What Keynes can teach middle class investors

BY John Wasik  January 16, 2014 at 11:23 AM EDT
John Maynard Keynes is often associated with government intervention, but his investment strategy reveals a die-hard capitalist, argues John Wasik. Photo courtesy of Tim Gidal/Picture Post/Getty Images.

John Maynard Keynes is often associated with government intervention, but his investment strategy reveals a die-hard capitalist, argues John Wasik. Photo courtesy of Tim Gidal/Picture Post/Getty Images.

The decline of upward mobility and increased inequality in America has been a frequent refrain on this page. But what if the middle class could boost their mobility in the 21st century with a little investment advice from an investor who didn’t even survive to the second half of the 20th century? Like the eponymous adjective that describes much of his contribution to economics, John Maynard Keynes is often thought of as an economic theorist who invested on the side. Here to bring out of the shadows Keynes as an avid investor and die-hard capitalist is John Wasik, author of the new book “Keynes’s Way to Wealth: Timeless Investment Lessons from the Great Economist,” recently reviewed in The New York Times. Wasik is a columnist for Reuters and has written 14 other books.

John Wasik: As America contemplates with mixed feelings the 50th anniversary of the War on Poverty and the proposed extension of jobless insurance, there’s been much hand-wringing on what could buoy the middle class and create more economic mobility.

Are Keynesian remedies to boost the economy still viable or will market forces eventually be the tide that lifts all boats? While Keynes’s legacy is steeped in this passionate debate, I wanted to examine another, much lesser-known side of the Keynesian legacy: Keynesian investing.

Although John Maynard Keynes and his theories have been discussed in numerous biographies, journal articles and op-eds, almost no attention has been paid to how he invested money. He was quite successful at it — he died wealthy — and pioneered some investment concepts that are critical for the long-term financial betterment of middle class working people.

Little did I know that I would find a wealth of investment wisdom in the writings and trades of Keynes, who is far better known for his economic theories. When I researched my book “Keynes’s Way to Wealth,” I knew that he was a professional investor of funds for King’s College/Cambridge University and two British insurance companies and that he started proto-hedge funds. But I had no idea the extent to which he plunged into the markets, speculated, lost money and eventually, came out on top.

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, such as two world wars and the Great Depression. Although he was a harsh critic of capitalism and markets, he kept investing — and was eventually rewarded. His experience provides solid grounding for stock investors everywhere.

Sometime around the start of World War I, Keynes started speculating in currencies and commodities. Although he had been investing money from awards and birthdays since he was a youth, King’s College began to enlist him in the management of its financial affairs in the first decade of the 20th century, a role he kept until he died in 1946. He later managed money for his friends, family and insurance companies in a time in which there was no such thing as formal training for institutional money managers.

For those who accuse Keynes of being a doting protector of government and socialistic virtues, when you look at how Keynes invested, it’s clear that he was a die-hard capitalist.

During the time he was an adjunct adviser to the British government, he bought and sold stocks, bonds, currencies and commodities. His spectacular success showed not only his passion for making money, but his growing aversion to losing it. Having gained and lost three fortunes through his trading prowess and hubris, Keynes is a stellar example of how an investor can learn, fall flat more than once, and still come out ahead.

So why is Keynesian investing so important today? Keynes decided in the wretched 1930s that he really had no advantage over markets, which he declared roiled by irrational “animal spirits.” This intellectual leap — vexing to those who still believe that they have an edge over Wall Street — later led to the formation of passive index fund investing, which Vanguard Group founder Jack Bogle pioneered. When I interviewed Bogle for my book, he acknowledged a huge debt to Keynes. (Index funds are low-cost ways of buying wide swaths of the market.)

The animal spirits that create bubbles and busts also emanated from Keynes’s thinking, leading to the founding of the “behavioral school” of economics, which includes Daniel Kahneman and Robert Shiller as its most influential researchers and proponents today.

Those who ignore Keynes’s insights, from day traders to investors who buy last-year’s returns from mutual fund managers, are destined to underperform the markets and come up short for retirement. For those middle-class investors who are saddled with inadequate 401(k)s — and are at the core of the economic crisis facing two generations — Keynes strikes the right notes: Don’t try to time the market; Diversify and favor dividend-producing stocks. This advice is hardly controversial among fundamental investors, and it has a better chance of reducing poverty and ensuring a dignified retirement than the ideas about trying to beat the market endorsed by the conventional wisdom. Few succeed at beating the market.

Paul Solman: I would only add this often-told story about Keynes the investor from the Keynes biographer we interviewed in 2009 Robert Skidelsky, whose book of a few years ago is “Keynes: Return of the Master”:

[Keynes] never quite renounced the joy of the chase, of gambling on borrowed money. As he wrote in the General Theory, “the game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay this propensity the appropriate toll.” Once, in 1936, he even had to take delivery of a month’s supply of wheat from Argentina on a falling market. He planned to store it in the crypt of King’s College Chapel, but found this was too small. Eventually, he worked out a scheme to object to its quality knowing that cleaning would take a month. Fortunately, by then the price had recovered and he was safe.