Wednesday, August 5, 2009

John Maynard Keynes: Money Manager (Couldn't Trade Lard to Save His Life)

In March we had a post "Keynes The Money Manager" that said:
...Last year, when it seemed that everyone had become a Keynes expert I thought I should read his "The General Theory of Employment, Interest and Money".
(here's an online version at [!])

It's a heavy slog but now it takes strangers longer to recognize my mental resemblance to Homer Simpson ("Stupidity got us into this mess and stupidity will get us out.";
"I'm not a man who's easily impressed. Hey, a blue car." etc.).

More interesting to me was a return to the money manager's assertion, which meant biographies and typing. Luckily, has put some of the material online so I can copy and paste rather than get all qwerty on you.
First up, a couple snippets from the one page piece "Keynes The Speculator":

John Maynard Keynes began his career as a speculator in August 1919, at the relatively advanced age of 36 years.

Keynes traded on high leverage - his broker granted him a margin account to trade positions of £40,000 with just £4,000 equity....

You know where this is going don't you:

...Keynes soon learned that short-term currency trading on high margin, using only his long-term economic predictions as a guide, was foolhardy. By late May, despite his belief that the U.S. dollar should rise, it didn’t. And the Deutschmark, which Keynes had bet against, refused to fall. To Keynes’s dismay, the Deutschmark began a three-month rally.

Keynes was wiped out. Whereas in April he had been sitting on net profits of £14,000, by the end of May these had reversed into losses of £13,125. His brokers asked Keynes for £7,000 to keep his account open....MORE
This morning I had a comment on a ClusterStock post, "Warren "Bailout" Buffett (BRK)" in response to another commenter's statement:
Neil Visnapuu (URL) said:
Like many libs in the public eye, the reality is that those with "good intentions" are just a bit more equal than others.

In Oct of 2001, Buffet wrote and spoke quite eloquently (and self-servingly) about how it never pays to bet against America. He then proceeded to short the USD for about 3 years.

Of course, as a trader / investor, he's free to do whatever he wants. But, unlike Carl Ichan etc., cultivating an image as some sort of sage for how we should manage our affairs, well that's why he deserves this criticism.

In a lot of ways, it's very similar to Keynes, in that there was a side to the man that effectively managed capital, and then another side, the academic wonk, that ultimately had (and continues to have) debilitating consequences on functioning markets, especially when juggled in the minds of the economically illiterate.
My two cents:
Climateer (URL) said:
Although Keynes ran King's College's Chest Fund 12-fold, £30,000 to £380,000, '27-'45,
the record is decidedly mixed.
Drawdowns of 32.4% and 24.6% in '30 and '31 exceeded the losses in the London market and had the fund at 1/2 it's '27 value.

1932's 44.8% and '33's 35.1% return's were coincident with and subsequent to, Britain's departure from the gold standard.
As an economic adviser to the government Keynes was well aware of the coming devaluation.
Although King's hasn't opened all the trading records, there is strong evidence to suggest that Keyne's was trading on inside information.

Some things never change.

In a 1983 paper "J.M. Keynes' Investment Performance: A Note" the authors are dubious of his performance, without casting the aspersion that I do in my comment. They on the other hand have a great tidbit:
...Investments in commodities were more substantial. The highest annual gain was for ₤17,000 from September 1936 to August 1937 and the highest annual loss, mainly in lard, for ₤12,600 in the following twelve months...
We too have commented on the lard market, in the March '08 post "Volatility Getting You Down, Bunky?":
Maybe it's time you looked into the tallow market.
The tallow/grease/lard complex has been traded for five thousand years:

2992 B.C.
Honey I'm home!
Hi dear, anything new in tallow?
Nope. Same ol', same ol'.

2008 A.D.

Here's a long term forecast for tallow: