John Maynard Keynes the Stock Market Investor: A Quantitative Analysis

David Chambers

University of Cambridge – Judge Business School, Department of Finance & Accounting

Elroy Dimson

London Business School; University of Cambridge – Judge Business School

Justin Foo

University of Cambridge – Judge Business School

H/T MarketFolly

Abstract:

The consensus view of the influential economist John Maynard Keynes is that he was a stellar investor. We provide an extensive quantitative appraisal of his performance over a quarter-century in both calendar and event time, and present detailed empirical analysis of his archived trading records. His top-down approach generated disappointing returns in the 1920s and we find no evidence of any market-timing ability. However, from the early 1930s his performance improved as he evolved into a bottom-up stock-picker with high tracking error, substantial active risk, and pronounced size and value tilts. Our careful reconstruction of Keynes’ stock trading provides a unique record of realized performance and sheds light on how equity focussed investing developed historically.

John Maynard Keynes the Stock Market Investor: A Quantitative Analysis – Introduction

John Maynard Keynes’ writings on the stock market are well-known. In particular, Chapter 12 of The General Theory discusses at length the influence of the stock market on the macro-economy. His observations on the “animal spirits” of the market continue to inspire behavioral economists (Akerlof and Shiller (2009)), to invite studies of the role of investor sentiment in anomalous stock returns (Stambaugh, Yu, and Yuan (2012)) and to anticipate explanations for modern stock market bubbles (Greenwood and Nagel (2009)).
Equally, stories of his share-dealing from his bed and his commodity trading threatening to fill up King’s College Chapel with grain have become legend. In contrast, this study constitutes the first detailed quantitative analysis of the stock trading record of this most influential of economists.

In The Collected Writings of John Maynard Keynes (“CWK”), Moggridge (1982) reviews Keynes’ investment activities, and suggests he was a star investor. Skidelsky (1983, 1992, 2000, 2005, and 2009), Westall (1992), Mini (1995), Backhouse and Bateman (2006), Walsh (2007) and Clarke (2009) discuss Keynes’ investment prowess. Among practitioners, Buffett (2013), Soros (2011), Swensen (2005, 2009) and others cite Keynes as the bedrock for their strategies. This literature is lacking in any empirical analysis. The only quantitative study of John Maynard Keynes’ stock market performance is Chua and Woodward’s (1983) note on his returns for the endowment in a study that suffers from substantial data and methodological limitations (see Section III.B). As Brown, Goetzmann, and Kumar (1998) reported in relation to another famous investor, evidence on the skill of influential investors can be inadequate.

Despite the John Maynard Keynes papers detailing stock holdings and dated transactions, “no comprehensive study has ever been made of the records in the Keynes papers relating to his investment activity” (Lawlor (1995)). In this paper, we exploit this archival material to investigate John Maynard Keynes’ performance in managing his Cambridge College endowment from 1921 to 1946. His top-down macro approach to investing generated disappointing returns in the 1920s. Our statistical tests find no evidence of any market-timing ability. We quantify how, after this disappointing start, his record improved as he switched to a bottom-up stock picking approach in the early 1930s. In this later period, the one-year post-transaction performance of his purchases measured relative to the market substantially improved, to beat the market by +5.4% compared to a one-year underperformance of –5.3% in the earlier period.

Furthermore, we quantify the extent to which he tilted his portfolios to equities, where free to do so. As a result, he exploited the equity risk premium available to longterm investors – an opportunity that was to emerge over the rest of the 20th century (Jorion and Goetzmann (1999)). We also provide empirical analysis as to how he constructed portfolios searching for additional risk premia relating to size and value prior to their discovery by financial economists.

John Maynard Keynes

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