How Keynes innovated a new style in investment management

J M Keynes is well-known as a patron of the arts and as the owner of one of the finest private collections of modern paintings when he died. In this article, John Wasik* describes Keynes’s role as investor and fund manager and shows how his practical experience of markets influenced his ideas about how capitalism worked.

When I was asked by my publisher to explore the investment portfolios of John Maynard Keynes, it didn’t appear to be a daunting task. After all, Keynes was not only one of the greatest economists in history, but the subject of numerous biographies, including the multi-volume masterwork by Lord Skidelsky.

Yet none of the biographies looked deeply into what Keynes owned and how he traded. Most acknowledged the well-worn tales of Keynes reading the daily stock tables in bed every morning and naming his favourite stocks his ‘pets’. But few economists today, I suspect, are aware of the extent of his trading prowess.

For the many detractors of Keynes who, even now, maintain that he was the progenitor of socialist-style government control of entire economies, they are sure to be profoundly disappointed by what I found. Keynes was clearly a rabid speculator and active trader. He loved markets and was able to adapt to some of the worst financial and historical calamities ever. Although Keynes was one of capitalism’s sharpest critics — albeit one who recognized its efficiency — his trading experience is often understated and provided a unique contribution to the future practice of money management.

More importantly, Keynes learned from his mistakes and near financial ruin. He was able to move on, reach new conclusions about how to regard market movements and earn a place in the pantheon of great investors that include Benjamin Graham, Warren Buffett and George Soros. It’s no small stretch to say that Keynes was also the godfather of behavioral economics and value investing at a time when such things had little or no currency.

Among other things, Keynes genuinely enjoyed being a speculator and investor. In addition to eventually crafting ideas and institutions that would rescue Western economies (and Japan) after two devastating cataclysms, he managed money for his own portfolio, his Bloomsbury friends and several institutions. Keynes was most likely one of the first hedge fund managers and established some time-honoured principles that the best investors follow today.

It was only after going through thousands of brokerage account statements, ledgers, shareholder letters and portfolio summaries that Keynes’s investment personality emerged. Thanks to gracious access granted to me by the King’s College archives at Cambridge University, I was able to piece together a mostly unknown side of Keynes that most Keynesian economists have never seen. The narrative starts with a brilliant Cambridge lecturer who is starting to make his way in academia after an unsatisfactory post in the India Office prior to World War I.

Early investments
Keynes probably felt unchallenged in his position in the India office, although he relished being in London and the immersion in the Bloomsbury Group. He also wanted to return to Cambridge, where his intellect could be stimulated as a scholar and lecturer. By mid-1908, he was back at King’s College. The following year, he started lecturing on money, credit, prices and the stock market (in 1910).

It’s at the end of the 20th century’s first decade that we see Keynes’s growing interest in markets, investing and speculation. In his lecture notes, we see a curious Keynes who has, up until that point, little direct engagement in investing, but a yearning to explore. His lecture on the stock market, in the Lenten term of 1910, calls it ‘essentially a practical subject, which cannot properly be taught by book or lecture.’

According to economist Professor Victoria Chick, whom I interviewed in London in March, Keynes ‘loved gambling and was always one to get involved in a card game.’1 But it was a penchant for market speculation and his friendship with stockbroker Oswald Falk that propelled Keynes to explore the markets just before World War I. When I asked his biographer, Lord Skidelsky, when he first saw evidence of Keynes’s serious interest in investing, he surmised it was before 1910, when ‘like (George) Soros, I think he used the financial markets to test his theory of probability.’2 Keynes had begun work on a book on probability — later published in 1921 as A Treatise on Probability — prior to the war.

Before World War I, Keynes was mostly unchastened in the stock market. Since he didn’t have inherited wealth —- and lecturing at Cambridge didn’t pay much at the time — he was dependent upon allowances from his father (a Cambridge don and administrator), his mentor economist Alfred Marshall, and tutoring fees. Although he managed to accumulate money from birthdays and academic prizes in a ‘special fund’ started in 1905, he didn’t really start investing in earnest until 1914, according to the editor of his papers, Donald Moggridge. ‘By 1911, he was not only buying additional shares, but also making switches and helping manage certain family trust funds,’ Moggridge discovered.3

After World War I broke out, Keynes took a post in the Treasury, where he helped finance the conflict for Great Britain. When the war concluded, Keynes began to speculate in the currency markets with unbridled enthusiasm, setting up investment funds for his friends, family and London colleagues.

