On Keynes The Investor

John Maynard Keynes is revered as an economist. His insights have stood the test of time. Most people don’t know he was also a brilliant money manager. He earned that reputation while tending to the affairs of King’s College, Cambridge where he increased their endowment dramatically.  Rivaling the endowment of the much wealthier Trinity College.

He wrote about the stock market and its affect on the macro-economy.  This comment from The General Theory of Employment, Interest and Money (1935), Ch. 12 demonstrates the problem investors face when they over emphasize the stock market generated prices of a security.

“The Stock Exchange revalues many investments every day and the revaluations give a frequent opportunity to the individual (though not to the community as a whole) to revise his commitments. It is as though a farmer, having tapped his barometer after breakfast, could decide to remove his capital from the farming business between 10 and 11 in the morning and reconsider whether he should return to it later in the week.”

We know a farmer  invests in his business and runs it without much notice or acknowledgement of its day to day value. Investors like Klarman and Buffett do the same thing even though they have ready and continuous access to market information about the value of the businesses in which they invest.

Like Buffet and the farmer, Keynes saw the value in concentration.

“I was suffering from my chronic delusion that one good share is safer than ten bad ones, and I am always forgetting that hardly anyone else shares this particular delusion.”

Thinking about investing in businesses is quite different than the intellectual approach to investing in stocks. Perhaps the British term “shares” rather than stock, would provide greater awareness that when one buys in the stock market, they buy a share of a business. A tiny percentage becomes theirs.

Investors own shares in a business, traders own stock.

Investing in a business is something one can analyze. Industry position, financial condition, profitability, free cash flow, management, products and services, the economy and government activity all figure in. It is not easy, but it is possible.

Buying stock and relying on the market to improve to your satisfaction is harder. There are few objective guidelines to what would work. Keynes himself may have been a trader sometimes. Two of his comments have the tint of trader.

“There is nothing more costly than a rational investment policy in an irrational world”

and

“Successful investing is anticipating the anticipations of others.”

Anticipating the anticipations of others in a sometimes irrational world strikes me as superhuman. The easier choice is to buy a business and hold it for a long time.

The trading style is always two-decisions.  Buy and sell with nothing but price as a guide. Investing has a buy and sell aspect too, but with differences on how to decide when. Sell can range up to never. Sell includes objective factors similar to the ones assessed when buying. Keep is the same decision as buy.

Trading can be very profitable and probably quicker, but it requires a skill set that is incredibly difficult to acquire. It is part predicting the future and part mind reading. Both of those have uneven outcomes. Perhaps Keynes can help again.

“The market can stay irrational longer than you can stay solvent”

Maybe something more objective would better suit your temperament. You can know why you own a business. Stocks not so much.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

 

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