Champagne, Hedge Funds, Keynes and Buffet

John Maynard Keynes was a colorful man revered as an economist, investor and hedge fund pioneer. He was bisexual and married Russian ballerina Lydia Lopokova at the age of 42. His former lover Duncan Grant was the best man at their wedding. Among other things, he is famous for his words from deathbed -

“My Only Regret Is That I Have Not Drunk More Champagne In My Life”

Sneak Peek at His Career: Pioneer of Hedge Funds, Architect of IMF, World Bank

Keynes’ work continues to dominate the global economic policy debate to this very day. World Bank and IMF can trace their origin to the economic insights and exceptional networking skills of Keynes.

He made and lost several fortunes. In many ways, he was an early hedge fund investor, first in macro in the 1920s, and then in equities in the 1930s. He ended as one of the most successful investors of the first half of the last century, but along the way he learnt many lessons which resonate to this day. That said, the only reason he is remembered today, unlike his arch rival Irving Fisher is that he changed his mind in face of contradictory evidence.

What to do when you are wrong

Keynes, in the early 1920s, became convinced that the currencies of the economies devastated by the first world war (Germany, France and Italy) would soon collapse with inflationary pressures. These positions soon made money, and Keynes proclaimed that with “a little extra knowledge and experience of a special kind”, the money “simply comes rolling in”.

Unfortunately for Keynes the money didn’t keep rolling in. In May 1920, the markets surprised Keynes and almost wiped out his entire company. He had to borrow money from his father much like investor Ray Dalio after his predictions about the impending recession fell flat.

Finance nerds will tell us a key lesson: market can stay “wrong” for longer than most investors can stay liquid.

Buffet - Keynes Bromance

After the 1920s debacle Keynes abandoned macroeconomic forecasting (Taleb et al call macroeconomic forecasting macroeconomic bullshit today). Instead, Keynes sought out well-managed (call them anti-fragile) companies that would yield good dividends and last. These companies would not be dependent on economic cycles and market dances.

Doesn’t this remind you of Warren Buffett’s investment strategy? As it turns out Buffet quotes Keynes’s investment maxims with reverence.

This is Buffet on economists

“I don’t pay any attention to what economists say, frankly.” “Well, think about it. You have all these economists with 160 IQs that spend their life studying it, can you name me one super-wealthy economist that’s ever made money out of securities? No.”

Mental Model, Strong Opinions, Weakly Held

We subscribe to technology forecaster Paul Saffo’s decision making framework called “Strong Opinions, Weakly Held.” Paul suggests that despite lack of available information, we should develop a strong, fact-based hypothesis.

Conviction is an important decision-making tool, but it shouldn’t blind us. We should continually gather information that either supports or refutes our hypothesis. If we uncover information unfriendly to our belief, we should abandon our belief.

At one point both Irving Fisher and John Maynard Keynes were equals. Both intellectual giants with extraordinary networks, social capital and presence. Ultimately one died penniless and the other went on to amass huge personal fortune and shape the 20th century. The only difference was one had strong opinions that were weakly held and the other did not.

“When the Facts Change, I Change My Mind. What Do You Do, Sir?” Keynes

Cheers!

Your Network Capital Team