Using his knowledge of international finance, Keynes took to the currency markets with abandon. Floating currencies, which had been fixed before 1914, were notoriously volatile at the time, but Keynes thought he had the advantage of ‘superior knowledge’. Believing that post-war inflation would hurt the values of the French franc, German reichsmark and Italian lira, Keynes shorted those currencies. This transaction made money if the currencies dropped in value relative to other, stronger currencies such as the British Pound or U.S. Dollar. He went long on the Indian rupee, Norwegian and Danish kroner and dollar.

‘He wanted to make money in a hurry in the 1920s,’ Skidelsky told me, ‘and thought gambling on currencies (when currencies were floating in the early 1920s) was the way to do it.’ 4

Along with Falk, his brother Geoffrey and Bloomsbury friends, Keynes set up an investing syndicate in 1920, which many financial historians claim was one of the first hedge funds. Rather than manage money for preservation of capital or yield, Keynes was speculating pure and simple. At first, his strategy paid off, netting $30,000 for his investors in the first few months. By April 1920, notes Liaquat Ahamed in Lords of Finance, Keynes made an additional $80,000, which was astounding considering that most of Europe was essentially broke from the war. Then something unexpected happened: ‘Suddenly, in the space of four weeks, a spasm of optimism about Germany drove the declining European currencies back up, wiping out their entire capital.’ 5

Embarrassed, though willing to get back on the speculation horse to make up the losses he suffered for his friends and family, Keynes re-invested in currencies following his 1920 shellacking. It also helped he was staked by his father and wealthy investors, who had unwavering confidence in Keynes.

The Roaring Twenties
As a trader who believed that he could profit from the impact of supply and demand curves, Keynes became enraptured with the idea of commodities trading in the 1920s. Europe clearly needed every kind of commodity to rebuild after the Great War. Prices generally followed the demand. There were opportunities for astute speculators and Keynes started researching and writing about commodities in the early 1920s for the London and Cambridge Economic Service and Manchester Guardian.

When it came to commodities, Keynes was an absolute data wonk. His documenting of commodity price supplies and fluctuations fill nearly 400 pages of Volume XII of his collected works. Why this intense interest? He figured if he could discern pricing patterns relative to supply and demand, he could make a fortune. And there seems to be an endless fascination with a variety of compiled figures. Here’s one of his earliest investment funds, which also included some of his stock purchases that had businesses related to commodities:

How did Keynes do overall during the 1920s? While it’s difficult to tell because he traded so many contracts in the 1920s, Skidelsky found that in 1927 his net assets totalled some $3.4 million (in today’s dollars). But everything in world markets began to change in 1928, when prices began to drop and he was still long in rubber, wheat, cotton and tin. After the stock-market crash of 1929, he would eventually lose some 80 percent of his net worth, forcing him to put some of his paintings on the market (he ended up not selling them).

By the end of the decade, Keynes’s foray into commodities ended much the same way the 1920s began (with currency losses), only worse. He was on the wrong side of most of his trades when demand collapsed. By 1930, after Wall Street crashed and the world plunged into the Great Depression, wholesale prices had plummeted 20 percent. Many commodities -— wheat, cotton, wool, silk, sugar, rubber and metals — took a 50 per cent hit.

The Great Depression and World War II
Having lost the bulk of two fortunes, Keynes re-oriented his thinking about trying to predict market movements. If one couldn't rely upon a mountain of data analysis and speculative insights on supply and demand, then what was left? As he concluded in his 1936 masterpiece The General Theory of Employment, Interest and Money, ‘animal spirits’ were the force behind market activity. They were hard to reckon with and impossible to predict, so he needed to adjust to this unpredictable current of irrationality. As he began to step outside the bounds of classical economics, he was doubtless influenced by his investment failures. Instead of trying to anticipate the market, Keynes now focused on the enterprise, or intrinsic, value of what stocks were worth. He drastically reduced his commodity positions. Then he latched onto high-dividend stocks in the 1930s when most traders were out of the market. It was this contrarian view that launched Keynes as not only one of the first value investors, but a long-term investor who turned his back on short-term valuations and market trends. Even more remarkable was that Keynes stuck to his new investment theory during one of the most decades for stocks in history.

