What you can learn about picking a successful investment strategy from John Maynard Keynes

Julie Brownlee, Fsp Invest, 22 Apr. 2015

Tags: investment strategy, fundamental analysis, bottom-up approach, top-down approach, investing, john maynard keynes,

One of the most influential economists of the 20th century was John Maynard Keynes. He was born in 1883 and passed away in 1946.

While his accolades surround his economic work, he was also an investor. Not only did he manage his own portfolio, but also those of others.

Interestingly, he tried different methods of fundamental analysis through his investment life.

Let’s take a closer look at what he did and what was more successful…

Macroeconomic trends form the basis of a top-down approach

In the 1920s, John Maynard Keynes started off investing as a macro trader. In other words, his investment strategy focused on macroeconomic trends.

In fundamental analysis, this is known as a top-down approach. It involves analysing the trends you’d expect to see in areas such as interest rates, inflation, growth and currency movements.

During this time, Keynes ran the endowment fund for King’s College, Cambridge along with other small investment pools.

Yet despite his impressive work as an economist, his returns were poor.

In 1920 he even required his own bailout after speculating on currencies with disastrous results.

From 1922 to 1929, his stock market investments underperformed the UK market for five of those seven years.

In the 1930s, Keynes changed his investment strategy. He changed from a top-down approach to a bottom-up approach. Today, this is known as value investing.

A bottom-up approach paid off

With this strategy, you focus on individual stocks rather than trends.

This change in strategy changed his investment fortunes, Cris Sholto Heaton in Money Week explains. His endowment fund at King’s College went on to outperform the UK market by about 8% each year until he passed away.

His own investment portfolio was extremely volatile, but this was mostly down to him holding over 60% of it in two UK car makers.

Yet at the time of his death, his net worth amounted to around £500,000 (R9.2 million). Around £19 million (R349.6 million) today.

Which type of fundamental analysis is easier to implement?

On the face of it, a top-down strategy may look easier to follow, but in spite of being a top economist, Keynes failed using this approach. A bottom-up approach was much easier for him to implement and find good stocks to invest in.

And many investing greats use a bottom-up approach with huge success.

So there you have it, what you can learn about investing from John Maynard Keynes.

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