Notes on "How They Did It": John Maynard Keynes 1
A polymath (and HODL’er) for all markets; and how to match the market through art
This is a continuation of a series of posts covering the various chapters of Murray Stahl’s 2011 hardcover-only book, “How They Did It”, for the purpose of making the content digitally available in some approximated form, mostly for my own future reference. For more background on what I’m even talking about, how this is series is formatted, and a complete list of the original sources compiled in the book, see the post here:
Keynes Part 1: A polymath (and HODL’er) for all markets
“Life is like reading a novel or running a marathon. It’s not so much about reaching a goal but rather about the journey itself and the experiences along the way” ― Edward O. Thorp, “A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market”
While John Maynard Keynes is best known as an distinguished economist (as well as perhaps lesser known as a philosopher, mathematician1, government policy-maker, patron of the arts, and art collector), he was also a successful investor and his investing career spanned across the volatile macro environment that witnessed…
the beginning and end of WW1 in 1914-1918 and the resultant interwar period,
the ensuing German Weimar hyperinflation,
the reestablishment (and later, abandonment) of the gold standard in England,
the UK General Strike,
the Great Depression (which —like Benjamin Graham— Keynes could not foresee),
all the way to the end of WW2 in 1945 (the start of which in 1939 would also mark the beginning of serious heart issues which ultimately led to Keynes’ death in 1946, yet apparently did not affect his investing performance —despite the added stress of also having to be on constant lookout for German air raids during this time).
Given the accelerating pace of change in the contemporary world, insight into Keynes’ investing thoughts and experiences —which include periods when large parts of the world were literally at war— should be of interest to anyone.
In fact, the Chest Fund, which was managed by Keynes starting in 1927 after he became First Bursar of King’s College (in 1924), Cambridge, was able to nearly 5x its capital through these volatile years (around the start of the Great Depression to the end of WW2) vs the UK broader stock market’s 15% decline over the same ~20yr period.
One thing to take note of is that the YoY performance of the Chest Fund was often more volatile than the general UK market, which in the long-run worked in Keynes’ favor —not to make any judgement here about whether stock volatility is a helpful or hindering factor for stock selection in general, but simply to point out what Keynes had to stomach.
Following two previous attempts at investing success before managing the Chest Fund (first in currency trading, then in commodities trading) that both ended in losses —perhaps further proof that the study of economics is, as Stahl was shocked to learn in college, clearly ‘not about how to make a lot of money’— Keynes persisted on to find success as a value investor while developing his ideas on “animal spirits”2 and, what would later become, behavioral finance. His secret to beating the market was the same use of the power series employed by coffee-can investors, art collectors (which Keynes was one of), and music labels as he changed the nature of the quality/kinds of investments he held and shifted from short-term trading to a longer-term holding strategy around the early 1930s. This can also be seen, in the Chest Fund’s returns, to be around the time that Keynes started outperforming the market (despite having taken over the fund around just before the start of the Great Depression); Keynes came to regret his earlier fast-trading behavior3.
I do not believe that selling at very low prices is a remedy for having failed to sell at high ones. The criticism, if any, to which we are open is not having sold more prior to last August. In the light of after events, it would clearly have been advantageous to do so. But even now, looking back, I think it would have required abnormal foresight to act otherwise. […] Then came the American collapse with a rapidity and on a scale which no one could possibly have foreseen, so that one had not got the time to act which one would have expected. However this may be, I don’t feel that one is open to any criticism for not selling after the blow had fallen. As soon as prices had fallen below a reasonable estimate of intrinsic value and long-period probabilities, there was nothing more to be done. It was too late to remedy any defects in previous policy, and the right course was to stand pretty well where one was.
