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Keynes and Wall Street

  • David Chambers and Ali Kabiri

This article examines in detail how John Maynard Keynes approached investing in the U.S. stock market on behalf of his Cambridge College after the 1929 Wall Street Crash. We exploit the considerable archival material documenting his portfolio holdings, his correspondence with investment advisors, and his two visits to the United States in the 1930s. While he displayed an enthusiasm for investing in common stocks, he was equally attracted to preferred stocks. His U.S. stock picks reflected his detailed analysis of company fundamentals and a pronounced value approach. Already in this period, therefore, it is possible to see the origins of some of the investment techniques adopted by professional investors in the latter half of the twentieth century.

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1 Edgar L. Smith, Common Stocks as Long Term Investments (New York, 1924).

2 John Maynard Keynes, “An American Study of Shares versus Bonds as Permanent Investments,” The Nation and the Athenaeum, 2 May 1925, 157.

3 Goetzmann, William N., Griswold, John, and Tseng, Yung-Fang (Ayung), “Educational Endowments in Crises,Journal of Portfolio Management 36 (Summer 2010): 112–23.

4 David F. Swensen, Pioneering Portfolio Management, 2nd ed. (New York, 2009).

5 Accominotti, Olivier and Chambers, David, “If You're So Smart: John Maynard Keynes and Currency Speculation in the Interwar Years,Journal of Economic History 76 (June 2016): 342–86.

6 Chambers, David and Dimson, Elroy, “Retrospectives: John Maynard Keynes, Investment Innovator,Journal of Economic Perspectives 27 (Summer 2013): 213–28; David Chambers, Elroy Dimson, and Justin Foo, “Keynes, King's and Endowment Asset Management,” in How the Financial Crisis and the Great Recession Affected Higher Education, ed. Jeffrey R. Brown and Caroline M. Hoxby (Chicago, 2014), 127–50.

7 Keynes gained some experience trading U.S. stocks for his own account prior to the 1930s. In 1911, U.S. Steel common stock became his first U.S. investment, which he traded actively for several years after that. In 1926–1927, he invested in Kennecott Copper, but this was his only U.S. holding in a portfolio of twenty stocks with a weighting of around 4 percent.

8 Benjamin Graham, “Is American Business Worth More Dead than Alive?,” Forbes, 1 and 15 June and 1 July 1932; Benjamin Graham and David Dodd, Security Analysis (New York, 1934).

9 Maury Klein offers a good summary of this extensive literature, in Rainbow's End: The Crash of 1929 (New York, 2001).

10 John Maynard Keynes, The General Theory of Employment, Interest and Money (London, 1936).

11 Ibid., 156, 158.

12 George A. Akerlof and Robert J. Shiller, Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism (Princeton, N.J., 2009).

13 The first market valuations of property were not carried out until the early 1960s. Based on a very rough guess of its market value in 1919, real estate accounted for approximately 80 percent of the King's endowment when Keynes took up the reins. By 1946, this allocation had dropped to around 50 percent, through both Keynes's policy of property disposals and the strong performance of the stock-laden Discretionary Fund. See Chambers, Dimson, and Foo, “Keynes, King's.”

14 Chambers, David, Dimson, Elroy, and Foo, Justin, “Keynes the Stock Market Investor: A Quantitative Approach,Journal of Financial and Quantitative Analysis 50 (Aug. 2015): 843–68.

15 Chambers, Dimson, and Foo, “Keynes, King's,” 127–50.

16 Shiller, Robert J., “Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?,American Economic Review 72 (June 1981): 421–36; Robert J. Shiller, Irrational Exuberance (Princeton, N.J., 2000), 186; Ali Kabiri, The Great Crash of 1929 (Basingstoke, U.K., 2014), 180–81.

17 Graham, “American Business.”

18 See Shiller's website, at The Cowles Commission for Research in Economics published a monograph in 1938 on indexes for U.S. common stocks. The full series covers the years 1871 to 1937. Data from 1917 are taken from the “Standard Statistics weekly indices” and represent 90 percent of all common stocks listed on the New York Stock Exchange. We use the P-1 series (ALL STOCKS). This value-weighted index has been used by William Goetzmann and Roger Ibbotson, in The Equity Risk Premium: Essays and Explorations (New York, 2006). For further discussion, see G. William Schwert, “Indexes of U.S. Stock Prices from 1802 to 1987,” Journal of Business 63 (July 1990): 399–426.

19 Calculated based on stock price and dividend data downloaded from Center for Research in Security Prices (CRSP), Stock/Security Files ©2015, University of Chicago Booth School of Business, The Commercial and Financial Chronicle (New York, various issues from 1929 to 1946).

20 John Moody, Moody's Manual of Investments, American and Foreign, Railroad Securities (New York, various issues from 1929 to 1946), Moody's Manual of Investments, American and Foreign, Industrial Securities (New York, various issues from 1929 to 1946), Moody's Manual of Investments, American and Foreign, Public Utilities (New York, various issues from 1929 to 1946); Moody's Manual of Investments, Banks – Insurance Companies – Investment Trusts – Real Estate – Finance and Credit Companies (New York, various issues from 1929 to 1946).

