Learning From One of the Wisest

Warren Buffett, Charlie Munger, and Jack Bogle have all learned from someone.  Buffett and Munger both studied under Benjamin Graham. Buffett and Bogle both refer to John Maynard Keynes as one of the most influential people in their investment learning process.  Keynes is considered one of the greatest economists in the history of the world. His work is often referred to even today. His writings are considered foundational classics by many. His most quoted writing when it comes to investing is The General Theory of Employment, Interest and Money.  Jack Bogle and Buffett both refer to Chapter 12 in this book as being game changers for them.  Buffett has said that if an investor understands chapter 8 and 20 in Graham’s the Intelligent Investor, and Chapter 12 in Keynes’ The General Theory of Employment, Interest and Money then they don’t need to read anything else.

Keynes realized that trying to outperform the market by anticipating what the average opinion expects the average opinion to be wasn’t a good idea.  Keynes started out investing with a top down approach, meaning that he would look at the big economic indicators to determine his investing decisions.  He would use economies, interest rates, currencies, and other drivers of the financial system. Unfortunately, he learned the hard way that this is a losing game.  His investment performance suffered. It wasn’t until he discovered bottom up investing, which starts with determining a company’s intrinsic value to determine investment choices, did his investment returns change for the better. 

In a memo to King’s College Keynes states that the idea of wholesale (big economic) shifts is impracticable in investing, and those that attempt it sell too late and buy too late, and both do it too often.  He goes on to say that good investing involves three characteristics: A careful selection of underpriced investments in relation to their intrinsic value over a period of years, a steadfast holding of these investments until they fulfill their performance or prove to be a mistake, and a balanced portfolio of risks.  Keynes theories are backed up by his investment performance after he changed his investment ways. In Michael Batnick’s book Big Mistakes he states that from 1928 to 1931 his King’s College assets under management dropped by nearly 50% compared to a 30% decline in the UK stock market.  From 1932 until 1945 Keynes grew the King’s College assets by 869%. The UK stock market only grew 23% over the same period. His portfolio turnover averaged 56% during the first half of the period and 14% in the second half which means he was adjusting in the first half and waiting in the second half.   

John Maynard Keynes lived from 1883 until 1946.  His practical knowledge and advice has been absorbed by many of the greatest investors.  Even in modern times his influences are still present in many of these investors strategies and beliefs.  Times have changed and information is more readily available, but using concepts that worked for Keynes and many of the greatest investors of our time can be a valuable lesson for those that want to be better investors.