Late last month, I shared the 25th factoid of my growing list of surprising and important things about investing that I think every investor should know. The list is made up of information and facts I have collected over my years as a student of investing. Earlier today, I recalled something I learnt a few years ago and which I think merits entry into the list. So, here goes Number 26: 26. The great economist John Maynard Keynes was also a wonderful investor. But, his earlier years as a professional investor were abject because he was trying to time…
Late last month, I shared the 25th factoid of my growing list of surprising and important things about investing that I think every investor should know.
The list is made up of information and facts I have collected over my years as a student of investing. Earlier today, I recalled something I learnt a few years ago and which I think merits entry into the list. So, here goes Number 26:
26. The great economist John Maynard Keynes was also a wonderful investor. But, his earlier years as a professional investor were abject because he was trying to time the market.
A couple of years ago, I chanced across a 2013 paper by finance professors David Chambers and Elroy Dimson titled “John Maynard Keynes, Investment Innovator” which detailed at length the professional investing career of the great economist John Maynard Keynes.
When Keynes was managing the endowment fund of King’s College at Cambridge University from 1921 to 1946, he beat the British stock market by an astounding eight percentage points per year. But from August 1922 to August 1929, he had lagged the market by a total of 17.2% – it wasn’t until he made a switch in his investing style in the 1930s that he began to catch-up and eventually trounce the market.
Keynes’ initial approach to investing was described by Chambers and Dimson in their paper as “using monetary and economic indicators to market-time his switching between equities, fixed income, and cash.” His later approach is something Foolish investors should find familiar. Here it is, straight from the horse’s mouth:
“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.”
Chambers and Dimson provided more flesh on Keynes’ later approach in their paper. They wrote that Keynes believed in buying investments based on their “intrinsic value” and that he preferred stocks with high dividend yields.
The finance professors also shared that Keynes had invested in a South African mining company because he thought that the company’s stock was selling at a 30% discount to his estimate of the firm’s break-up value; Keynes had held the company’s management in high-regard too.
So, the essence of Keynes’ experience as a professional investor can be summed up as this: When Keynes tried to time the market, he failed miserably; he only started gaining success when he invested based on companies’ fundamentals.
In Singapore’s market, some companies that could perhaps interest Keynes to dig in further are Vicom Limited (SGX: V01) and Straco Corporation Ltd (SGX: S85). They are companies with (1) market beating yields at the moment and (2) a track record of growing their dividends.
On the first point, Vicom and Straco have trailing yields of 4.8% and 3.4%, respectively. The SPDR STI ETF (SGX: ES3) – an exchange-traded fund that mimics the fundamentals of the Straits Times Index (SGX: ^STI) – has a yield of just 3.2% at the moment. The chart below shows how the duo’s dividends have grown over their last 10 fiscal years:
Source: S&P Global Market Intelligence
For me, Chambers and Dimson’s paper on Keynes is a stunning reminder why market-timing is a great way to lose money and why it is so important that investors adopt a business-focused approach to investing. Keynes had a formidable intellect and is a highly-regarded economist – if even he couldn’t time the market, why should we try?
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Vicom and Straco Corporation.