More importantly, the results from this tumultuous period show Keynes’s resilience and willingness to adapt to changing markets. Keep in mind that during the Great Depression, there were a series of recessions followed by stock-market comebacks. Although Keynes wasn’t able to avoid some of the largest sell-offs in 1930-31, 1938 and 1940, the Kings College Chest Fund had a winning streak from 1932 to 1937, a period in which U.S. stock market losses ranged from 43 to 25 percent annually. Over those six years, US big companies lost money in three annual periods. Considering the time in which he was investing, Keynes showed either amazing skill or sizzling luck.

Looking at the three-worst recorded years for large U.S. stocks (measured by total return since 1926) — 1931, 1937 and 2008 — Keynes did reasonably well (he was managing money during only two of them). He only lost about 25 per cent in 1931 when American shares lost 43.3 per cent and gained 8.5 per cent in 1937, the year of a 35-per cent loss in the US He beat the UK market in 12 out of 18 years.7

Much of Keynes’s innovative style was fuelled by his growing preference for stocks, although he contributed a plethora of insights and advances to institutional money management as well. David Chambers of the Cambridge Judge Business School and Elroy Dimson of the London Business School recently published a landmark study that showed that ‘Keynes’s experience in managing the [King’s College] endowment remain of great relevance today.’8

What’s even more remarkable is that Keynes was not only managing money for King’s College during his heyday, but institutional funds for National Mutual Life Assurance Society (he was chairman from 1921 to 1938), the Provincial Insurance Company (director from 1923 to his death) and personal funds for himself, friends and colleagues.

As the table (right) shows, Keynes pivoted from his losing macro strategy in the 1920s, in which he underperformed indexes from 1926 through 1928, to a more bottom-up style thereafter. His outstanding performance reflects his modified style: He only fell behind market indexes once in the 1930s (1938 was his worst year, but it was also dismal in the US) and once in the 1940s. His Sharpe ratio and average performance are excellent as well.

Keynes the investment innovator
Keynes’s performance under fire during the 1930s and World War II (his street in London was literally bombed), inspired several generations of investors that followed. His dogged pursuit of value stocks, dividends, cash flow and future earnings established him as a durable ‘buy and hold’ investor who was confident he would be rewarded in the long run.

After his death, the vindication of Keynes’s portfolios proved that he deserved to be emulated. Although his estate was worth at least $22 million (in 2013 dollars) when he died, his contribution to the arts, modern economics and a more stable global economic climate is incalculable. As an investor, he championed the merit of examining the ‘earning power’ of stocks, looking deep into the ability of a business's ability to survive in a variety of economic conditions and the abandonment of market timing and speculation.

Even more significant is his recognition of ‘animal spirits’ and the role that mass psychology plays in investing and markets. In doing so, he tackled one of the most elusive — and powerful — elements of markets, behavior that modern economists have still yet to fully understand, much less predict.


* John Wasik is the author of the forthcoming book Keynes’s Way to Wealth: Timeless Investment Lessons from the Great Economist (McGraw-Hill, 2013). He also writes a weekly investment column for Reuters and contributes regularly to other business publications. Email:

1. Interview with Victoria Chick, Bloomsbury, London, March 3, 2013.

2. Email response from Lord Skidelsky, 1/9/2013

3. Maynard Keynes: An Economist's Biography, by Donald Moggridge (Routledge, 1992), p. 194.

4. Emailed response from Robert Skidelsky, 1/9/2013.

5. The Lords of Finance: The Bankers Who Broke the World, by Liaquat Ahamed (Penguin, 2009), p. 165.

6. Collected Works of Keynes, Vol. XII, p. 32.

7. Chambers, D., and E. Dimson. ‘John Maynard Keynes, the Investment Innovator’, Journal of Economic Perspectives, 27 (3), Summer 2013, pages 1-18.

8 Ibid.

9. D Chambers and E Dimson (forthcoming) ‘Keynes the Stock Market Investor’, Journal of Financial and Quantitative Analysis. table 2. Available at

10. ‘DMS’ refers to the authors of the UK equity index Dimson Marsh and Staunton. See p.6 of Chambers and Dimson in note 9, above.

From issue no.163, October 2013, pp.5-9

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