Monday, June 13, 2011

Michael Harkins – Grant’s Conference Speech: “Embrace Reason, Shun Theories or Think Big, and Go Broke”

Thanks to James for passing this along.

My speech, all gall, divides in three parts. What you shouldn’t do, what you should do, and what Jim wants me to do. “Aw Michael, just give them CUSIP numbers,” was my invite. I’m coming to that presently. The face of American investing is a spittle flying, neck vein popping, barnyard noise making character who spews economic nostrums twenty to the dozen. Foretell the economic future, make it loud and Croesus will grow jealous of your wealth shortly. Right. A generation of American investors has been taught this, and the idea is not only wrongheaded, it is dangerous, and I want to spend a few minutes illustrating why, but first a brief moment of personal history.

When I was an eighteen year old undergraduate, I sat in the stacks at Cornell reading John Maynard Keynes’ General Theory of Employment, Interest and Money because I wanted to know something of the original flavor of this one work I had heard so much about. I was besotted instantly, and within a fortnight I had consumed every major work that he wrote. Worse yet, I had started using words like fortnight and besotted. To an undergraduate mind, Keynes was instantly addicting. He was also a trading legend. He once cornered the market in wheat, the shorts surprised him by forcing delivery, and he calmly proposed to the Cambridge Dons that they vacate Kings College Chapel, so he could use it as his personal silo. In the event, this didn’t fly, but imagine the cheek in trying it on. He then claimed the wheat wasn’t in good deliverable form, got the sellers to clean it, the market recovered in the interim and he made a profit. Great stuff, no? And chapter 12 of this book is the wittiest and wisest 17 pages you will ever read on markets. Well worth the price of admission all by itself. It is also part of an elaborate front to conceal a dirty little secret, one that I only found out many years later from this book.

This is Robert Skidelsky’s brilliant work of scholarship, in three volumes by the way, and the title of this volume tells the story in typical British understatement. Keynes really was the savior of western capitalism. He also wasn’t what he seemed to be, and here I have to let Robert Skidelsky tell you the tale directly. This is from pages 524 and 525, lightly edited by me for concision.

“In 1929 Keynes had lost practically all his money, in 1931 he even tried to sell his two best pictures, his Matisse and his Seurat, but found no buyers. Keynes personal investment philosophy changed with his economic theory” says Skidelsky, which if I can interject, is better than you can say for most of us. After all, Keynes did once say, “When the facts change, I change my opinion. What do you do, sir?” