John Maynard Keynes

I have neither Warren Buffet track records nor Wall Street experiences. On what basis am I publishing my thoughts or making market calls? None. This is my personal diary, in part talking to myself and in part talking to some imaginary friends. Instead of putting up some incomprehensible disclaimers, let me be straight forward. Take all my writings with a truck load of salt.

Having saying all these things in my grand opening, let me make a bullish case - a stock picker will survive this bear market(even a Great Depression). I have published my thoughts saying we will not see a Great Depression 2, it is just a severe recession. Let's pretend this is a Great Depression, will there be any man or woman perform spectacularly in the stock market? Assuming you can bring back some dead people to help, who will it be? Two persons came to my mind: Benjamin Graham and John Maynard Keynes. Neither Benjamim Graham nor John Maynard Keynes needs introduction. But today, I want to highlight John Maynard Keynes.

There is a lot of information about how he turned himself from a speculator to an investor in this website.

http://www.maynardkeynes.org/keynes-the-investor.html

His investing philosophy changed over time - Keynes began to doubt his initial belief that he could profit from his broad understanding of economic cycles. He grew to favour making large investments in individual businesses. Keynes was a logical man and individual businesses had balance sheets he could study and they sold products or services whose value he believed he could objectively assess.

Keynes spent half an hour each day on stock market research - in the morning, still in bed - studying company reports, reading the financial sections of the newspapers and speaking to his various brokers by telephone.

The Chest's initial capital was £30,000. By the time Keynes died in 1946 the fund had grown to £380,000 - an annual compounding rate of just over 12 percent. This might not seem very remarkable but for the facts that:

* This performance was achieved during a period that encompassed both the crash of 1929 and the build up to World War Two, both of which proved disastrous for British stocks.
* In the same period of time, the British stock market fell 15 percent.
* The growth in the value of the Chest Fund was entirely due to capital appreciation. There was no dividend reinvestment because Keynes spent all of the dividends on the college. He believed the fund was there to provide money for the college and was scornful of the way other Cambridge colleges managed their finances, referring to them as "savings banks".

The performance of Keynes's fund from 1927 to 1946 is shown below. During these years the Chest grew at an annual compounding rate of 9.1 percent while the general British stock market fell at an annual compounding rate of slightly under 1 percent.

You are of course will be impressed by the rising chart. It's so beautiful and glorious. However, the devil is always in the details, if you put the chart under microscope, his fund did not break even until 1933-1934, a long dark 7 years. If he did accumulate regularly over these 7 years, his efforts were paid off handsomely next 11 years from 1934 to 1945. Please also note that his fund lost close to 50% in 1931. Just like Buffett always reminding us, if you cannot stomach a 50% portfolio decline, then you should not hold stocks.

The common argument is what if he started buying stocks in 1935, will the return will be better? Of course it will silly but the question is how good are you with market timing? For me, I am a terrible market timer.