Seeking Alpha

Christopher O'L...'s  Instablog

Christopher O'Leary
Send Message
Financial blogger, market contributor and long-term investor in the United Kingdom. Author and creator of ‘The Astute Investor’, a financial blog created to help investors preserve and accumulate wealth.
My blog:
The Astute Investor
  • The Investment Style Of John Maynard Keynes

    Who is John Maynard Keynes?

    John Maynard Keynes (1883 - 1946) was a world acclaimed, British economist. During economic downturns, keynes believed that governments should intervene to stimulate demand through borrowing and spending. Then as the economy expands, governments can run surpluses to pay back those debts.

    His policies were commonly referred to as 'Keynesian economics'; this was a dramatic break with the 'laissez-faire economics' of Adam Smith, which held that economies perform best when markets are left to their own devices.

    Western government adopted his theories to move out of the Great Depression and Keynes was a major contributor to Roosevelt's 'New Deal'.

    Money Manager for Kings College, Cambridge

    His role as a successful economist is well documented; however his success as a money manager and investor are less known.

    Few academics, journalist and investors have noticed the incredible success of Keynes Chest Fund, managed for the Kings College.

    Between 1924 and 1946, Keynes earned an annual compound rate of return of 12% per annum; he managed to do this during the Great Crash and World War Two!

    Furthermore, the British stock market fell by 15% during the same period, Keynes trounced the market.

    Chest Fund Performance 1927 to 1946

    Keynes Investment principles

    In a nutshell, Keynes was a contrarian and value investor. He believed in holding balanced and concentrated portfolios of companies of which he possessed great knowledge of and below their intrinsic values.

    After practically being wiped out during the Great Depression, he gave up on short-term trading believing it to be a mugs game. Following an unsuccessful spell trading currencies on high margin, Keynes later quipped that "The market can stay irrational longer than you can stay solvent."

    Thereafter, he was convinced that investors should steadfastly hold good quality stocks, through 'thick and thin' in order to weather the worst aspects of short-term market volatility. Below is a paragraph of each principle in more detail.

    Contrarian Approach

    Keynes was a pioneer of the contrarian approach in his pursuit of superior investment returns.

    Keynes said of his contrarian style: "My central principle of investment is to go contrary to general opinion, on the ground that, if everyone is agreed about its merits, the investment is inevitably too dear and therefore unattractive."

    He believed that contrarian thinking in the pursuit of investment returns is "one sphere of life and activity where victory, security and success is always to the minority and never the majority. When you find anyone agreeing with you, change your mind"

    Keynes contrarian principles are similar to that of Warren Buffet who believed that investors pay a high price for a 'cheery consensus'. Keynes contrarian style required strong conviction to follow through on his investments through very challenging economic times. It was that conviction and rigorous research that produced his outstanding investment returns.

    Concentrated Portfolio

    Keynes often preached the importance of holding concentrated portfolios. He believed that investors should build a carefully selected portfolio comprising of a small number of companies of which they possessed great knowledge of. Warren Buffett in his 1991 Chairman's letter to Berkshire Hathaway investors quoted Keynes to sum up this principle beautifully.

    "As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one's risk by spreading too much between enterprises about which one knows little and has no reason for special confidence."

    Investors can only understand a handful of companies at one given time. Rather than be a 'Jack of all trades, master of none', Keynes discovered that investors can make exponential returns by understanding a few areas of the market in great deal.

    Long-Term Approach

    Initially, Keynes investment style was very speculative and based on market timing. After experiencing large losses in the early twenties, he grew to believe that investors should hold fairly large units in companies for many years through 'thick and thin'. After the Great crash, he switched from a top-down (looking at the macroeconomic picture) to a bottom-up approach (which focuses on the analysis of individual stocks). He searched for stocks which he believed was "satisfied as the assets and ultimate earnings power and where the market price seems cheap in relation to these". In short, he believed that investing should be like a marriage and not a one night stand!

