

and shorted these currencies.

He held long positions in Indian rupees,

Norwegian and Danish kroner, and US dollars.

In the first few months,

the hedge fund he co-founded with several partners made a net profit of $30,000,

later earning another $80,000,

which was astronomical considering most European countries were bankrupt due to war.

But just four weeks later,

optimism about Germany caused European currencies to rebound, destroying all their funds.

With help from family and friends, Keynes recovered,

and as an economist confident in quantifying supply and demand curves,

he was fascinated by commodity trading.

By 1927, his net worth exceeded $3.4 million,

but after the 1929 stock market crash,

his net value lost 80%,

forcing him to sell some paintings (though he ultimately did not sell).

By 1930, Keynes’s commodity positions were nearly wiped out.

One of his students, Cel Cook, who was deputy director of the National Mutual Life Insurance Society,

went bankrupt in mid-1930,

and committed suicide in July.

Even economist Keynes could not predict the impending collapse of the world economy in the 1930s and the outbreak of World War II.

His “extraordinary knowledge” built on mountains of pricing data failed to save him from disaster.

But he shook off the dust,

reorganized during the darkest decade of economic history,

and became a very different investor.

Keynes’s Transformation

After experiencing a series of market failures in the 1930s,

Keynes no longer believed his macroeconomic theories could predict large-scale investor sentiment,

and he abandoned currency and commodity trading,

turning to stock investing in the 1930s,

ultimately creating wealth,

which undoubtedly required great courage.

Facing the worst sell-off in 1929,

Keynes actually became a contrarian investor.

He didn’t jump on the lifeboat,

but continued to stay on the storm-ravaged ship.

He believed that deflation could bring interest rates back down,

and investors could benefit from it.

Although his commodity positions had been destroyed,

he believed stocks could not only preserve some value,

but also rebound.

Such thinking in 1931 required considerable courage,

and this established Keynes’s reputation as a pioneering fund manager and an inspiring investor.

From 1932 to 1937,

few realized that this period was the second-largest price rebound in the 20th century after the boom of 1921–1929,

with US stocks rising nearly 280% during the 1930s rebound.

Throughout the 1930s, Keynes never exited the market,

but he experienced punishing losses from 1937 until World War II.

From 1942 to 1946,

another incredible counterintuitive wave.

Germany was bombing London,

hundreds of British ships sank,

and until the Normandy landings in 1944,

Europe was in a dire situation,

but Keynes persisted with his portfolio,

and US stocks rose 122% during this period.

Throughout the 1930s and World War II,

Keynes held onto his carefully selected stocks—almost representing every major component of the economy.

If he had sold these stocks during crises (after the 1929 crash and the 1937 recession),

his returns would have been poor.

In the most seemingly disastrous times, there were two little-known price recoveries,

which formed the largest part of Keynes’s total gains.

Keynes became a long-term investor.

He wrote to the directors of the National Mutual Life Insurance Society: “If we withdraw,

it will be very hard to come back in thought.

By the time we do come back, it will be too late,

and we will be far behind the recovery.

If it never recovers,

what does it matter?”

After 1934, Keynes finally became a “bottom-up” value investor focused on concentrated investments.

In the early 1930s,

Keynes favored buying large-company stocks at low prices,

which was the beginning of the entire value investing school.

In 1936, nearly 66% of the assets in Keynes’s managed portfolio at King’s College were in mining stocks,

and contemporary fund managers called this the “concentrated investment method,”

holding only a few stocks,

as opposed to broad diversification or index portfolios.

Keynes’s Ten Keys to Wealth

1. Over the long term,

stocks outperform bonds.

While not always true (depending on the specific period studied),

it is generally valid.

2. Speculation is a dangerous game.

Keynes initially believed that with his “extraordinary knowledge,”

he could navigate the fluctuations in currency and commodity markets.

The allure of speculation may blind you,

but always remember that few speculators achieve good long-term returns.

They may get lucky temporarily,

but ultimately, their performance will revert to or fall below average,

because they cannot understand every important fact about the market.

Speculation is a dangerous game.

3. Possibility does not equal certainty.

You may have the earnings forecasts of some excellent analysts and bond interest predictions,

or the latest stock analysis charts for different cycles.

In the age of information economy,

such data is abundant,

but it cannot protect you from the uncertainties of stocks and markets.

Unquantifiable uncertainty is the enemy of speculation,

while well-informed investors who do their homework can seize buying opportunities from it.

4. Hedging risks helps balance your portfolio.

You need to combine several uncorrelated assets in a portfolio,

to achieve true diversification.

If you focus on hedging risks,

you will find that not all assets rise simultaneously,

and negatively correlated assets can play a role during market downturns.

5. Use intrinsic value.

Faced with market crashes in the 1930s,

Keynes decided to focus on a company’s intrinsic value.

What is the value if the company goes bankrupt? How strong are its competitive advantages? What are its future profit points? Examine the company’s book value and P/E ratio,

and compare with other companies. Would you hold a stock for 10 years?

6. Dividends don’t lie.

In the 1930s, Keynes bought大量 utility stocks,

forming a good investment buffer and income stream.

Identify companies that regularly increase dividends,

these are among the most stable companies worldwide,

capable of achieving lasting,

steady operations.

7. Don’t follow the crowd.

Contrarian investing pays off.

Find stable,

unpopular companies,

buy at low prices and hold persistently.

Avoid trying to time the market,

but seize opportunities to buy companies with a moat.

Compared to buying popular stocks today and hoping for appreciation,

finding and holding obscure stocks can yield greater returns.

Stocks are not a beauty contest,

hundreds or thousands of stocks may not win today,

but time’s test will lead them to success.

Most of the time, markets efficiently price securities,

but not always.

Why not take advantage of market mistakes,

and pick out out-of-favor stocks or industries?

8. Long-term investing.

Even if the current economic environment is bleak,

if you have a long-term investment policy that still aligns with your preferences,

be sure to stick to it.

The greatest danger for investors is impulsiveness,

markets can send false signals at any time,

creating panic,

so you must stick to your investment strategy.

9. Invest passively.

Because “animal spirits” interfere,

you cannot predict long-term or short-term expectations,

so allocate most funds to cheap index funds,

a small amount of index funds can form a diversified portfolio.

Most investors’ market forecasts are often wrong,

so why not directly capture the main market?

10. Enjoy life.

After formulating a comprehensive investment plan that meets your goals,

set it aside,

review once a year,

and enjoy life the rest of the time.