John Maynard Keynes was one of the most influential economists of the 20th Century; his name is associated widely with the economic theory that governments should step up spending during recession to pull countries out of slumps. But here’s a little-known fact about Keynes: he was one of the most successful investors of his time. He managed money for his own portfolio, his friends, several institutions – and he even provided financial advice to Winston Churchill and Franklin Delano Roosevelt.
Financial journalist and author John Wasik has just published a fascinating new book about Keynes the investor – Keynes’s Way to Wealth: Timeless Investment Lessons from the Great Economist (McGraw-Hill Professional). John, who is a friend and colleague at Reuters, looks at Keynes’ investment principles and strategies, which will be familiar to any followers of modern investment legends such as John Bogle, Benjamin Graham or Warren Buffett.
I recently asked John five questions about lessons today’s retirement investors can learn from Keynes.
Q: Keynes today is seen by many as an anti-capitalist, because of his strong belief that government must spend aggressively to stimulate the economy during slumps. Why did you decide to write a book about Keynes philosophy of investing?
A: It’s largely an untold story. He managed two insurance company portfolios and money for himself, King’s College and Bloomsbury Group. I asked many economists if they knew this side of Keynes and most were unaware of what he actually did. The major biographies are all fairly quiet on the subject. It was was a chance to explore uncharted territory.
Q: You were fortunate to get John Bogle, the investing legend who founded Vanguard, to write a foreword for the book. How do you think about the relationship between Keynes and Bogle? What lessons did Bogle learn from Keynes?
A: Bogle told me than Keynes influenced his entire career, particularly his view on enterprise value of companies. Unlike most of Wall Street, Keynes came to the conclusion — in the 1930s — that he couldn’t beat the market’s sentiments (“animal spirits”) — which couldn’t be measured or predicted. Bogle took that concept and created index funds, which are built on the assumption that it’s nearly impossible to correctly time the market.
Q: You identify nine keys to wealth according to Keynes. Can you summarize the most important ones here for people who are investing for retirement?
A: Stay invested if you can afford to take the risk. Buy quality stocks that have durable earnings and consistent dividends. Don’t be fooled by “trends” in the market. Buy when everyone is selling. Hold on until you need to sell.
Q: What would Keynes have to say about the current state of the U.S. and global economy – and what would he prescribe?
A: Probably that “austerity” economics is wrong-headed and ultimately damaging. Every economy that has been devastated in the 20th century received some Keynesian stimulus — Japan, Germany (and all of Europe through the Marshall plan), East Germany after 1989, etc. In every instance the government stimulus was effective. He would prescribe ramping up spending to create employment and spending on public sector projects, then backing off when the economy rebounds.
Q: Did Keynes live to enjoy the fruit of his investment – did he retire well?
A: He was the wealthiest economist –ever. His art portfolio alone must have been worth tens of millions. Imagine buying the best stocks in the 1930s at all-time low prices and holding on for decades! But he never retired, actually. He died putting the finishing touches on the Bretton-Woods accords, which set up the International Monetary Fund and World Bank. Without a doubt, though, I think he enjoyed the wealth he created. He built theatres, was an arts patron and donated most of his fortune to Cambridge University. King’s College has one of the richest endowment of any of the Cambridge colleges as a result. And certainly every money manager who looked at what Keynes did — including Warren Buffett, David Swensen, Jeremy Grantham and George Soros — made billions for their clients and themselves. What Keynes did worked and worked well during some of the worst markets in history.