    Aug 14 3:16 PM | Link | Comment!
  • Investing Like Buffett

    Too many articles and books have been written about Warren Buffett, a world renowned value investor. His snippets of wisdom in the form of quotations and investing strategies have been overly repeated. However I believe that if investors are to read just one book about Buffett, then it has to be "How Buffett Does It' by James Pardoe. This book succinctly and beautifully articulates Buffett's investment principles in the form of 24 simple investing strategies. I've selected some of the best investment lessons from this book that will serve as an indispensable guide to making shrewd investment decisions.

    1) Choose simplicity over complexity

    The stock market isn't a mysterious entity reserved only for the finance professionals. One of the wonders of investing is that you don't require an advanced degree in accounting to be able to independently select stocks of your own. The internet is abreast with 'get rich quick schemes' promising the latest computer program or theory to deliver the gullible investor instant riches. Most turn out to be 'get poor quick schemes'.

    Buffett believes in 'keeping it simple'. By this he means only investing in easy to understand businesses, run by honest and competent people. He wants fundamentally strong and enduring businesses which trade at a discount to their fair values. He is value investor, and therefore seeks unloved businesses shunned by mainstream investors.

    Albert Einstein: "Make everything as simple as possible, but not simpler".

    2) Make your own investment decisions

    Buffett believes that financial professionals bring nothing to the table. People are too often focused on short-term trading; this incurs higher commission for the investor through the buying and selling of shares. Short-term trading is often hazardous to your wealth; investors are better off owning a portfolio of exceptional companies over a multi-year time period.

    Investing in the stock market requires a basic knowledge of accounting and the financial markets. One such book which I thoroughly recommend is 'Shares Made Simple' by Rodney Hobson', a respected financial journalist. This is a beginners guide to the stock market, Rodney strips away the arcane jargon and mystique surrounding the financial markets.

    3) Control your temperament

    Investors should not let emotions get in the way of making the right decision. Too often investors experience the extremes of fear and greed, which drive the market in the short-run. These emotions can often cloud their judgment. Benjamin Graham (author of 'The Intelligent Investor') said that "the investor's chief problem, even his worst enemy, is likely to be himself". He realized that in the face of extreme events, investors often panic and behave irrationally. Investors instead should behave more like 'Spock (Vulcan character from Star Trek)'. Spock would think logically, look at all the data and facts before reaching an objective conclusion. In the face of highly volatile markets, the astute investor will remain calm and disciplined.

    4) Be patient

    Benjamin Graham, Buffets mentor, believed that the market is a voting machine in the short- run, tallying up firms which are the most popular. Where as in the long-run, the market is a weighing machine, analyzing the fundamentals of a business. Buffett therefore believes that investors should be willing to wait for a 3-5 year time horizon, in order for their stocks to reflect their future earnings potential. Buffett was a 'decade trader' and not a 'day trader'. Charlie Munger, Buffett's long-term business partner described the need for patience less elegantly, by saying "Investing is where you find a few great companies and then sit on your ass".

    5) Buy businesses, Not Stocks

    Investors often forget that when you're investing in shares, you are buying a part of an actual business. As an owner of that business, you share in the profits and growth of that company through dividends and capital appreciation. A share is not a lottery ticket, and hence investors should be looking to invest in businesses, and not pieces of paper.

    6) Build a concentrated portfolio

    Buffett believes that investors should avoid the 'Noah's Ark' style of investing, that is I'll have a little of this, and a little of that. Investors should instead become an expert in a small number of a companies, rather than possess little knowledge of many stocks. It takes courage and conviction to hold a concentrated portfolio of high quality companies, but it is this principle that has made Buffett extraordinary wealthy. Building concentrated portfolios was also embraced by famous investors like 'Jim Slater'; he referred to this approach as the 'Zulu Principle'. The Zulu Principle teaches you to focus on one specific area and master that niche area, rather than knowing very little about everything. Applying the Zulu Principle helps you become the master of your niche area, in a very short period of time.

    Mar 11 8:40 AM | Link | Comment!
Full index of posts »
Latest Followers
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.