I feel no shame at being found still owning a share when the bottom of the market comes. I do not think it is the business, far less the duty, of an institutional or any other serious investor to be constantly considering whether he should cut and run on a falling market, or to feel himself open to blame if shares depreciate on his hands. I would go much further than that. I should say that it is from time to time the duty of a serious investor to accept the depreciation of his holdings with equanimity and without reproaching himself. Any other policy is antisocial, destructive of confidence, and incompatible with the working of the economic system. An investor is aiming, or should be aiming primarily at long-period results, and should be solely judged by these. The fact of holding shares which have fallen in a general decline of the market proves nothing and should not be a subject of reproach. It should certainly not be an argument for unloading when the market is least able to support such action. […]
I do not agree that we have in fact done particularly badly. I have been carrying on for my own benefit a post mortem into results and making such comparison with other institutions as are open to me… As far as I can judge, there is extremely little difference between our results and those of other people… Moreover, if our results are compared with those of the Index, for a period, they are extremely good. We have done a very great deal better than the Index, and have in that way shown power of management and have justified the capacity of insurance offices to undertake constructive investment. If we deal in equities, it is inevitable that there should be large fluctuations. Some part of paper profits is certain to disappear in bad times. Results must be judged by what one does on the round journey. On that test we have come out successfully. If, on the other hand, we do not hold equities, we must either be content with earning a definitely lower rate of interest, or we shall be tempted, in my judgment, into risks which, while they may be less apparent and take longer to mature, are really much more serious than those of equity holders. —- John Maynard Keynes, 1938, in a memo defending National Mutual’s portfolio during the Great Depression (from https://novelinvestor.com/lessons-in-a-1938-letter-from-keynes/, citing “The Collected Writings of John Maynard Keynes, Vol. 12”); emphasis, mine
(I’m going to need to remember this as my bag-holder mantra when the next recession comes.)
Interesting factoid (though I could not find any primary sources confirming this, so perhaps call it a rumor)4: Apparently John Keynes and libertarian rival Friedrich Hayek once spent a night of fire-watch duty together during a German Baedeker bombing campaign against historical London buildings in WW25; The London School of Economics (at which Hayek was the Tooke Professor)6 had been evacuated to Cambridge (where Keynes lived and was the King's College bursar). Apparently, Keynes and Hayek were assigned to fire-watch duty together on the roof of the King’s College chapel where they were to alert volunteers to, and help extinguish, flames from German incendiary bombs. Aside from being an interesting tie-in given that they had greatly contrasting thoughts on economics7, it’s an interesting connection in that Hayek’s “Denationalization of Money” seems to be one of the driving factors behind Stahl’s investment thesis on Bitcoin —yet Hayek is not mentioned throughout the entire book, while Keynes is afforded two essays. I write a bit about Hayek's part in Stahl's Bitcoin thesis (and some questions I have regarding this) here, below (you can just word-search for “Hayek” in the post).
Also of possible interest to Bitcoin enthusiasts, Keynes briefly wrote about ancient currencies in Volume 28 of “The collected writings of John Maynard Keynes”. In a 1920 memo on "The Monetary Reform of Solon" it seems that, in contrast to Hayek8 —and as also appears to have been enacted by US policy-makers over this last decade9— Keynes saw monetary debasement and the reduction in the value of money as a useful tool for good in the service of relieving debtors and driving down interest rates, which he believed helped stimulate the economy10 (as well as the stock market, which he also believed played a behavioral role in stimulating investment in the economy)11 out of (deflationary)12 recessions.
(The above also sounds suspiciously like what Stahl appears to believe the Fed is planning to do in regards to the USD for the relief of the US Federal and collective debt.)13
(Stahl and Bregman would likely agree with this last sentence14, yet --unlike S&B-- Keynes here appears to see this as useful tool.)
This idea on the benefits of currency debasement was rebutted in a correspondence with fellow Cambridge faculty member, a professor of ancient history, Frank Adcock15 via a sort of Thiers’ Law16 argument that appears in the same volume…
In the book, the chapter kinda just ends after the Chest Fund discussion but, before closing, Stahl adds some remarks on Keynes’ HODL’ing behavior thusly…
I don’t think any other investor of a similar skill set was able to accomplish a like rate of return during an extended disruptive market. Keynes managed to do it by leaving his investments alone and allowing the best ones ultimately to become the largest part of the portfolio. In such manner, he generated that rate of return. He liked to state, though who knows if it’s true, that he spent no more than one day per week thinking about his investments. […] He’s not the first, or even the sole, longterm investor; he’s merely a great investor who has yet to be significantly studied by investment thinkers.
In that vein, a nice and concise article on Keynes as an investor can be found here.
