Wednesday, May 18, 2016

When Keynes Gave Up On Market Timing

Our 2013 post Dimson & Chambers-- "Retrospectives: John Maynard Keynes, Investment Innovator" has quite a few of the 'Keynes as Money Manager' links and begins with this intro:
This is the newer, shorter version of the scholarship, it appeared in the Summer 2013 Journal of Economic Perspectives.
(free download, 16 page PDF via the American Economic Association)

We've looked at the original March 17, 2012 version of the paper (last edited July 12, 2013) a couple times.

That paper "Keynes the Stock Market Investor: The Inception of Institutional Equity Investing" (free download, 54 page PDF) is now the authority on Keynes the money manager although we've also looked at some of the earlier works on Keynes' success in the market.

In April 2012 I differed with the Wall Street Journal's Jason Zweig on the question of  Keynes' alpha and did so very reluctantly. Zweig has devoted considerable time and thought to the study of Keynes and his investing and outside of a few academics is probably as close to an authority as anyone. Plus, he's a good guy.

Hat tip on the JEP article to the Conversable Economist, here are our posts:

"Keynes The Stock Market Investor"
We've had a few posts* on Keynes at the market and came to the conclusion that Keynes traded on the knowledge of Great Britain's abandonment of the Gold Standard in September 1931.

In his Weekend WSJ column, "Keynes: One Mean Money Manager" and this morning's blog post "Keys to Thinking About Keynes" the Journal's Jason Zweig isn't buying it. Here's the WSJ's Total Return blog putting it bluntly:
My column this past weekend about the remarkable investing record of John Maynard Keynes provoked an outpouring of comments...

...Thus, several commenters ridiculed the notion that Keynes could have had access to inside information on interest rates and currency values without trading on it. Others insisted that he was front-running his own economic policies, buying gold before he debauched the value of the British pound....MORE
One quick note on verbiage: trading on material non-public information ≠ "insider trading" in Keynes' case as the act was not illegal at the time.

From Value Investing World:

John Maynard Keynes' move away from market timing 
As he had demonstrated in the early 1930s wrestle with the board of the P.R. Finance Company, Keynes began by explaining why he no longer believed in market timing driven by his credit cycling theory: 
We have not proved able to take much advantage of a general systematic movement out of and into ordinary shares as a whole at different phases of the trade cycle. Credit cycling means in practice selling market leaders on a falling market and buying them on a rising one and, allowing for expenses and loss of interest, it needs phenomenal skill to make much out of it.   
. . .   
As a result of these experiences I am clear that the idea of wholesale shifts is for various reasons impracticable and indeed undesirable. Most of those who attempt to sell too late and buy too late, and do both too often, incurring heavy expenses and developing too unsettled and speculative a state of mind, which, if it is widespread has besides the grave social disadvantage of aggravating the scale of the fluctuations. 
(In a note to his student Richard Kahn that accompanied the letter sent, Keynes mourned the failure of market timing strategies based on credit-cycling, writing, “. . . I have seen it tried by five different parties . . . over a period of nearly twenty years. . . . I have not seen a single case of success.”) He went on in the letter to King’s College to describe the core of his philosophy in three principles that he believed would result in sound investing....MORE