CHICAGO What many people don't realize about economist John Maynard Keynes is that he was a professional investor, not just a thinker who addressed big issues. Although Keynes did not foresee the crash of 1929 and was nearly wiped out on three separate occasions, he made money during some of the most challenging years - and pioneered some durable investing principles along the way worth following in all market conditions.
So how would the father of Keynesian economics, who died in 1946, have played 2014?
He likely would not have been swayed by the recent swoon - the S&P 500 Index is down 3 percent year-to-date through January 24. He quickly threw out conventional wisdom and stopped trading based on big economic themes in the early 1930s, instead focusing on the intrinsic value of companies. This strategy later influenced mega-investors like Warren Buffett, George Soros and John Bogle.
When stocks were getting battered, Keynes was buying. He managed money for his alma mater, King's College at University of Cambridge, as well as two British insurance companies, friends and family.
In researching my recent book "Keynes's Way to Wealth," (McGraw-Hill, 2013, ((link.reuters.com/gyf46v )) ), I discovered that Keynes made money in 12 out of 18 years between 1928 and 1945, a period that includes the Crash of 1929, the Great Depression and World War Two. All told, his annualized return for the Cambridge "Chest" portfolio, a discretionary portfolio he managed, was 13 percent from 1928 through 1945, compared with a negative 0.11 percent for the UK market during that period.
How did Keynes do it? Here are some key strategies he developed that are worth emulating today:
1. Ignore the noise
Keynes saw daily price information as: "an altogether excessive, and even an absurd influence on the market." Unless you are a professional who can beat robotic, high-frequency trading programs, you should not be trading based on short-term price fluctuations. Think year-to-year and have a long-term investment policy.
2. Be a contrarian
That means buying unloved stocks, not glamorous tech titans like Google Inc and Apple Inc. Keynes bought out-of-favor shipping, railroad and mining stocks in the 1930s. They would later rebound and post huge profits. Today's toads are in the real estate, energy and utilities sectors, among the poorest-returning groups in the S&P 500 last year.
3. Favor stocks over bonds to beat inflation
Keynes made a switch from the traditional staples of institutional portfolio managers - bonds and real estate - to stocks in the 1920s and 1930s. It is a strategy that still works today. Including a 30 percent return last year, common stocks gained an average 10 percent from 1926-2013. "Ultrasafe" U.S. Treasury Bills averaged only 3.5 percent during that period and lost ground to inflation last year.
4. Commodities can be dangerously volatile
Keynes was heavily into commodities futures during the 1920s, but got crushed when the 1929 crash came along. Commodities are a reliable inflation hedge that do not move in lock step with stocks, but in the event of a market catastrophe, commodities follow equities. When global demand for items like oil, metals and agricultural goods plummets - as in the early 1930s and in 2008 - those markets are not a good place to be.
5. Dividends are desirable
Some of the most valuable companies in the world are boring, but have paid steady dividends for decades. They are worth holding because they boost and compound total return, particularly if you reinvest dividends in new shares. Keynes sought dividend payers in the 1930s when many of these companies were being dumped. Today you do not even have to purchase individual stocks: buy and hold an exchange-traded fund like the SPDR S&P Dividend ETF, which holds established companies including AT&T Inc, Consolidated Edison Inc and Clorox Co. The fund gained 30 percent last year, has a 2 percent yield and charges 0.35 percent annually to manage a portfolio of companies that are regularly increasing their dividends.
6. Stop sweating
When Keynes stopped market timing and forecasting, he became more successful. His best portfolios held companies with solid long-term prospects, were bought at bargain prices and spread out across the world. He bought more shares when they became cheaper, ignoring market sentiment. Keynes learned that abandoning large-scale "macro" forecasts was a plus; he was better off looking at company "enterprise" values, or how well they could increase earnings in the future based on their management and business model.
The moral of Keynesian investing is to play the long game, stick to an investment plan and avoid being distracted. Take advantage of buying opportunities - even when popular sentiment seems sour.
(Editing by Beth Pinsker and Matthew Lewis; Follow us @ReutersMoney or here)