Part 7 (1/2)
-Keynes to hishis interview for a director ' s seat at National Mutual, Keynes ventured the opinion that ” the right investment policy for [the Society] would be to hold one security only and change it every week at the board ned to dislodge the old guard from their stubborn attachment to a passive and property - oriented investh it was an aents out of their coe extent, Keynes ' faith in ” focus investing”
However, for all his enthusiasm for a compact portfolio, even Keynes conceded that the principle of concentration ” ought not to be carried too far” Keynes accepted that the maintenance of ” a balanced investree of diversication within any stock holding He de ned a ” balanced position ” as one in which there were:a variety of risks in spite of individual holdings being large, and if possible opposed risks (eg a holding of gold shares ast other equities, since they are likely to eneraluctuations)
A portfolio of stocks with opposed risk characteristics - to take another example, oil producers and airline companies - will serve to offset, at least in part, the effect of unforeseen and unpredictable shocks to any particular security
Additionally, investors may obtain so a focused portfolio, by spreading their capital between different asset classes - by holding not only stocks but also, for exah Keynes ' wealth was particularly concentrated in the stock market - he never owned a house or any other form of real property, and by the time of his death his securities portfolio represented over 90 percent of his total assets - most other investors display a preference for considerably less reliance on just one asset class ” Sell down to your sleeping point,” the Aan reportedly advised a friend whose slu compromised due to worries about his stock portfolio Sihtlyinvest Up To suppose that safety - rst consists in having a se number of different directions, as compared with a substantial stake in a company where one ' s information is adequate, strikes me as a travesty of investment policy
-Keynes to the Chairman of Provincial Insurance Company, February 6, 1942 Value investment emphasizes the quality of stocks rather than the quantity of stocks For those investors who believe they know so of the market, or at least certain sectors within the market, it makes sense to focus on what Keynes called the ” ultra - favourites” This handful of stocks - Keynes never prescribed an exact nuested ” ve to ten sensibly - priced coent investors - because they know the co and because their coh to justify such relatively large outlays - will satisfy theent analysis, that the investment is not too riskyThey will not e of stocks about which they know very little, relying on a belief in the efciency of markets to absolve the co, then, refers not just to the eted portfolio of stocks, but also to the limited pool of stocks evaluated (those within an investor ' s ” circle of competence ” ), and the laser - like intensity hich those stocks are assessedThe intelligent investor will not reexively spread his or her funds across the universe of invests in a great nu time or opportunity to discover howrisk and loss
Contrary to conventional nancial wisdoues that a focused portfolio should be less risky than a diversied portfolio, as investors will restrict their analysis to those stocks within their circle of coin of co a substantial proportion of total funds to a single stock
It is ironic that in the high temple of capitalism,Adam Smith ' s conored Disma of diversication, Keynes noted in a letter to the Chairoes on I get ht e su about and in the hly believes It is atoo much between enterprises about which one knows little and has no reason for special con dence
The level of investment risk in respect of a particular stock, Keynes enorance and uncertainty surrounding that securityValue investing inverts the risk - return trade - off suggested in orthodox texts - those stocks offering the greatest apparent in of safety, and therefore by denition the least downside risk, also potentially offer the greatest returns By ” loading up ” only in respect of ” stunners ,” as Keynes suggested, investors should both reduce the riskiness of their portfolio and give themselves the best chance of outperformance relative to the broader market
Chapter 13
A Sense of Proportion
The Stock Market Stoic Of all existing things some are in our power, and others are not in our powerLet hi or avoid anything that depends on others; or else he is bound to be a slave
-Epictetus, THE HANDBOOK Maynard Keynes granted only conditional assent to Saint Timothy ' s belief that the love of money was the root of all evilTrue, he had lit-tle time for the ” strenuous purposeful moneymakers ” motivated by ” the love of reed with Samuel Johnson that there are feays in which aerous human proclivities can be canalized into comparatively harmless channels by the existence of opportunities forand private wealth, which, if they cannot be satised in this
way, may nd their outlet in cruelty, the reckless pursuit of personal power and authority, and other forrandizement It is better that a man should tyrannize over his bank balance than over his fellow - citizens
In any case, those touched with ” thepassion ” were, as Keynes conceded, a necessary evil - it would be in the wake of theseafter prot, that the rest of ed to the promised land of ” economic bliss ” and etic worshi+ppers of Mammon, pro-fessed a much more utilitarian conception of money As he coolly coed ” to have received ood as a means and absolutely unimportant in itself” Later, in A Tract on Monetary Reform, he would return to the theme of money as a simple expedient: It is not easy, it seems, for men to apprehend that their nicance in itself, whichows from one hand to another, is received and is dispensed, and disappears when its work is done fro, Keynes thought, should be accorded its proper place - as an aood things in life
