John Maynard Keynes is best known as the 20th Century’s most influential and controversial economist. Less known is his great track record as an investor. He managed his own money and the endowment of Kings College at Cambridge University during some of the toughest times to be an investor. An analysis shows that he beat an index of British common stocks by 8% per year from 1921-1946.
More interesting is his uneven performance over that time leading him to evolve his strategy. He started with an effort to time the markets using a top-down (macro) approach, which primarily consisted of changing allocations between stocks, bonds, and cash according to changes in macroeconomic indicators. Poor performance in the late 1920’s caused him to change his strategy.
The 1930’s saw his evolution into a long-term value investor with a bottom-up, stock-by-stock approach. He emphasized small stocks and stocks with high dividend yields, and exhibited growing patience. He aimed to buy at a discount to intrinsic value, and he ran a concentrated portfolio. These changes caused him to consistently outperform the market.
This strategy echoes Graham and Dodd, so no wonder Warren Buffett and George Soros were admirers of his.
So to recap, a strategy as old as the hills that still works. Focus on:
2. Buy with a margin of safety.
3. Be patient.
4. All else equal, gravitate toward smaller companies and higher dividend yields.
There is more to successful investing than these factors, but you’ve got a head start if you begin with them.
John Maynard Keynes, Investment Innovator by David Chambers and Elroy Dimson