keynes' three rules for successful investing

Keynes had three main rules in running his equity portfolio:

1. Stay invested and don’t try to time the market

He adopted this approach after failing to trade well in the wake of the 1929 crash. The crucial lesson here is to make sure you stay committed to equities during a downturn. If you try and time the market, you risk missing out on the early stages of a recovery when big gains tend to be made. An endowment (or a private investor) has the long-term view necessary to do this.

2. Focus on ‘value’ stocks, particularly big dividend payers

Again, he was exploiting a long-term approach. Keynes’ fund was able to take a contrary view, buy out-of-favour stocks which were cheap, and patiently wait for them to return to favour. Again, this is an advantage private investors can exploit. In contrast, professional fund managers often try to chase short-term trends and market fashion.

3. Keep your portfolio very different from the broader stock market

Of course, the concept of index-tracking didn’t exist back then. But Keynes understood that the best portfolio would often bear little relation to the makeup of the market as a whole. This lesson is well understood today. But ‘closet-indexing’ by mutual funds is commonplace and predictable generates poor returns. As private investors, we have the freedom to ignore the index and just own what we really like. We ought to make sure we do this.
So the message from Keynes is that endowment funds and private investors have some big advantages over the mainstream fund management industry. They can be patient and take a long-term view. They can also own stocks that they really like and believe in, rather than being a closet-indexer. It’s important that we recognise these advantages and use them.