Investment process
Victory, security and success is always to the minority
Successful investing requires a sound investment process. The investment process we adopt is a reflection of the style of investing we pursue.
The different styles can be described fairly simply. As to what the different styles really mean is another question. The styles may be described as: buying great companies; buying growth companies; buying companies cheap; buying strong stock price performers; buying steady stock price performers; buying small companies; buying big companies; buying dividend payers; buying dividend growth companies; buying fallen stars; buying great companies cheap and so on. There are fundamental differences between these styles. There are also fundamental misconceptions as to what the styles really are.
We learn about the different styles by reading about them. We want to learn from the giants of the investment world. How do the great investors go about it? Once we know that, we can try the styles out for ourselves. Through the school of hard knocks, we eventually adopt a style that suits our own personality and aptitudes.
I have learned a lot from Maynard Keynes, John Templeton and Warren Buffett. Let’s look at their styles.
Maynard Keynes
John Maynard Keynes was a towering figure in macroeconomics whose ideas are still central to the debate over fiscal and monetary policy. He was also an extremely successful investor, both in his personal investments but also on behalf of others. The level of his success is suggested by the investment performance of the Kings College Cambridge investment fund he managed. During the years from 1927 to 1946 the Chest grew at an annual compounding rate of 9.1 per cent while the general British stock market fell at an annual compounding rate of slightly under 1 per cent. (maynardkeynes.org)
Take note: this was through the Great Depression of the 1930s and the worst market crash in history.
From immediately after World War l into the 1930s Keynes had been a speculator trading on his own account mainly in currencies. He was apparently personally wiped out in the great crash in 1929. On his own account he turned to true investing and eventually amassed a substantial fortune. (maynardkeynes.org)
The maynardkeynes.org website outlines Keynes investment philosophy: “The investment strategy Keynes finally adopted is, in many respects, remarkably similar to Warren Buffett’s. Buffett has acknowledged Keynes’s influence on his thinking. In 1991 Buffett said Keynes was a man, “whose brilliance as a practicing investor matched his brilliance in thought.”
Buffett went on to quote a letter from Keynes to a business associate, F. C. Scott, dated August 15, 1934 showing how Keynes, in addition to favoring long term investments, had grown to favor limiting these investments to a small number of enterprises:
Keynes in a nutshell
Keynes wrote: “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… One’s knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence.”
Like Buffett, Keynes was sometimes criticized for investing in stocks he believed would prosper in the longer term and then sticking doggedly with his selections despite shorter-term problems. Increasingly, Keynes grew to favor an against the grain approach to investing. As with John Templeton, Keynes saw that prices fluctuated more than value in the stock market and that the best approach was to buy when others were selling and sell when others were buying.
Writing in 1937, Keynes said: “It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find any one agreeing with you, change your mind. When I can persuade the Board of my Insurance Company to buy a share; that, I am learning from experience, is the right moment for selling it.” (maynardkeynes.org website)
Not too dismal
In an article February 10, 2014 in the New York Times titled ‘John Maynard Keynes’s Own Portfolio Not Too Dismal’ John F. Wasik wrote:
“Considering that Keynes was investing during some of the worst years in history, his returns are astounding. How did he do it? In addition to focusing on bargain-priced small and midsize stocks, Keynes carefully evaluated managements. Could they prosper long term? Did they have a plan for when the economy turned around? “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,” Keynes wrote this in 1934; Shades of Benjamin Graham and Warren Buffett, and the whole school of value investing.
Keynes also loved dividend payers, some of which were paying up to 6 percent during the deflationary 1930s. His portfolios were full of old-line companies in mining, railroads and shipping. Although they were perhaps boring and suspect choices at the time, he bought more shares when they became cheaper and predicted they would be worth more when the general economy recovered.”
Manifesto
In 1938, Keynes wrote his manifesto for sound investing using a concentrated, balanced portfolio. He proposed:
“ •A careful selection of a few investments (or a few types of investment) having regard to their cheapness in relation to their probable actual and potential intrinsic value over a period of years ahead and in relation to alternative investments at the time;
•A steadfast holding of these in fairly large units through thick and thin, perhaps for several years, until either they have fulfilled their promise or it is evident that they were purchased on a mistake;
•A balanced investment position, i.e., a variety of risks in spite of individual holdings being large, and if possible, opposed risks.
His view of investing versus speculation was: “Investing is an activity of forecasting the yield over the life of the asset; speculation is the activity of forecasting the psychology of the market.”” (maynardkeynes.org website)
Justin Fox quotes from a letter Keynes wrote to a friend in 1942: “My purpose is to buy securities where I am satisfied as to assets and ultimate earning power and where the market price seems cheap in relation to these.” (Fox, The Myth of the Rational Market, A History of Risk, Reward, and Delusion on Wall. 2009) p115
Templeton and Buffett
To learn about the investment styles of John Templeton and Warren Buffett we can do no better that hear about it from their own mouths. Let me share this gem with readers. I invite readers to view the following interviews of John Templeton and Warren Buffett conducted in about 1985 by George Goodman (aka Adam Smith).
The picture of the YouTube video below is a screen grab still photo. The link is https://youtu.be/LFWj0ps9DqA
Conclusion
The common investment style of Keynes, Templeton and Buffett is to buy great companies cheap. As they say, the devil is in the details. Successful investing is not easy. One has to work at it.
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