Right from the start, Keynes allocated more money to stocks. That was his first big move as Chairman of National Mutual.
For an insurance company at the time, it was significant. Yet, it was still a small portion of the total funds. The average insurance company at the time held about a 4% allocation to stocks. Keynes bumped it closer to 20%.
And it paid off.
Returns averaged more than 7% after tax from ’21 to ’28. The return on the stock portion exceeded that amount over the same period.
In fact, it worked so well that Keynes offered an annual warning about not expecting consistently good returns year after year:
We have had a long series of successful years as regards the capital appreciation of our investments. But a year is bound to come sooner or later when we shall suffer some degree of depreciation, possibly for reasons quite beyond our control.
This is not so large as in recent years, but, as I pointed out a year ago, capital appreciation is bound to be an irregular item, in respect of which we cannot hope to repeat year by year the figures of our best years.
And when the Great Crash of ’29 hit, he acknowledged the lesson:
The most important event of the year, however, on the investment side has, of course, been the serious fall in the general level of investment values — the most important movement, indeed, which has taken place since 1921. For a considerable number of years we have shown an unbroken series of gains through the appreciation in the capital value of our Stock Exchange securities. I have repeatedly stated in my annual speeches that this source of profit could not be regarded as a reliable one year by year, and I have warned you that the time was sure to come when a general movement of investment values in the downward direction would wipe out some part of our previous gains.
The moral is that no body which is responsible for the investment of large sums of money can hope to be immune from the major movements of the market as a whole, whether upwards or downwards, and we shall be very content if in the long run we can earn more appreciation than the average on the up-swings and lose less on the down-swings.
National Mutual succeeded in “losing less on the down-swings.” The total fund lost 6%, but the stock portion lost 8% in a year where most British indexes showed losses in the range of 20% to 30% (depending on the index used).
In spite, therefore, of our well-known policy of investing in Ordinary shares to a greater extant than the majority of insurance offices, we have, in a year in which Ordinary shares have suffered a quite exceptional depreciation, managed to get through with a percentage of loss which is not only far below the fall in Ordinary shares generally, but is much less than the amount of depreciation of non-gilt-edged fix-interest securities, and is only a little greater than has been suffered by long-dated British Government securities. I am not sure that, rightly viewed, this does not represent a greater measure of success for the long-run prospects of our general policy than the results of some former years which have looked much better.
Keynes wasn’t taking huge risks in the market. He wasn’t trying to squeeze the biggest possible return out of the funds every year. He didn’t get seduced by the “long series” of good returns. He never exceeded a 20% allocation to stocks. He understood market volatility was out of his control.
The only thing he could control was the amount of risk he took. So he created a plan. He stuck to it.
We have regarded the avoidance of loss on the Society’s investments as our first object…
A funny thing happens when you focus on not losing money. You win by not losing as much as the market. Beating the market in the worst years may not seem satisfying, but it leads to outperformance in the long run.
National Mutual Life Assurance Society Meeting Speeches – The Times
- What to Worry About in This Surreal Bull Market – Bloomberg
- Expert Judgment Or Lack Thereof – A Wealth of Common Sense
- When a 10% Gain Makes You Feel Like a Loser – J. Zweig
- Getting Clear About Risk – S. Godin
- Michael Lewis on Errors and Medical Misdiagnosis – Medscape
- Great Products vs. Great Businesses – M. Housel
- Index Providers Rule the World—For Now, at Least – Bloomberg
- What Makes a Safe Asset Safe? – Liberty Street Economics
- The Stock Market Might Be Right, Sort Of – M. Buchanan
- Spin Gold From Spinoffs: A Portfolio of Castoffs Trounces the S&P – M. Pabrai
- The 12 Signs a Cheap Stock Is a ‘Value Trap’ – N. Colas
- Death by Derivatives – Damn Interesting
- The Surgeon Who Wants to Connect You to the Internet with a Brain Implant – MIT Tech Review