You would think that if anyone could make money playing the markets, it would be John Maynard Keynes. He was brilliant, and arguably the inventor of 'macroeconomics', which is the difficult business of analysing the economic system as a whole, rather than as a series of discrete parts.
Keynes was also very well connected. In the 1920s, he once received advanced warning that the Bank of England was to change its interest rates. (Insider trading was not an offence at the time.)
During the First World War, he worked at the British Treasury, which was borrowing dollars from the US and lending pounds to France and other allies. Keynes's task was to make money doing all this. It provided unparalleled experience as a currency trader on the grandest scale — experience, which he used while trading on his own account immediately after the war.
He was not a great success. On occasion his speculations were hugely profitable — he roamed post-war France in 1920 spending the proceeds on paintings by Picasso, Cezanne and others. Within months, though, his bets had unravelled and he had to rely on wealthy friends to bail him out. By 1924 he was rich again but, overall, a draft research paper by the economists Olivier Accominotti and David Chambers concludes that Keynes's record as a currency trader was unimpressive.
Keynes also invested in shares, not least in his role managing the investment portfolio of King's College, Cambridge, for 25 years until his death in 1946. He embraced this task with undiminished confidence that his superior understanding of the economic cycle would lead to profit, and he moved the investment portfolio in and out of different industrial sectors in anticipation of these large economic fluctuations.
This approach, based on Keynes's macroeconomic forecasts, was (again) not a success. According to a recent study of Keynes's investments for King's College — by David Chambers again, this time with Elroy Dimson — Keynes actually underperformed the market as a whole by about two percentage points a year through the 1920s.
Finally, after failing to foresee the 1929 stock market crash, Keynes changed his tactics. Instead of trying to anticipate macroeconomic trends, he searched for undervalued stocks and bought substantial holdings in them. He tended to hold shares for the long term, calling favoured stocks his "pets". He sought companies that paid generous dividends, and distressed companies that held out the possibility of recovery. In short, he invested like Warren Buffett.
This new approach, based on business fundamentals rather than economic forecasting, paid off very nicely indeed. By the end of his 25-year reign, Keynes's success had made up all his early underperformance for the college and much more, outperforming the market as a whole by almost six per cent per year.
All's well that ends well, then. But, if the world's leading macroeconomist could not prosper with a macroeconomic approach to investing, surely that is a lesson for the rest of us.
Tim Harford is a Financial Times columnist and author of The Undercover Economist Strikes Back (Little, Brown, £20).
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