Perhaps if Keynes’ investing style had adopted his art collecting style, he would have had more success much sooner; Keynes' art collecting performance is studied in greater detail by Chambers, Dimson, & Spaenjers in "Art as an Asset: Evidence from Keynes the Collector"17. Keynes was a lover of the arts and began accumulating small art purchases around 1905 after publishing “A Theory of Beauty” when he was 22 years old —this was also 22 years before he would find investing success as First Bursar of King’s College and manager of the Chest Fund. By 1918, the final year of WW1, he was a well establish patron of the arts, a member of the Contemporary Arts Society, and at this time —at the advice of friends he met in the art world— also made art purchases in war-ravaged Paris (likely at greatly diminished prices)18. Keynes' largest buying spree came nearing the final years, yet still well in the midst, of the Great Depression in 1935-1937 (by which time he was managing the Chest Fund and was also readying to published his famous "The General Theory of Employment, Interest and Money" in 1936) and would continue to buy works up to his death in 1946.
By simply holding on to his collection —as well as with the selection help of his better-versed artist friends— Keynes’ art portfolio over the long-run was able to beat bonds and the overall art market index19, matching the general performance of equities over the fullness of time. His portfolio took advantage of positive skewness in the market (which, IMO, is basically an implicit bet on the Lindy'ness20 of generally upward progress of whatever civilization you're investing in, when it comes to equities) which enabled the value of his portfolio to naturally become concentrated around a few key out-performers; anyone who's read Nick Sleep's old Nomad Partnership letters21 or Chris Mayers "100-Baggers"22 is likely familiar with these concepts as they relate back to the world of equity investing. This was despite --or perhaps owing to-- the illiquid nature and the highly dispersed opinions on valuations for any individual piece by potential buyers ("valuation heterogeneity", as they refer to it in the study) that characterizes the art market. I could find no evidence anywhere online that Keynes ever sold a single piece of art he collected, which actually makes sense given that Keynes was largely buying art as a collector and patron rather than as an "investor" (so it's also not obvious that he was consistently buying at any kind of discount for any given purchase) —talk about low portfolio turnover.
Of note, is that Keynes’ art world compatriots found his own personal taste in art to be "ill-founded" and "lamentable". Despite this, his art portfolio performance was consistently able to beat its index. This actually relates well to several essays by Stahl —not in the book— called "Buy-and-Hold vs. Market Timing: The Consequences of Portfolio Turnover"23 and “Can a Bad Portfolio Manager beat the S&P 500?”24; the answer to this question in Keynes’ case —and as is reached by Stahl in the essay where a hypothetical under-performing PM "begins to regard trading as a futile activity and therefore practices a buy and hold strategy"— is apparently "decidedly affirmative".
Speaking of bad investors and coffee-canning portfolios, I myself have written a bit more about this coffee-canning POV from Stahl and a mix of others, here.
Further related reading:
This idea first appeared in Keynes’ famous “The General Theory of Employment, Interest and Money” in 1936, which was also the period at which Keynes most the most levered on his investments.
TBH, in the original essay, this idea that Keynes adopted a longer-term strategy at the time he took over the Chest Fund is simply claimed without any reference. The supposed regret Keynes’ felt about his past style is also just implied for the reader to extrapolate from a quote by Keynes saying “I was the principal inventor of credit cycle investment, and I have not seen a single case of success having been made of it.” However, looking at other sources, this does appear to be the case.
https://www.maynardkeynes.org/keynes-the-speculator.html
https://www.cfainstitute.org/en/research/financial-analysts-journal/2014/keyness-way-to-wealth
When I was initially looking into this, it appears that King’s College was evacuated some 128 miles away to Bristol during the outbreak of WW2, see https://www.kcl.ac.uk/wartime-reggie-kings-at-war-1939-1945
… And at the same time, it also appears that the LSE was evacuated to Cambridge during WW2, see https://blogs.lse.ac.uk/lsehistory/2018/02/21/evacuation-to-cambridge/
… so I thought, well I how could they have met in Cambridge in WW2 then?
Then I found this, from Nicholas Wapshott’s “Keynes Hayek : the clash that defined modern economics”…
… so it appears the claims of a Keynes-Hayek rooftop fire-duty night are not too far fetched.
