ETF Momentum Signal
for May 2015 (Final)
Second Place ETF
Third Place ETF
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(Since August 2006)
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Last Updated: April 17, 2012 • Posted in Individual Gurus
Was John Maynard Keynes, famous for contributions to macroeconomic hypotheses, a superior investor? In their March 2012 paper entitled “Keynes the Stock Market Investor”, David Chambers and Elroy Dimson evaluate the investment philosophy, strategies and performance of John Maynard Keynes based on his discretionary trading for the King’s College endowment (and, by similarity, for his own account). A key performance measure they apply is buy-and-hold abnormal return (BHAR), defined for each security as the geometric difference between the security’s cumulative total return over a specified interval and the cumulative beta-adjusted return on the market over the same interval. They combine BHARs for individual securities by averaging (equal weighting). Using King’s College endowment annual investment reports (including lists of holdings) and transaction records (567 buys and 387 sells) for portfolios managed at Keynes discretion for fiscal years 1924 through 1946 (ending in August), along with associated security prices/dividends and estimated UK market index levels, they find that:
The following chart, taken from the paper, summarizes post-purchase average (equal weighting) BHAR for stocks bought by Keynes and held for two to 12 months during 1924-1932 and during 1933-1946. The early underperformance and late outperformance of his equity investments correspond to a shift in strategy from market timing based on macroeconomic conditions to stock picking based on firm valuation.
In summary, evidence indicates that John Maynard Keynes was consistently a good short-term stock trader. At intermediate-term and long-term horizons, his early investing performance as a macroeconomic timer is weak, while his later performance as a stock picker is strong.
As quoted in the paper, Keynes summarizes: “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.”
Cautions regarding findings include:
Compare the evolved philosophy of Keynes with that summarized in “Warren Buffett on Investing”.
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