1. “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.” Keynes started investing on behalf of King’s College in 1924 and because he believed he knew a lot about macroeconomics, he made a lot of macroeconomic-based bets. During this period, which lasted to the early 1930s, Keynes’ performance as an investor was dismal. It was only when he was delivered a large dose of reality/humility as an investor that Keynes set himself on a course which focused on the microeconomics of individual companies. Records of Kings College show that as soon as he focused on systems that were understandable and less complex (individual companies and their markets) Keynes found success as an investor.
2. “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.” Keynes understood that generating alpha requires investors to concentrate their bets or run the risk of being a “closet indexer.” See: https://25iq.com/2013/01/16/charlie-munger-on-investment-concentration-versus-diversification/
3. 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.” Keynes is talking about what Warren Buffett calls an investor’s “circle of competence. Investing is hard work and there are only so many hours in the day to follow companies in a meaningful way.
4. “[Investing] 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.” It is not possible to outperform the market if you are the market. You must occasionally have a contrarian view and be right about that view to generate a return which exceeds the market (alpha).
5. “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done.” Keynes is creating a distinction here between investing and speculation. It was as an investor and not a speculator that Keynes found success.
6. “[Investing is] intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.” If you treat investing as gambling you will almost certainly lose in the long run since the house is extracting a significant rake of the action. People too easily confuse luck with skill if someone does outperform the market. Portraying luck as skill is a special competence of people who market products for Wall Street.
7. “Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole, not those faces which he himself finds prettiest, but those which he thinks likeliest to match the fancy of the other competitors, all of whom are looking at the problem from the same point of view. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.” This is a “Keynesian Beauty contest” and is best avoided altogether. By guessing what others are guessing what others are guessing [repeat] you will not beat the market.
8. “We have not proved able to take much advantage of a general systematic movement out of and into ordinary shares as a whole at different phases of the trade cycle Credit cycling means in practice selling market leaders on a falling market and buying them on a rising one and, allowing for expenses and loss of interest, it needs phenomenal skill to make much out of it.” Keynes tried to be a “market timer” based on his macroeconomic knowledge and failed. He learned the hard way that macroeconomists are not able to make predictions in a way that beats the market.
9. “I feel no shame at being found still owning a share when the bottom of the market comes…I would go much further than that. I should say that it is from time to time the duty of a serious investor to accept the depreciation of his holdings with equanimity and without reproaching himself. … An investor…should be aiming primarily at long-period results, and should be solely judged by these.” Self-explanatory (brevity is important since I am close to exceeding 999 words on this post).
10. “The danger of Board management [is to] have to suffer the penalty of their faint-heartedness at a later date, just when the virtues of continuity of mind are most required if one is to be successful in the long run.” A wise investment manager will outperform a committee.
11. “When the facts change, I change my mind. What do you do sir?” Charlie Munger said once that if he does not succeed in changing his view on something significant during a year, he considers that to be a failure. Keynes seemed to agree.
12. “It is better to be roughly right than precisely wrong.” Those people who profess to have formulas which can predict the direction of markets, stocks or bonds often impress the uninformed with fancy mathematics (look Greek letters!) based on fake assumptions (garbage into a formula means garbage out).