Tooke Professor is a named chariman position at the LSE, see https://www.lse.ac.uk/economics/about-us/named-chairs
https://www.britannica.com/biography/F-A-Hayek
https://sticerd.lse.ac.uk/_new/programmes/hayek/about.asp; Info on Hayek and the LSE
https://www.econlib.org/library/Enc/bios/Hayek.html
One cause, he said, was increases in the money supply by the central bank. Such increases, he argued in Prices and Production, would drive down interest rates, making credit artificially cheap. Businessmen would then make capital investments that they would not have made had they understood that they were getting a distorted price signal from the credit market. But capital investments are not homogeneous. Long-term investments are more sensitive to interest rates than short-term ones, just as long-term bonds are more interest-sensitive than treasury bills. Therefore, he concluded, artificially low interest rates not only cause investment to be artificially high, but also cause “malinvestment”—too much investment in long-term projects relative to short-term ones, and the boom turns into a bust. Hayek saw the bust as a healthy and necessary readjustment. The way to avoid the busts, he argued, is to avoid the booms that cause them.
In a famous passage in The General Theory, Keynes compared investors in the stock market to judges of a beauty contest who, instead of judging the beauty of the contestants, are trying to guess how beautiful the other judges think the contestants are. Keynes’ theory linked the stock market with the labor market. In his view, the loss of confidence by investors caused the Great Depression. When businessmen and women lost confidence in the economy they stopped buying new machines and factories. The firms that produced factories and machines laid off workers. When workers lost their jobs they stopped spending and that reduction in purchasing power caused more layoffs in other industries.
For context, it should be noted that at the time of Keynes writing this memo, the UK, US, and other countries were experiencing a sharp deflationary recession coming out of WW1.
https://econreview.berkeley.edu/in-the-shadow-of-the-slump-the-depression-of-1920-1921/
https://en.wikipedia.org/wiki/Depression_of_1920%E2%80%931921#
https://mises.org/library/forgotten-depression-1920
https://www.manhattan-institute.org/html/forgotten-depression-1921-crash-cured-itself-6377.html
The 1981 article here from the Richmond Federal Reserve defends Keynes posthumously from being painted with a broad “inflationist” label and more of simply an advocate for intervention and counter-cyclical policies, whatever the point in the cycle: https://www.richmondfed.org/-/media/RichmondFedOrg/publications/research/economic_review/1981/pdf/er670101.pdf
https://horizonkinetics.com/app/uploads/Q4-2022-Commentary_FINAL.pdf
The usual choice in such circumstances is to do the opposite of the Great Depression approach, namely to tolerate or even encourage inflation, using time as tool. Over time monetary inflation diminishes the relative value of the debt liabilities (more dollar bills in the economy per unit of bonds). That is the mechanism at the government’s disposal. The central bank might already be trapped into a long-term strategy of inflationary money printing. —- Steve Bregman
https://horizonkinetics.com/app/uploads/Bitcoin-newsletter_October-2017.pdf
The history of government monetary policy, domestic and foreign, recent and ancient, provides a mindnumbingly endless series of examples of currency debasement, all telling the same story.
For more background on Thiers’ Law (vs Gresham’s Law, which Stahl frequently cites re. Bitcoin), see https://www.momentum-analytics.io/news/are-we-starting-to-see-thiers-law-in-action-the-reverse-of-greshams-law
David Chambers, Elroy Dimson, Christophe Spaenjers, Art as an Asset: Evidence from Keynes the Collector, The Review of Asset Pricing Studies, Volume 10, Issue 3, October 2020, Pages 490–520, https://doi.org/10.1093/rapstu/raaa001
David Chambers, Elroy Dimson, Christophe Spaenjers, Art as an Asset: Evidence from Keynes the Collector, The Review of Asset Pricing Studies, Volume 10, Issue 3, October 2020, Pages 490–520, https://doi.org/10.1093/rapstu/raaa001
Finally, we compare the performance of the Keynes collection to a measure of the overall art market. We use the index developed by Goetzmann, Renneboog, and Spaenjers (2011) updated using the U.K. art index of Artprice.com (2019). Of course, this index is not investable; the goal is to understand how differently the Keynes collection performed as compared to (an imperfect proxy for) the overall art market.
“100 Baggers: Stocks That Return 100-To-1 and How to Find Them”, Christopher W. Mayer