Television and radio and the free dailies thrash out the big questions. Everyone has an opinion. Answers to the big macro questions are mostly free. They’re given away because few people will pay for them. And there’s a good reason for that: It’s the answers to the small questions that make the money.
Most people don’t know that famed economist John Maynard Keynes was actually a fairly accomplished investor. Even though I loathe the snarl of ideas he unleashed on the realm of economics, he had some interesting things to say about investing. As the steward of King’s College’s endowment from 1928 to 1945—a difficult set of years, given the Great Depression sandwiched in between—he managed an average return of 13.2 percent. This looks especially sweet considering that the overall market in the United Kingdom actually lost money during those years, declining by an average of 0.5 percent per year.
Keynes’s basic philosophy was to buy cheap, out-of-favor investments, hold on for a period of years, and concentrate the portfolio in his best ideas—as opposed to buying a little bit of lots of ideas.
Keynes’s contrarian investment style could be difficult to implement. He had to get his ideas past an investment committee. Investing, I believe, is something that can’t be done well by committee. It is best to have one guy make the ultimate decisions.
Anyway, this committee, like all committees, was more interested in showing off what it knew and protecting its behind. This led to some humorous exchanges between Keynes and the committee, which Bill Miller (the manager of Legg Mason Value Trust) recently retold at an investment conference in New York.
Keynes once recommended Argentine bonds. The committee nixed the idea, essentially saying the outlook for Argentina was no good. That response prompted the witty Keynes to reply:
I want to again explain my investment philosophy. It’s called contrarianism. And what that means is that the stuff I like is stuff that the average person, when they look at it, won’t like, and, indeed, will think it imprudent. So the fact the committee doesn’t like it is the best evidence for it being a good investment.
On another occasion, the market was falling apart, and the committee asked him if he should be reducing his exposure. Keynes wrote back: “I wouldn’t consider it imprudent to own a few shares at the bottom of the market. Your apparent investment approach is that I should be liquidating as the market gets more attractive, and that I should be buying as it goes up.”
My favorite Keynesian line is about taking losses. He wrote: “I consider it the duty of every serious investor to suffer grievous losses with great equanimity.”
Unfortunately, Keynes wasn’t content to be solely an investor, or perhaps the batty committee drove him to look for other things to do. Either way, he wrote an incoherent blob of a book that soon became the new bible of economics. His ideas became the basis of a new highly mathematical approach to economics, which encouraged big government spending and active management of the economy.
For most people, when a stock they own is down, they get nervous. They think about selling.
Most people are not dealmakers.
For the true dealmaker, market prices are just that—market prices. They are not well-reasoned appraisals of business value. They are the product of opinion and emotion and can be way off base.
They are there to take advantage of or ignore, as the case may be.
True dealmakers don’t try to time the market.
They don’t trade stocks.
They don’t look for insights from chart patterns or recent market action.
Stop-losses (traders mechanically looking to sell if stocks fall to certain levels) are not even part of their language.
The investors who understand this live a good life.
Not only is their investment performance generally better over the long term, but they just don’t worry as much.
They are secure in their knowledge and their research.
They are calm and reflective, even when the market is turbulent and pulsing with fear.
They spend time away from their computer screens. They sleep well at night, as the old saying goes.
Your investment dollars are safest in cash. That is true. Yet there is an old saying: “Ships are safest in the harbor, but that’s not what ships are built for.”
If you are really a long-term investor, you ought to welcome the lower prices as a chance to pick up some choice bargains.