Yahoo Finance How to Invest Like John Maynard Keynes
Many people are familiar with British economist John Maynard Keynes. His contributions to modern macroeconomics, such as the idea that boom-and-bust cycles should be moderated by government intervention and that periods of high unemployment can continue longer than expected due to low demand from consumers, remain hugely influential more than 60 years after his death.
Few people know how he invested, however. John Wasik, the author of several investment books, has written a new book, "Keynes's Way to Wealth: Timeless Investment Lessons from the Great Economist," for the average investor who is curious to know what Keynes invested in and what principles drove him to those investments. U.S. News asked Wasik more about what investors can learn from Keynes.
One of Keynes' major contributions to modern macroeconomics and investing behavioral research was the idea of "animal spirits," that people make emotional decisions when investing that aren't always easy to predict. What should investors look out for?
There can be no justification for day-to-day [share] price changes. You can't say it went down because of factor X. That's pure hokum. Humans are moving things for no particular reason. You get spooked by something and move it. In Keynes' book ["The General Theory of Employment, Interest and Money"], there is a gem of a chapter where he says there's no point in trying to figure out what this beast is doing.
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What kind of investments did he favor?
In the 1920s, Keynes focused on betting on macroeconomic trends in currencies and commodities but later focused on the quality of management at companies to make investment decisions.
Which do you think is a better investing approach?
His view changed after he started speculating in commodities and got his clock cleaned. His view is long-term. He learned, "I can pretend to know the animal spirits but it will destroy the value if I try to outsmart it." What he was doing is the antithesis of what a lot of people are doing today. This is pure Warren Buffett. Why sell if it's heading in the right direction? I tried to ask [Warren Buffett] myself. His prime inspiration was Ben Graham, but did Keynes influence him? I think so, and it's apparent from his quotations that he knows what [Keynes] was up to but I couldn't confirm it.
[Read: Investors: Don't Follow the Herd.]
Keynes called gold a "barbarous relic," as you wrote. What would he think about all of the people who said during the recession, "Invest in gold during a crisis"?
Keynes would have said it was a bad idea because there is a finite amount of gold in the world. Since 2008, people have been talking about it as a sort of backup currency, and it was very disappointing to a lot of people who came to that conclusion. Gold, by itself, pays no dividend, is not tied to earnings and is largely indexed to fear.
Keynes didn't foresee the crash of 1929, despite all of the information available to him. Plus, his portfolio had an unusually high-risk exposure for commodities futures contracts, which you called his "pets." What lessons do you think investors can learn from Keynes' mistakes?
Emotionally based reasons are really not good reasons for investing. People have really been burned that way. Maybe you know the company well and you patronize the company, but that's not a reason. Keynes thought he knew currencies and commodities better than anyone else, but he was wrong on a lot of things he shouldn't have been. The best strategy is to know to turn off the television, stop watching Fox Business and figure out where you need to be in a couple of years.
Keynes had impressive risk-adjusted returns from 1928 to 1945. You said he achieved this by being resilient after large losses and adapting to changing markets. Some people would say it's difficult to have both qualities at once. How do you suggest investors embody both commitment and adaptability in their investments?
The fundamental question is: How much can I afford to lose? Some people shouldn't be in stocks, period. But there is always some risk in whatever you're investing in. There is a study on retirement research that shows that when people see something like a hedge fund manager [being] prosecuted, they take their money out. Now, not investing in something because something happened doesn't make sense. Something will always happen. It's life. The question is can you go to sleep at night knowing this is your strategy?
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You write that investors should invest passively because index funds are the market. Some people might say that investing in active equity funds is a good idea now because it's a stock picker's market. What do you say to that?
There is a fallacy there. If you go into an active fund, you assume that you have a manager who knows the future. You have to prove those decisions weren't simply luck or chance. Most managers won't pass that hurdle. Most can't prove they have that skill. It just isn't a good probability.
Why did you decide to write about Keynes?
After a while, I didn't think I'd write another book. I thought, "No one really wants to invest in stocks when market is down. Investors have been gun-shy about stocks since 2008. Most people don't want to listen to that advice." Then someone approached me and said, "Hey, maybe you could write about this guy's portfolio." And I realized that a lot of economists who are familiar with his work had no idea what he invested in. I approached Paul Krugman [at a book signing], one of the biggest Keynesians, and asked him, and he said he didn't know!
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