Published by Jake Bleicher
When most people think about John Maynard Keynes they usually think about Keynesian economics. His work has helped to shape modern economic policy and played a monumental role in revitalizing the global economy after the Great Depression. The theory of supply and demand is nothing new; Adam Smith does a fine job of elucidating this concept in Wealth of Nations (1776). The thought was supply will always be met with demand, but the price to create demand may be much lower than the supplier would like. In the years leading up to the Great Depression, demand in certain economic sectors dried up completely and created high unemployment. Keynesian economics advocate for government intervention to moderate demand during down cycles in the economy. In the latter half of the decade, critics of Keynes became dismissive of governmental stimulus.
It remains a controversial subject today after being brought back into the limelight by Ben Bernanke. Forget for a moment the dovish and hawkish arguments and Wall Street’s absurd focus on “considerable time.” Keynes was a macroeconomist, and for the most part, his theories are still relevant today. Compare the recovery in the US with that of Europe. Europe adopted starkly different policies than the US, rather than stimulate the economy they cut government spending. It appears more and more likely that Europe’s austerity measures will be replaced with an endorsement of Keynesian economics.
What most people do not know is Keynes was a very successful investor. Before Benjamin Graham wrote Warren Buffett’s favorite book (The Intelligent Investor), Keynes was successfully employing value investing. In addition to managing his own investments, he managed the assets of the King’s College, Cambridge and the National Mutual Insurance Company. His investment philosophy consisted of three main pillars:
- Select investments that are priced below their intrinsic value.
- Continue to hold the investments until they have fulfilled their promise, or if you realize you have made an error in your assumptions.
- Take large positions, but diversify the risks across the portfolio.
These concepts are nearly identical to Warren Buffett’s widely touted philosophies. Though Buffett has more media outlets canonizing his every word, a selection of a few quotes illustrates my point:
- “Price is what you pay; value is what you get.” “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
- “Our favorite holding period is forever.”
- “When we are convinced as to attractiveness, we believe in buying worthwhile amounts” “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” (Perhaps the quote doesn’t make the connection clear enough, but both Buffett and Keynes endorse balancing of risk, just not blind diversification.)
When Keynes died in 1946, his net worth was approximately $17 million (in today’s dollars). Unimpressed? Like Buffett does today, Keynes had donated most of his money to various charities prior to his death. The money he amassed during his investment career was far more substantial. Keynes’ philosophies are still alive and well today. I think in twenty years when all of the dust settles from the economic crisis, we will look back and again marvel at the profound impact his works have had in finance and economics.