Keynes anticipated with uncanny accuracy the findings of modern researc h, which has repeatedly shown that trying to guess the movements in a market's overall level is a losing investment strategy
Saturday 20 April 1996
Yet investors then spent a good deal of the time arguing over just the same issues as they do now. Are shares a better bet than bonds? Should you trade shares actively or buy and hold them for a long time? Can anyone successfully forecast the market? Should you buy companies that are growing fast or ones whose shares look cheap by historic standards?
Everyone in the 1930s had their views, then as now, on all these questions - and none more so than Lord Keynes, the man whose brilliant mind did more to change the face of economics than anyone else this century.
This week marks the 50th anniversary of Keynes' death, and this year the 60th anniversary of his most famous publication, The General Theory.
While most people are aware of the decisive impact that Keynes' ideas had on the way governments attempt to manage their economies, fewer know much about his life as an investor. Yet as his biographer Lord Skidelsky has pointed out, few economists have ever been so actively involved in playing the markets as Keynes - and none, arguably, has ever understood them better.
Throughout the 1920s, Keynes was an active trader in the currency and stock markets. For several years, with his stockbroking partner, Oswald Falk, he managed a pool of money for their friends and acquaintances.
He also single-handedly managed the finances of King's, his Cambridge college, with conspicuous success, multiplying their capital sevenfold in a matter of just a few years. All this while he was simultaneously pursuing his main career as a professional economist and taking a leading part in the political debates of the day.
The irony is that, while his reputation as an economist has suffered in recent years, his standing amongst investors has remained much more secure. Keynes had nearly all the qualities that good investors need, including the vital one of being able to change his mind overnight. According to Lord Skidelsky, Keynes' prowess at investing was such that by 1936 his personal net worth was of the order of pounds 500,000 - equivalent to some pounds 13m in today's money.
And this despite having been nearly wiped out in the wake of the Wall Street crash just seven years earlier. Interestingly, the Wall Street debacle was not the first time that Keynes had confronted disaster.
In 1920, his feverish speculation on the currency markets all but wiped out the capital that he and Falk had raised from their family and friends.
But Keynes was notoriously not short of confidence and he returned to the fray with undiminished vigour. But he entirely changed his strategy. In his early career as an investor, his aim was to try and make money by anticipating short-term movements in the markets, based on his analysis of what was happening to interest rates and the money supply.
Yet even Keynes was forced to the reluctant conclusion that this particular game was simply too difficult to make work. "I was the principal inventor of credit-cycle investment," he told a fellow economist in 1938, "and I have not seen a single case of a success having been made of it."
Keynes therefore anticipated with uncanny accuracy the findings of modern research, which has repeatedly shown that trying to time the market (that is, guessing the movements in the market's overall level) is a losing investment strategy.
In the 1930s, while continuing to speculate in the commodities market, he now preferred to stick to buying a relatively small number of shares that he liked - and then holding them for longer periods of time. These favoured stocks he dubbed his `pets'.
The key to successful investment, he came to believe, was to look for bargains and resist the blandishments of "the crowd" who determine the short-term ups and downs of the markets.
Falling markets were the time to be looking to buy, not to sell. An investor, he told one correspondent, "should be aiming primarily at long period results".
It was good advice then, and it is good advice now. Yet Keynes was never one to lose sight of the fact that one reason so many people are drawn to the stock market is that they like to play what he called "the great game" of investment. Pitting your wits against the crowd may not be the best way to make money long term, but it can still be a lot of fun.
Not for nothing was Keynes one of the first to draw an analogy between the stock market and a casino. "The game of professional investment", he wrote, "is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct".
Keynes was also wise enough to know that stock markets are made up of people, not bits of paper, and that nothing will ever change human nature. Keynes may not have solved the problem of unemployment for all time, as many post-war politicians dared to believe, but he was the first great economist to write "the love of money" into his model of the economy.
He was also one of the first to realise that speculators, love them or loathe them, were a fact of life. He knew - for the simple reason that he was one himself.
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