Was Keynes really a savvy investor?
An excerpt from Scott Sumner's thought-provoking blog:http://blogsandwikis.bentley.edu/themoneyillusion/?p=1652
See what you make of this:[/quote]
ďIn early 1920, he [Keynes] set up a syndicate, with his brother, some of the Bloomsbury circle, and a financier friend from the City of London. By the end of April 1920, they had made a further $80,000. Then suddenly, in the space of 4 weeks, a spasm of optimism about Germany briefly drove the declining currencies back up, wiping out their entire capital. Keynes found himself on the verge of bankruptcy and had to be bailed out by his tolerant father. Nevertheless, propped up by his indulgent family and by a loan from the coolly acute financier Sir Ernest Cassel, he persevered in his speculationĒ[/quote]
Translation, without help from his rich daddy and rich friends, this cocky, arrogant, smart-aleck would have fallen on his face, ended up digging ditches somewhere and we would never have heard of him. But he did have a rich daddy, who bailed him
Donít anyone write in and tell me that Keynes made lots of other good investments, because if youíve got a rich backstop, none of that matters.
Hereís what Iíd do if Bill Gates was willing to lend me $3.57 billion dollars for a day: Iíd go to Vegas and put $5 million on numbers 1 through 34 on the roulette wheel. The odds are roughly 90% Iíd win. If I did so, Iíd win $180 million on a bet of $170 million. I repay the $3.57 billion and pocket my $10 million dollars and be rich for the rest of my life, clipping coupons. If numbers 35, 36, 0, or 00 came up Iíd bet again, this time $100 million on each number 1 through 34. If I won, Iíd receive $3.6 billion, repay Gates, and have $30 million dollars to spend for the rest of my life. The odds are nearly 99% that Iíd win one of these two bets. Of course if both failed, Iíd be in big trouble. But thatís not very likely is it?
Whatís the point? If you have a rich backstop itís relatively easy to come up with investment strategies that will usually (not always) make you look like a genius. From now on I will never believe anyone who tells me that Keynes was a great investor.
Does this matter? It shouldnít, but unfortunately it does. If his investment reputation was like Fisherís (calling stocks fairly priced in 1929) nobody would take seriously his Chapter 12 in the General Theory where he tries to shoot down the efficient market hypothesis.