Keynes’ Legacy as an Investor

According to a research paper by David Chambers of Cambridge University and Elroy Dimson of the London Business School, the economist John Maynard Keynes, whose economic theories still provide the theoretical underpinning for countercyclical fiscal policies, was an extraordinary money manager. Though Keynes had written extensively on the subject, uncovering his actual performance record required deep data mining.

This is because he plied his investment skills during the first half of the 20th century, most notably as manager of London’s King College endowment funds from 1924 until his death in 1946. That 22-year period, during which Keynes generally had full discretion over the Cambridge endowment in his position as First Bursar, provided the raw performance numbers used by the authors to reconstruct Keynes’ results.

Those results were exceptional, albeit lumpy: The discretionary portfolios Keynes managed over that nearly quarter-century period averaged 15.21% per year, compared with 8.08% for the U.K. equity market. Several characteristics of Keynes’ investment strategies stand out. He was among the first to allocate heavily to common stocks; at the time, bonds and real estate were the asset classes of choice among professional investors. Keynes also ran an idiosyncratic and concentrated portfolio.

“As time goes on,” he wrote in 1934, “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.”

Importantly, Keynes adhered to his famous dictum that “when the facts change, I change my mind.” Early on, he was a top-down, macro-theme manager, but after failing to anticipate the October 1929 stock market crash (he had 83% of assets in equities as of August 1929), Keynes switched to a bottom-up, stock-picking strategy. He noted that executing what’s now called market timing required “phenomenal skill” and strongly implied that it was a fool’s errand.

The Great Depression taught Keynes another lesson as well. Until then, he had traded frequently, contributing to three consecutive years of underperformance in the late 1920s. When he recognized the errors of his ways, he switched to a long-term, buy-and-hold approach. Overall, the second half of Keynes’ investment management tenure at King’s College was far more successful than the first.

Whatever his economic legacy, Keynes was undeniably a great investor whose money management techniques warrant serious inquiry.

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