As he noted in his recent post, Ben Carlson fired John Maynard Keynes from managing money. Looks like Keynes the capitalist can join Marx’s reserve army of the unemployed once and for all. Ben cited the short-termism of current day investors as well as the high level of volatility in the portfolio. Ben’s almost certainly right – there’s no way JM Keynes could have managed money like that in today’s environment. But there is also more to the story here.
First, Keynes’s first four years managing money were terrible in relative terms. His fund basically underperformed the broader market over this period. Most asset managers need a solid 3 year track record to raise assets or they go out of business. And if those first three years are as mediocre as Keynes’s first three years then you’re likely to go out of business.
Second, Keynes was known for holding highly concentrated and leveraged positions. There were times when over 50% of the portfolio was invested in 5 stocks. This means that Keynes was probably taking a lot more risk than the standard deviation of the portfolio portrayed. And who knows – if one or two of those 5 stock positions had blown up at the wrong time we might be having a discussion about how the great economist was a terrible money manager. And that’s the funny thing about money management – sometimes the best money managers aren’t just talented, but extremely lucky. After all, I am sure there are lots of very smart investors in Greece over the course of the last 20 years who will never be world famous asset managers due primarily to the fact that they were born in the wrong place at the wrong time.
The point is, there just aren’t very many investors who would leave their money with someone these days who is leveraging up a portfolio that’s so concentrated. In a macro world like ours there’s simply no reason to take those sorts of risks when it’s so easy to own a diversified portfolio. And that brings us to the most interesting comments by Keynes. Like Warren Buffett, Keynes actually thought that indexing into a broadly diversified portfolio might be the best approach:
“The theory of scattering one’s investments over as many fields as possible might be the wisest plan on the assumption of comprehensive ignorance. Very likely that would be the safer assumption to make.”¹
¹Keynes, J M (1945), “Letter to F.C. Scott”, February, King’s Archive, JMK/PC/1/9/366.