Keynes as investor-speculator

John Maynard Keynes (the First Baron Keynes of Tilton, 1883-1946) is usually remembered as the author of The General Theory of Employment, Interest and Money (1936) and father of “Keynesian economics.” He was probably the most famous and influential economist of the past century, and (based upon the damage they wreaked in the 1960s-1970s and since the GFC) the policies that he inspired have surely been the most destructive. Only infrequently, in contrast, has he been recalled as a speculator who first lost heavily, then learnt hard lessons and eventually became a successful (but lucky and privileged insider) investor-speculator.

It helps to have acolytes

Keynes’ many admirers have discounted his failures and exaggerated his successes as a speculator-investor. In “Why Keynes Is the Man” (The Weekend Australian, 27-28 March 2021), for example, Helen Trinca incorrectly asserts that he “outperformed the index [she doesn’t say which one] over many decades.” And in “Markets, Mobs and Advice from a Master” (The Deal, June 2021) Justyn Walsh gushes that Keynes “mastered the financial markets in practice as well as in theory, substantially outperforming the broader indices over a multi-decade period ...”

Laudatory allegations such as these have been uttered repeatedly over the past several decades. “Regardless of how you feel about his theories on the need for governmental intervention in the economy,” wrote Jason Zweig (“Keynes One Mean Money Manager,” The Wall Street Journal, 2 April 2012), “Keynes has, among those who’re aware of this aspect of his life, long … had a reputation as an outstanding investor.” Warren Buffett hasn’t just extolled Keynes’s investment acumen: he’s cited Keynes as a forerunner of his investment philosophy. In his 1988 Letter to Berkshire Hathaway’s shareholders, Buffett stated that “Keynes … began as a market-timer (leaning on business and credit-cycle theory) and converted, after much thought, to value investing.” In his 1991 Letter, Buffett enthused that Keynes’s “brilliance as a practicing investor matched his brilliance in thought.” 

Zweig praised Keynes even more highly: "the famous economist also was one of the greatest investors of the past century … David Chambers and Elroy Dimson, finance scholars at the University of Cambridge and the London Business School, respectively, … have found Keynes’s returns were extraordinary." Similarly, John Wasik claims that Keynes was a “stunningly successful investor;” and the blurb in the jacket accompanying Justyn Walsh’s book (recently re-released) lauds his "ability to make vast sums of money on the stock market. … The college endowment fund he managed … massively outperformed the broader market over a two-decade period."

To substantiate their assertions, Zweig, Walsh and Wasik cite the research of academics such as David Chambers and Elroy Dimson. Alas, the non-academics overstate and perhaps even misrepresent the scholars’ conclusions. Chambers and Dimson actually found that “previous studies … claimed that Keynes’s performance for [King’s College of the University of Cambridge] was stellar. Our results, however, qualify this view.” Specifically, Keynes’ “investment performance for King’s College, whilst impressive, was not the uninterrupted success that has previously been believed.”

A less laudatory view

Liaquat Ahamed’s assessment of Keynes the speculator, detailed in Lords of Finance: The Bankers Who Broke the World (2009), is much less complementary. After the Great War,

remained an active speculator, an exhausting and dangerous pastime in that turbulent decade. … Buying and selling on margin, he was able to leverage his positions substantially and his portfolio could be very volatile. he began 1923 with about $125,000 … During the next five years, he doubled his money, making most of it trading commodities and currencies, rather than stocks. …But as 1928 progressed, his portfolio began to unravel. He sustained substantial losses in April when rubber prices collapsed by 50% as the world cartel broke down, forcing him to liquidate large holdings to meet margin requirements. …

The price for being a speculator was that all these miscalculations wrought havoc on his net worth. By the middle of 1929, he had lost almost three-quarters of his money. The only saving grace was that in order to meet his margin payments, he was forced to liquidate much of his stock portfolio and entered the turmoil of 1929 only modestly invested in the market. …

In that latter respect, Keynes was very lucky rather than highly astute. His admirers agree that he learnt from his mistakes and therefore that he profited greatly during the Great Depression. That view certainly isn’t false; critically, however, it isn’t complete. Ahamed explains:

During the 1930s, Keynes’s speculative activities made him a rich man. After losing 80% of his money when commodity prices collapsed after 1928, he … ended 1929 with a portfolio of under $40,000. He shifted his strategy from short term speculation to long-term investment and at the lows of the Depression put together a concentrated portfolio of a select number of British and American equities. Convinced that Roosevelt would succeed in reviving the U.S. economy, Keynes used margin to leverage his portfolio … By 1936, his net worth was close to $2.5 million – the equivalent today of $30 million. Though the bear market of 1937 more than halved this, by 1943 it had recovered to $2 million.

