Monday, August 16, 2010

Investing Tips from the World's Richest Economist

No not Paul Krugman. The columnist and Laureate knows how to earn money as exemplified by his lending his name to Enron for $50,000 for four days work.
Judging by his temperament on the Sunday talking head circuit (there's that earnings power/branding again), I would think he's more of a hoarder rather than an investor, speculator or gambler.

And no, it's not John Maynard Keynes.
We had a look at Keynes' investing style in "Keynes The Money Manager". After a disastrous start in currencies, which led to the observation attributed to him by A. Gary Shilling: "Markets can remain irrational a lot longer than you and I can remain solvent."
The performance of the Chest Fund (a sidecar of the Kings College endowment) was indeed impressive.
However, it now appears that Keynes only achieved positive results starting in 1932.
It is probable that this timing indicates he was trading on inside information, knowledge of the British government's abandonment of the gold standard. He was an adviser to the gov. and pushed the policy.
Here are a couple snips from "John Maynard Keynes: Money Manager (Couldn't Trade Lard to Save His Life)":
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?"...
Here is a chart of his record with the college:
The performance of Keynes’s fund from 1927 to 1946 is shown below. During these years the Chest grew at an annual compounding rate of 9.1 percent while the general British stock market fell at an annual compounding rate of slightly under 1 percent.

Chest Fund Performance 1927 to 1946

Maynard Keynes Chest Fund
The whole thing is worth a read.

It is estimated that Keynes' fortune would translate into $35 million in 2010 buying power.
Here's the big dog, presented by professor Mark Skousen via The Daily Reckoning:

How David Ricardo Became The Richest Economist in History

When David Ricardo started out in business at the age of twenty-one, his property base amounted to £800. By the time he died in 1823, a mere thirty years later, his estate was worth an unimaginable £675,000 to £775,000, from which he enjoyed a yearly income of £28,000. No other economist, not even John Maynard Keynes, has reached this level of affluence.

Ricardo has the distinction of writing erudite theoretical works and making a for-tune. Few economists can boast doing both. Keynes would be one of the few to join Ricardo in this distinction, amassing an estate worth £650,000 during the Great Depression while writing The General Theory.
How did Ricardo do it? If he had written a book on investment, what secrets would he tender?

The Arbitrage King
Ricardo made his money primarily as a stockjobber, handling his own accounts, rather than as a broker . A stockjobber might be compared to a specialist on the floor of the New York Stock Exchange who handles large sums of stock and constantly makes a market in specific issues. During the early nineteenth century, most transactions involved government bonds, known as consols, although great chartered companies such as the Bank of England and the East India Company issued shares. Otherwise, there were no corporations or corporate stock at this time.

Ricardo made most of his money early on as an arbitrager of government debt. He played the forward market, which was ten times bigger than the cash market. A contemporary wrote of Ricardo: “He is said to have possessed an extraordinary quickness in perceiving in the turns of the market any accidental difference which might arise between the relative price of different stocks [government bonds].” His transactions would tend to be short-term and he would “realise a small percentage upon a large sum,” typically £200 to £300 a day. He wrote a friend, “I play for small stakes, and therefore if I’m a loser I have little to regret”.
Historians have debated the extent to which Ricardo profited from insider dealings and stock manipulations. According to Professor Norman J. Silberling, Ricardo often played the villain, a leader of an “inner clique of exchange professionals” known as “bear-jobbers” who would attempt “bear raids” on the government loan market. By panicking the public and pushing consol prices sharply lower, Ricardo and his band could pick up consols on the cheap and profit from high interest rates. Silberling accused Ricardo of writing his pamphlet, The High Price of Bullion, in early 1810, in order to bring about a fall in bond prices. Indeed, the price of bonds fell abruptly in late 1810 and one of the Goldsmids, a primary financier of government loans, com-mitted suicide. However, Piero Sraffa, Ricardo’s biographer, disputes this claim, noting that Ricardo had made a firm bid on a government loan in 1810 and it would have been to his disadvantage if consol prices had fallen. It should also be noted that Ricardo failed in his bid.

Ricardo’s Golden Rules Of Investing
Ricardo never wrote down his trading techniques, but business associates said that he held scrupulously to his two “golden rules”: “Cut short your losses” and “Let your profits run on.” He also took advantage of undervalued and overvalued situations, based on the observation that the investing public often exaggerates events, and he may at times have engineered these overbought and oversold conditions, as noted above.
Ricardo was no miser, however. As quickly as he profited, he moved his wife and family into larger and more expensive housing, and frequently vacationed in Brighton.  He became a country gentleman, buying Gatcomb Park, a large estate, and investing in land, mortgages, and French stocks after retiring around 1815....MORE

I'm pressed for time so I won't do the formal inflation adjustment, here's a quick rule of thumb. Buying power for the 19th and 20th centuries should be multiplied by 20 for each century or a total of 40 for the 200 years.
Taking the midpoint of Skousen's estimate, £725, 000 we get £29,000,000. As the pound was convertible to dollars (via the gold standard) through much of the period at 4.80 we get (and remember this is very rough) $139,200,000. Various inflation calculators might give a result double this.

Cut your losers and let your winners run indeed.