Keynes ' pragmatic attitude conferred on him a hardy resistance to the assaults of anihted approach to stockAfter the false starts of his early invest success in the stock market accrued to those who exploited mob behavior rather than those who participated in it, and that a businesslike approach to invest- the crowd Keynes ' lesson froes were inher-ently unpredictable, at least in the short terent investors, then, accept that they cannot control thetheir own behavior - what is required, as Warren Buffett would later af r deci-sions and the ability to keep e that fra, Stand There
Investing should be row If you want exciteas
-Paul Samuelson (attributed) Keynes was not unaware of the tribute exacted by stock trading In one biographical sketch, he described the German representatives at the Paris Peace Conference as a ” sad lotwith drawn, dejected faces and tired staring eyes, like e” At rst blush, this see the representatives of a vanquished nation to victims of a merenancial defeat - but the h of the Great Depression and with the death of a former student still fresh in Keynes ' mind Sidney Russell Cooke, a fellow director at National Mutual and a ” brilliant and engaging per-sonality ” in Keynes ' estimation, took his own life the previous year as a result of losses on the stock exchange Reversals in the world of money could, as Keynes discovered, claiion of animal spirits
In the subsequent calm, after he had restored his fortune on the back of value investing principles, Keynes concluded that the intelli-gent investor needed ” as much equanimity and patience ” as possible to withstand the periodic incursions of ani prices Market liquidity and its concoed sword - it enables investors to easily enter and exit theto run a risk,” as Keynes noted, but es in stock prices can also foster a short - ter stock market players Keynes cautioned that: One must not allow one ' s attitude to securities which have a daily market quotation to be disturbed by this fact or lose one ' s sense of proportion Some Bursars will buy without a tremor unquoted and unmarketable invest quotation for iray
The intelligent investor, Keynes asserted,that for sustained periods a stock ' s pricevalue The investor is not overwhelmed by constant price quotation, by Mr Market ' s ceaseless urgings to buy or sell Rather, the disciplined investor applies his or her own analysis in identifying- term time horizon, condent that the stock market will eventually revert to its professed role as aexpected future cash ows and, ulti-mately, will reward those businesses with a sustainable earnings pro le The value investor ue noted of Keynes ' own tehtness of a policy based on reason and common sense”
Do - It - Yourself For my own part, I can certainly clai wholly on my own meditations
-Keynes to a fellow stock investor, March 28, 1945 As Ben Grahalected and therefore under-valued issue for prot generally proves a protracted and patience - trying experience,” and the value investor e conformism and a short - term mindset Not only can con-stant price quotation distract undisciplined investors fro -term merits of an investainst an institutional apparatus geared to high turnover Brokers and invest active markets, and even orthodox nancial theory conspires with the specu-lator to assert the pre - e - ter ” risk ” as volatility in prices rather than volatility of earnings
Value investors are not swayed by these factors Rather, they rec-ognize that the stock market is there to serve investors, not to instruct them In the dark days of the early 1930s, after the stockspells, Keynes remarked de antly that:I do not draw fro body should every week cast panic glances over its list of securities tond oneto the bears
Value investors like Keynes rely on their own independent analysis rather than seeking guidance from the crowdThey practice, as Keynes did, ” a certain continuity of policy ” - a strategy that li activity to those occasions when price departs widely fro value
Stock market prices are only relevant to the value investor as a benchainst assessed intrinsic value, to deterin of safety exists It is a potential entry or exit point for the investor, but past price patterns should not inuence the investment decisionAs Keynes said:it seems to me to be most is by being too attentive to nore such things, but one ' s whole tendency is to be too much inuenced by them
It is a market truism that in ti hands - the disciplined investor er advises, a ” disposition to own stocks without fretting”
Going for It A nilish proverb One of the rst trading ventures established by Keynes and ” Foxy” Falk was the PR Finance Coed mainly in commodities speculation The initials of the company - an allusion to the ancient Greek aphoris abides ” ) - were perhaps a subtle salute to the mercurial nature of the commodities market In the stock market, too, all is in a state ofux - prices jump about and the intrinsic value of a stock alters as conditions affecting the underlying business change Value investors, therefore, cannot let their professed bias toward a long - term investilant, to be alert to changes in the value of stocks relative to their price
A philosophy of ” being quiet ” - of trading only when a substantial gap is identied between a stock ' s intrinsic value and its quoted price - in no way implies a complacent or passive investment style In his role as chairman of National Mutual, Keynes repeatedly eet ” investment policy: The inactive investor who takes up an obstinate attitude about his holdings and refuses to change his opinion ed is one who in the long run corievous loss
Value investors ilance, con-stant revision of preconceived ideas, constant reaction to changes in the external situation” In stock , he iilance
The intelligent investor, by focusing only on those stocks within his or her circle of competence, will in fact be far more attuned to shi+fts in their relative value thanaon a smaller pool of stocks, the value investor is in a better position to -ment on the merits of a particular security and act decisively One observer of Keynes ' reat point about King ' s has been that when a good opportu nity is pointed out to theo for it” The swiftness of decision which marked their policy is due to Mr Keynes
Nicholas Davenport, a fellow board reed that Keynes ' stock un,” adding that ” I have never known a e race” Value investing, conducted prop-erly, is not unlike Keynes ' beloved cricket - vast longueurs occasionally punctuated by episodes of intense activity