This past week I was in England and I had the privilege of looking through John Maynard Keynes’ personal papers stored at Cambridge University. Keynes was a famous Englishman who helped lay the cornerstones of modern macroeconomics and helped create the modern financial system. Keynes’ archive is amazing because the man was a pack rat. He kept everything. You can look at some of his golf scores, check book stubs, and read his personal letters to friends, family and many of the famous people alive from the 1920s until World War II. Among the things I examined were the ledgers where Keynes recorded his personal purchases and sales of stocks, bonds, commodities and currency. (It is a real treat to hold the books written in the great man’s own handwriting.)
The ledgers show how Keynes actually invested his own money. Keynes’ investing style is important because of a recently published book by John Wasik entitled “Keynes’s Way to Wealth.” Mr. Wasik’s key points are that Keynes was a passive investor and that a simple way for you to become wealthy is to follow Keynes and not be an active investor.
What is the difference between an active and passive investor? People who buy shares in low cost mutual funds or ETFs that mimic market indexes like the S&P 500 or the Dow Jones Industrial Average are passive investors. They are not trying to beat the market, only match its performance. Active investors are trying to beat the market by picking stocks that they think will outperform the average. Interestingly, even people who try to perfectly match the “market indexes” are not completely passive since the S&P and Dow indexes are periodically reviewed and poorly performing companies are deleted and companies with a brighter future are added. Which kind of investor should you emulate?
The book states very clearly that ordinary people should be passive investors. The book even has an effusive introduction by John Bogle, the founder of Vanguard Mutual Fund company, who is a champion of the passive investing approach.
However, even the most casual glance at Keynes’ ledger books reveals in the early part of his life he was a very active trader, not one who was investing passively. Communications in the 1920s were slow but, based on his frequency of trading, it appeared to me Keynes would have been a day trader if the technology existed a century ago. Then around 1937-1938 Keynes become a very passive investor. This is at the time he became quite sick and was forced to temporarily move to a Welsh sanitarium. Yes, the ledgers show Keynes switched from active to passive trading, and for the rest of his life simply held a top quality portfolio.
The question this raises for me is: Did Keynes change his portfolio strategy after carefully examining his own investment history OR did he just stop active trading when he was too ill to pay attention to the market? I believe if Keynes had stayed healthy and vigorous he would have stayed a very active trader. Therefore, I believe the advice in Mr. Wasik’s book is not based on the financial philosophy of John Maynard Keynes. Being a passive investor might be a better way to become rich than being an active investor, however, it wasn’t the way that Keynes became a very wealthy man.