A more balanced assessment

In 2016, I reanalysed data compiled by Chambers, Dimson and Moggridge (see the attached pdf, which provides details, references, etc.). Unlike the academics, I analysed Keynes’s personal portfolio as well as the main external one (i.e., the “Discretionary Portfolio” of King’s College) over which he possessed virtually unfettered discretion. When I expressed these results properly – that is, as geometric rather than arithmetic means, and adjusted for the considerable risk that Keynes took during most of his investment career (in particular, his heavy use of borrowed money), I found that his overall results were indeed very good (albeit extremely volatile); but they weren’t as good as Chambers and Dimson state – and not phenomenal as Walsh, Wasik and Zweig assert. 

Moreover, I added key caveats that put Keynes, his modus operandi and results into proper perspective – and some doubt.

First, and most importantly, analyses of Keynes’s results don’t derive from verifiable records. More specifically, they don’t stem from objective information such as contract notes; instead, they depend upon his subjective “estimates” of his results. Can we trust them? Given his highly questionable character, it’s sensible to take Keynes’s “estimates” with a large pinch of salt.

The second caveat is that in several key respects Keynes was blatantly hypocritical: privately, he eagerly speculated in markets; publicly, he self-righteously demanded that the government regulate them. The public-spirited reformer purported to see the damage that volatile prices wreaked upon consumers and producers; yet the self-interested speculator sought unabashedly to profit personally thereby! In Hunter Lewis’ words, 

Keynes was a speculator, at the same time that he criticized speculators and the “casino” atmosphere of the market. He also failed entirely to understand that the casino was fuelled by the easy money policies which he espoused.

Keynes was particularly two-faced about gold. In A Tract on Monetary Reform (1923), he famously denounced the gold standard – and by extension gold itself – as a “barbarous relic.” By this he meant that its usefulness as money was obsolete and hence it had no monetary value. Yet at several points during the 1920s and 1930s he invested heavily in the stocks of gold miners. Indeed, according to one account in 1932-1933 he ploughed two-thirds of his personal investments into South African gold stocks! Keynes believed that South Africa’s parlous economic situation at that time would oblige it to depreciate its currency. On 27 December 1932, South Africa abandoned the gold standard; the Rand subsequently plunged. A weaker Rand meant that the profits of South African gold miners – generated by selling gold abroad — would rise sharply. Non-monetary gold, Keynes correctly reckoned, was more valuable than non-gold currency. Some relic! Damn the duplicity: Keynes, it seems, never let his public utterances stand in the way of private profits. 

Jason Zweig also adopts a double standard and gives Keynes the resultant benefit of the doubt: he lauds the concentration of Keynes’s portfolio – including his occasional heavy purchases of gold mining stocks – yet for the same reason excoriates others’! Similarly – and my third caveat – the academic establishment, too, has greatly changed its tune – to the benefit of Keynes’s reputation. Until a couple of decades ago, its standard of evidence was exceedingly strict and for all practical purposes impossibly high: leading professors emphatically denied that investment “outperformance” was possible – and even if it was, without up to 75 years of quarterly data they piously proclaimed that they couldn’t ascertain whether it resulted from brains or mere luck. Today, however, they uncritically accept Keynes’s subjective “estimates” (rather than hard evidence from contract notes and the like) of the Discretionary Portfolio’s 20-year track record, and ignore the more volatile and leveraged results of his personal investments. On this flimsy logical basis (and its subjective evidentiary basis), they don’t just affirm – they praise – Keynes’s alleged “outperformance.”

Finally, we can’t ignore the incontestable truth: throughout his life Keynes was insufferably arrogant. Such people usually get their comeuppance – as Keynes the speculator repeatedly did. Yet in fairness we must also acknowledge that, as an investor, his hubris had a positive side: as Zweig noted in “John Maynard Keynes: Courage Is the Key to Investing” (The Wall Street Journal, 14 October 2016), during the market crashes of the early- and late-1930s he displayed admirable guts and patience. 

Chambers and Dimson, as well as Walsh and Wasik, emphasise that Keynes learnt from adverse experience. But they overlook the critical fact that he saw the light at just the right time – and got plenty of help when he was on the financial ropes. Was Keynes, as Zweig gushes, “one of the greatest investors of the past century”? That’s a gross exaggeration. As an investor, he held his nerve when many others panicked, and consequently achieved very good long-term results.

But he was also extremely well-connected – and his contacts allowed him to borrow heavily and repeatedly saved him from oblivion. In a stratified society like Britain in the 1920s and 1930s, when you got into financial strife it helped – to put it mildly – if you had once been a senior official at the Treasury, then chaired a large insurance company and finally sat on the board of the Bank of England! Assuming that you can trust his “estimates,” Keynes wasn't so much a good investor as a supremely well-networked (and hence very privileged and lucky) investor-speculator. On balance, Keynes the investor, unlike Keynes the economist and speculator, deserves study and in some respects emulation: but not veneration.

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