Stock market investors could learn a thing or two from John Maynard Keynes, one of the most famous economists of the 20th century, Jason Zweig, a financial columnist for The Wall Street Journal, recently wrote.
Besides changing the developed world’s model for economic policy and helping to set up the modern global monetary system, Keynes made a lot of money in the stock market during a very scary time, the stock market crash of 1929 and the ensuing Great Depression of the 1930s, Zweig reminds us.
Keynes, who was British, managed to beat the United Kingdom’s stock market by almost 6 percentage points a year from 1922 through 1946 partly by showing courage in the face of daunting stock market selloffs, Zweig wrote.
He notes that Keynes, like just about everyone else, did not see the 1929 stock crash coming. He was in charge of the endowment at his alma mater, King’s College at the University of Cambridge, and he held 90 percent of the endowment’s money in stocks in 1929, far more than the average endowment fund. By the end of that year his endowment was performing miserably, way behind the British stock market.
But Keynes didn’t throw up his hands in panic. He stayed strong and started pouring money into U.S. stocks that were slaughtered by the 1929 panic and ensuing Depression, Zweig wrote.
Keynes bought stocks throughout the Depression, even when the U.S. stock market fell by 39 percent in 1937. “He focused on a small number of stocks trading at low multiples of their value as businesses, often hanging on for eight years or more until their stock prices finally rose to reflect those asset values,” Zweig wrote in his Journal column.
Such courage was rewarded. By “barging into bear markets to buy, rather than trying to sidestep them,” Keynes took advantage of the long-established market phenomenon whereby stocks rise more often than they fall, Zweig said.
Zweig encourages today’s investors to write themselves a contract in advance, committing themselves to put more money into stocks when the markets fall 25 percent or more. “Years from now, you will be glad you did,” he wrote.
Richard Schroeder, CFP®, Chief Investment Officer