John Maynard Keynes’ economic principles have been the subject of intense debate over the past few years. But in a recent column for The Wall Street Journal, Jason Zweig notes that one thing not up for debate is Keynes’ remarkable track record as an investor.
What’s particularly interesting, Zweig says, is that Keynes’ struggled as an investor early in his career when he based his decisions on macroeconomic factors. But later on, when he focused on individual stocks’ fundamentals rather than macro factors, he really excelled. David Chambers and Elroy Dimson, finance scholars at the University of Cambridge and the London Business School, respectively, have found that from 1924-1946, Keynes, while serving as the overseer of King’s College at Cambridge’s endowment fund, produced returns that beat the UK market average by 8 percentage points per year, adjusted for risk, Zweig reports.
After he switched to being a bottom-up stock picker around 1933, Kenyes’ results improved dramatically as he focused his portfolio on undervalued small and midsize companies, Zweig says. He made “titanic bets on industries he thought were cheap”, Zweig says, adding that Keynes “relished risk, concentrating as much as half of his assets on his favorite five holdings.” Keynes also had a very long time horizon, typically holding a stock for over five years.
Interestingly, Zweig says on WSJ’s Total Return blog that his column on Keynes provoked an outpouring of feedback from readers — feedback that offers a couple key lessons in behavioral finance. Zweig says that those who admire Keynes’ economic principles and theories were quick to defend him as an investor — an example of the “halo effect” — the phenomenon in which people allow their general opinion of a person or thing to positively color their opinion of specific aspects of the person or thing. “But Keynes was neither a good nor a bad investor because you agree or disagree with his investment policies,” Zweig writes. “His track record as an investor should be judged just as any other investor’s should be: by the numbers. And, as my column pointed out, Keynes’s investment results were extraordinary — regardless of whether you love his economic theories or you hate them.”
Zweig also says that many of the respondents to his column demonstrated “confirmation bias” — i.e., looking only for information that supports your original thesis and discarding information that refutes it. “Thus, several commenters ridiculed the notion that Keynes could have had access to inside information on interest rates and currency values without trading on it,” he says. “Others insisted that he was front-running his own economic policies, buying gold before he debauched the value of the British pound.” Zweig says there is no evidence supporting either contention, adding that Keynes’ investing returns got better when he stopped basing his buying and selling on macroeconomic factors.
“In short, what you think about Keynes as an economic theorist should have nothing to do with the question of how good an investor he was,” Zweig writes. “Similarly, investors should always be on guard against the halo effect and confirmation bias. When you ask a question about an investment, make sure you don’t end up answering a different question entirely.”