Influential economist John Maynard Keynes (1883–1946) is reputed to also have been
a star investor. To test this hypothesis, the authors apply a range of modern quantitative
and qualitative techniques to a dataset of Keynes’s investments.
The authors offer a reappraisal of Keynes’s investment performance and assess his
contribution to professional asset management. In the mid-1920s, a time when larger
investors regarded stocks as an alternative asset, Keynes believed equities constituted a
new, separate asset class. At that time, legal restrictions prevented institutional
investors from investing in equities, which were largely the domain of the individual
investor. The authors regard Keynes’s shift into equities for the King’s
College, Cambridge, endowment fund early in the 1920s as being as radical as well-known U.S.
institutional investors’ moving into illiquid assets in the late 20th century.
How Is This Research Useful to Practitioners?
Using modern research techniques, the authors analyze original records for explanations of
Keynes’s success and discover two particular insights. First, Keynes’s record,
clarified by the authors, demonstrates the importance of intellectual flexibility to adapt
investment approaches to changing times and to learn from mistakes. Second, the
organizational setup that Keynes enjoyed at his college endowment fund was important to his
success because it allowed him the freedom to make the switch into equities and to
experiment widely with different types of risk. According to the authors, Keynes also varied
his sectorial emphasis quite frequently. At times other than the period of 1940–1945,
the majority of his holdings were in small- and mid-cap stocks outside of the mainstream. He
also rotated between high- and low-dividend-yield stocks.
How Did the Authors Conduct This Research?
The authors analyze Keynes’s trading in quoted U.K. stocks owned by the Kings
College, Cambridge, endowment, over which he held full discretion between 1923 and 1946. A
total of 954 transactions by Keynes—567 buys and 387 sells—are examined.
Transactions outside the United Kingdom, day trades, misbookings, and transactions with
unclear capital raisings or rights issues are excluded. For the benchmark, the authors use
the capitalization-weighted 100-share U.K. equity index series estimated by Dimson, Marsh,
and Staunton (Global Investment Returns Sourcebook 2011). They also iterate
monthly intrayear values using fluctuations in other indices and estimate dividend income
using data reported by companies in the index.
Using an event study analysis, the authors assess Keynes’s trading behavior with
standard methodologies commonly used to analyze the performance of individual investor
trades. Abnormal returns are calculated in a window centered on the month of the
transaction. Return estimates cover 12 months before and after the transaction month.
Buy-and-hold abnormal returns for each security are calculated as geometric differences
between observed cumulative returns over a specified interval and cumulative beta-adjusted
returns on the market. The authors find that both bought and sold stocks increased strongly
in the 12 months prior to a transaction by Keynes. Post-purchase share prices outperformed
the market by 3.3% over the 12 months following the purchase. Sells also outperformed the
market by 4% over the 12 months following disposal.
A Quandt–Andrews breakpoint test and other econometric techniques indicate a break in
trading behavior in the early 1930s. Correspondence excerpted in the study corroborates a
change from a top-down to a bottom-up approach. The authors further examine the data by
dividing the analysis into two periods: before and after this change.
In the 1920s bull market, Keynes tended to buy stocks that had outperformed; those stocks
subsequently underperformed by 4% in the 12 months after purchase. In the earlier period,
purchases and sales were usually made after favorable performance, which is consistent with
recent studies of overconfident U.S. individual investor behavior.
In the 1930s and 1940s, Keynes’s buys produced a post-transaction outperformance of
6.2% in the 12 months after purchase. Between his earlier and later periods, Keynes improved
the timing of his disposals of short-term holdings. But the timing of his disposals of
long-term holdings worsened. Post-transaction performance reinforces the conclusion that
Keynes exhibited greater skill in buying individual stocks after 1932.
The authors also test for susceptibility to the disposition effect (the desire to avoid
regret by selling winners too early and holding on to losers). They analyze the proportion
of realized gains and that of realized losses using a standard test and find that Keynes
displayed a disposition effect across all periods.
Finally, the authors use a binomial distribution approach to test whether Keynes’s
trading behavior is indicative of contrarian or momentum tendencies. They find that Keynes
displayed weak contrarian behavior prior to 1932 and strong contrarian behavior after 1932,
which provides further evidence of a change in investing style.
Keynes is still invoked today to support many diverse viewpoints. This study clarifies his
investment successes and changes in his investment style. It prompts as many questions as it
answers but does provide evidence of his undoubted insight into his own era. One question
the study raises is how much of his performance was attributable to what we would consider
insider trading today because of his close involvement and personal relationships with the
governing class. Given his portfolio bias toward smaller companies, the abnormal return
against a large-company benchmark may be evidence of the small-cap effect rather than
Keynes’s skill. Another question is how Keynes fared with his multiasset capabilities
outside of the narrow field of domestic U.K. equities. Unfortunately, we may never know.