Tags: Keynes | Stock | Picker

Believe It or Not, Keynes Was a Stock Picker

Tuesday, 03 Apr 2012 06:45 AM

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The economist whose name is synonymous with macroeconomic management, John Maynard Keynes, apparently made a lot of money doing something quite unexpected: Picking undervalued stocks.

A new analysis of Keynes’ performance on behalf of the endowment of King’s College, Cambridge, suggests that Keynes started out as you would expect, leaning on his perspective of macro events to invest.

Over time, however, he eventually pioneered stock picking, instead seeking undervalued opportunities in equities, researchers have found. The work was done by David Chambers and Elroy Dimson, finance scholars at the University of Cambridge and the London Business School.

“From 1924 through 1946, while writing numerous books and overhauling the global monetary system, Keynes also found time to run the endowment fund of King's College at Cambridge,” writes Jason Zweig at The Wall Street Journal.

“Over that period, according to Messrs. Chambers and Dimson, Keynes outperformed the U.K. stock market by an average of eight percentage points annually, adjusted for risk.”

Interestingly, despite his reputation and learning as a macroeconomist, his previous approach to investing was a dismal failure, Zweig points out. Using macro signals, he lagged the market and managed to fall victim to the Crash of ’29.

He soon realized he had to be more selective and, one doing so, began to outperform. In the process, he took on risk.

“He was a leader among institutional investors in making a substantial allocation to the new asset class, equities,” Chambers and Dimson explain.

A more contemporary name, meanwhile, suggests that macro events likely will destroy an enormous amount of wealth.

Marc Faber, publisher of the Gloom, Boom and Doom report, is positive on certain assets at the moment, but he believes that central bank easing means a comeuppance is inevitable.

"I think somewhere down the line we will have a massive wealth destruction. That usually happens either through very high inflation or through social unrest or through war or credit-market collapse," Faber tells CNBC.

"I would say that well-to-do people may lose up to 50 percent of their total wealth. They'll still be well-to-do. Instead of $1 billion, they'll have, say, $500 million."


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