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The Non-Secret Secret of John Maynard Keynes

| March 10, 2018

I’m writing this post on the afternoon of February 21, 2018.  Contrary to my own best advice, I’m watching the stock market.  A couple of hours ago, the Dow Jones Industrial Average (DJIA) was up 150 points. Suddenly, a little after 1:15 pm, it headed south and closed down 167 points1.  Did the thirty stocks of the DJIA really lose that much vale in an hour and half?  Of course not. 

What happened, I’m assuming, was that the Federal Reserve Open Market Committee released the minutes of its last meeting, and reported that the economy is strong enough, and inflation is threatening enough, to justify a continuation of their plans to raise short-term interest rates three more times in 2018.  In response, the yield on the benchmark 10-year US Treasury bond rose to 3%2, which in turn triggered the selling in stocks.  The logic behind the market sell-off, then, must be that a strong economy is a bad thing.  If that’s the case, it completely ignores the far more important aspect of a strong economy, which is rising business profits.  The Federal Reserve didn’t address that probability, but investors should not be ignoring it.  Another day, perhaps.

John Maynard Keynes, the twentieth century’s most influential economist, was also one its greatest investors.  He suffered an 80% loss of his capital in the 1929-1932 stock market crash, but learned from his mistakes, recovered, and posted annualized gains from 1927-1946 of nearly 12%.  In other words, even through the Great Depression of the 1930’s and WWII, Keynes blew the doors off the vast majority of his fellow institutional investors3.  How did he do it?  He eschewed trying to time the market. Here is Keynes in his own words:

In the main, therefore, slumps are to be lived through and survived with as much equanimity and patience as possible.  Advantage can be taken of them more because individual securities fall out of their reasonable parity with other securities on such occasions, than by attempts at wholesale shifts into and out of equities as a whole.  One must not allow one’s attitude to securities which have a daily market quotation to be disturbed by this fact.

                ~from a memorandum dated May, 1938*

There is a bit more to the Keynes story, of course, including the fact that his portfolios were super concentrated, meaning that he might have five stocks that comprised half or more of his portfolio.  Like Warren Buffet, he was a consummate stock-picker.  Although you and I are not Buffet or Keynes, we can take a lesson, and we have.  PATIENCE, DISCIPLINE, and CONFIDENCE in the FUTURE.  mh

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  1. 100 Baggers, by Christopher Mayer, Laissez Faire Books, 2015.
  2. http://markets.wsj.com/us Feb 21, 2018
  3. 100 Baggers, by Christopher Mayer, Laissez Faire Books, 2015.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.All indices are unmanaged and may not be invested into directly.Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.