Book Review: Keynes’s Way to Wealth

Keynes’s Way to Wealth: Timeless Investment Lessons from the Great Economist. 2014. John F. Wasik.

John F. Wasik, an award-winning columnist and author of 14 books, examines the life and investment strategies of John Maynard Keynes in Keynes’s Way to Wealth: Timeless Investment Lessons from the Great Economist. In addition to being a great economist, Keynes was a risk-taking investor who built a multi-million-dollar fortune in the stock market while providing financial advice to such political luminaries as Winston Churchill and Franklin D. Roosevelt. He managed his own money as well as that of King’s College at the University of Cambridge, his friends and family, and some insurance companies.

During his investment career, Keynes made and lost two fortunes speculating on commodities and currencies. After his second lost fortune, he became what we would now refer to as a buy-and-hold value investor. Similar to today’s investors, Keynes faced markets roiled by panic, inflation, deflation, high unemployment, and war, and he developed a core set of investment principles to prosper by in every environment. Wasik presents a pragmatic guide to the style of portfolio management that has influenced such investors as Benjamin Graham, Warren Buffett, David Swensen, Jeremy Grantham, and Charles Munger. This straightforward work makes it easy for all investors to implement the action-oriented strategies provided in each of the nine chapters. Although Keynes is remembered mainly as an influential economist, it is Keynes the investor who has been the inspiration for the investment philosophy outlined in this book.

The author believes that by using Keynes’s insights, investors can create not only a risk-appropriate investment plan but also a life plan for prosperity while harnessing, rather than being scared by, the energy of the market’s “animal spirits” — a term made famous by Keynes that refers to a restless and inconsistent element in the economy, to our peculiar relationship with ambiguity and uncertainty. Keynes described animal spirits as an urge to action arising from spontaneous optimism, rather than the outcome of a weighted average of quantitative benefits multiplied by estimated probabilities. Wasik characterizes animal spirits as an intangible form of mass human emotion, a part of our nature that acts out of fear, compulsion, and survival. To money manager and author Lee Munson, CFA, animal spirits are the reason why crowds and individuals exhibit irrational behavior.

Keynes’s recognition of mass psychology sowed the seeds of what would later become known as behavioral economics. Economist Marcello De Cecco has called Keynes’s book The General Theory of Employment, Interest and Money, first published in 1936, the foundation of modern behavioral finance. Keynes was an inspiration to Nobel Laureate Robert Shiller, a Yale economics professor and pioneer in behavioral investing. In attempting to understand the prevailing narrative of animal spirits, Shiller regularly looks for “contagion, social epidemics and memes” — social messages that describe the narrative. Are grandmothers investing in tech companies they do not understand? Does a certain company engender a horde of cultlike followers? Are ordinary homeowners buying homes to flip them? Animal spirits are quirky, unreliable, and difficult to forecast. Wasik urges readers to keep a close eye on the tenor of the times, which often runs from mania to melancholia and back again.

According to Wasik, we can take away several vital lessons from how Keynes invested:

• Stocks outperform bonds over time, so hold stocks for the long term.
• Take advantage of the value quotient by focusing on a company’s intrinsic worth.
• Dividend-paying stocks (sometimes pooled in dividend growth funds) help buffer a portfolio by providing a steady income stream.
• Buy healthy, unloved companies at bargain prices and stick with them.
• Invest for the long term by rebalancing once a year, use leverage sparingly, and sell some of your winners to buy undervalued assets.
• Invest passively by placing most of your money in cheap index funds.
• Invest to ensure prosperity for a secure and comfortable future, not to become obsessed with making money.

These investment strategies, from Keynes’s 10 “keys to wealth,” are comparable to the general philosophy espoused by Warren Buffett and other notable value investors. It would be interesting to determine how much of Keynes’s ideas on investing either directly or indirectly influenced the great value investors of today. It could be argued that the most important of Keynes’s keys to wealth is Number 10, which calls for “drinking more champagne” and enjoying life. According to the author, Keynes believed that it is best to put your investing on autopilot with a sound plan that meets your goals — revisiting it once a year — and then go out and live your life. Keynes was a genius who truly loved life, people, and the world. He kept on trying to improve the world he knew with his mind and spirit. That is his spiritual legacy — not the money he made from investing or the economic theories he devised.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.