21 Leonard Kuvin, Private Long-Term Debt and Interest in the United States (New York, 1938).

22 Keynes's investment in EPL 6 percent preferred and EPL 7 percent preferred from the early 1930s was also a “play” on United Gas. The two stocks were connected via a cross-holding resulting from a 1930 restructuring by which EPL acquired various securities of United Gas, including virtually the entire 2nd preferred stock issue. Keynes bought the United Gas 7 percent 1st preferred, which ranked ahead of the 2nd preferred in paying dividends. As the economic recovery continued and oil and gas prices rose from their low in 1932 to a high in 1936, the probability of United Gas clearing the dividend arrears on its 1st preferred stock and resuming payments on its 2nd preferred stock increased accordingly. Because almost all of the latter issue was held by EPL, this in turn would assist the cash flows of EPL and the payment of the dividend arrears on the 6 percent and 7 percent preferred also held by Keynes. Hence, he was attracted to all three stocks.

23 We follow the sector classification in Moody's Manuals.

24 DeLong, J. Bradford and Shleifer, Andrei, “The Stock Market Bubble of 1929: Evidence from Closed-End Mutual Funds,Journal of Economic History 51 (Sept. 1991): 675700 .

25 Ibid., 683.

26 Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, N.J., 1963).

27 Chambers and Dimson, “Retrospectives,” 213–28.

28 John Maynard Keynes (hereafter Keynes) to F. C. Scott, 5 Oct. 1933, folder 1, file 1, pp. 221–22 (Provincial Insurance Co., Ltd.), Papers of John Maynard Keynes, King's College Archive Centre, Cambridge (hereafter JMK Papers).

29 Data for market capitalization values are downloaded from CRSP, Stock/Security Files ©2015 and book values are taken from Kenneth French, Data Library (2014), Where data are missing we use the Moody's manuals. We exclude investment trusts.

30 Chambers and Dimson, “Retrospectives,” 213–28.

31 Keynes to F. C. Scott, 25 Apr. 1939, folder 3, p. 162, JMK/52/BM (Correspondence and memoranda exchanged with business houses), JMK Papers (hereafter JMK/BM).

32 Buckmaster & Moore to Keynes, 21 June 1938, folder 7, p. 83, JMK/SE/2 (Correspondence and memoranda exchanged with Buckmaster & Moore), JMK Papers (hereafter JMK/SE).

33 Buckmaster & Moore to Keynes, 17 June 1938, folder 7, p. 92, JMK/SE.

34 Buckmaster & Moore to Keynes, 19 Dec. 1939, folder 7, p. 167, JMK/SE.

35 Case traveled to England circa 1938 to discuss investments with Keynes. Keynes to Richard Kahn, n.d., folder 57, pp. 231–36, Correspondence, GBR/0272/RFK (Papers of Richard Ferdinand Kahn), King's College Archives, Cambridge.

36 Keynes to F. C. Scott, 25 Apr. 1939, p. 157, JMK/BM.

37 Ibid., 162.

38 One such example is a letter to Case advising on U.K. exchange-rate policy in 1933, Keynes to Walter Case, Case, Pomeroy & Co., 2 Mar. 1933, folder 2, p. 311, JMK/BM.

39 Ibid., 87.

40 Keynes to F. C. Scott, 25 Apr. 1939, p. 157, JMK/BM.

41 Ibid.

42 David S. Roswell to Keynes, 18 Apr. 1938, folder 3, p. 52, JMK/BM.

43 Keynes to Alvin Johnson, 21 Mar. 1931, folder 1, p. 36, JMK/27/AV (American visits), JMK Papers (hereafter JMK/AV).

44 Keynes to Geoffrey Marks, 17 June 1931, folder 1, p. 92, JMK/AV.

45 Keynes to Geoffrey Marks, 22 June 1931, p. 95, JMK/AV.

46 Case Pomeroy & Co. to Keynes, 26 Sept. 1932, folder 2, p. 246, JMK/BM.

47 Keynes to Walter Case, 7 Sept. 1932, folder 2, p. 242, JMK/BM.

48 The word “funky” in this context means that he was afraid and, hence, sweating.

49 Chambers and Dimson, “Retrospectives,” 213–28.

50 We also include directors of noncore holdings with whom Keynes was connected and who were themselves connected to directors or officers of Keynes's core holdings.

51 Irving Kahn and Robert D. Milne, “Ben Graham: The Father of Financial Analysis” (occasional paper no. 5, Financial Analysts Research Foundation, Charlottesville, Va., 1977), 42–46.

52 Chambers and Dimson, “Retrospectives,” 213–28; Chambers, Dimson, and Foo, “Keynes the Stock Market Investor,” 843–68.

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Business History Review
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