‘How the world’s greatest economist overturned conventional wisdom and made a fortune on the stock market’.
This is the ‘come on’ on the cover of this arresting book. It is as accurate as any such advertisement I have read. If you are an investor – and which of us is not? – you will enjoy this book and learn (or recall) a lot about investing as you read it.
It is a first book, written by Justyn Walsh, described as a man who has worked as a financial journalist, lawyer and, most recently, as an investment banker. This is a (presumably young) man of whom we shall hear more.
I had been aware that Keynes had made, lost and then remade a fortune. But having a similar insouciant approach to the making of money to Keynes himself – probably acquired by my undergraduate attraction to Keynes, his economics, his politics and his life views – I had not focussed on the how and why of his early failure and his later success.
‘The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelope our future’. This quote from The General Theory is one of the book's most arresting.
The early Keynes was a punter who tried to ride the waves of optimism and pessimism that his economics analysed so well. His first serious speculating began in August 1919, while correcting drafts of The Economic Consequences of the Peace. With the abandonment of the pre-world gold standard, currencies were fluctuating wildly. Keynes was bearish on some continental currencies and bullish on the US dollar. He quickly made a small fortune.
Then Keynes joined up with an old Treasury pal to form a syndicate to speculate on a grander scale. They started speculating in January 1920, the pal withdrew, after 3 months Keynes was well ahead but by August had experienced ‘the slaughter of a large part of our holdings’. Keynes regrouped, persuaded King Edward’s private banker, Sir Ernest Cassel, to lend him a grubstake. By December 1922 Keynes had discharged all his debts, repaid investors and boasted net assets of around $2 million in today’s money.
The return of the gold standard in 1925 reduced opportunities to speculate on currencies. Keynes discovered a book on equities and that equities are (by reinvesting some profits) effectively ‘compound interest machines’. Keynes became a powerful advocate of equities at a time when ‘gentlemen preferred bonds’. With Britain depressed and America booming, US stocks beckoned.
‘Drawing on vast reserves of confidence and self-regard, Keynes convinced himself that he possessed the requisite foresight, skill and agility to navigate the shifting shoals of market sentiment’.
Keynes in the late 1920s embarked on what he called ‘terrifying adventures’ involving commodity speculation until in 1928 his positions in rubber, corn, cotton and tin markets turned against him. He was obliged to liquidate most of his equity positions to cover his losses, and the meltdown in 1929 eliminated most of his remaining wealth.
As Walsh comments, no doubt with a nod to current events: ‘The gilded mansion of American prosperity proved to be top-heavy and teetering, perched precariously on the sandy foundations of instalment credit and margin loans. Wall Street had finally brought down this house of cards. There were foreclosures, runs on banks and, ultimately, masses of men were laid off.’
Keynes called his stock market trading in the 1920s ‘credit cycle investing’. Success requires the practitioner to correctly anticipate ‘mob psychology’. Walsh neatly links this not so successful experience with the famous Keynesian comments about industry being at the mercy of the activities of casinos and the challenges of trying to pick the girl average opinion will on average regard as the prettiest. Of course, the consequences of the Great Depression led directly to The General Theory, Keynes’ master work.
Walsh cleverly works in the famous views of philosophers, market analysts and economists about the myriad of matters covered in this book. Indeed, it is one of the best guides to the literature one could imagine, with some very nice swipes at those who believe as an act of faith that all markets are perfect and even unemployment of 30 % is voluntary and no sign of ‘disequilibrium’.
Keynes returned to the investment fray an older, wiser man and a convinced contrarian. Walsh claims Keynes’ unorthodox views ‘anticipated the investment philosophies of some conspicuously successful contemporary ‘value investors’, most notably Warren Buffet of Berkshire Hathaway. Buffet himself has ‘on a number of occasions’ recognised his intellectual debt to Keynes.
Space does not permit a detailed exposition of the later Keynes as a ‘value investor’. He ended with a fortune of $30 million on today’s money, and obviously was doing something right.
The chapters on the Keynes/Buffet approach to equity investing are as follows:
• Searching for stunners
• Safety first
• Leaning into the wind
• Being quiet
• Eggs in one basket
• A sense of proportion
I’d enjoy distilling the message of each chapter, but should leave it to readers to acquire this book and read it for yourself. It is published by Random House Australia, and if you have trouble finding it, call them.
You will not be disappointed.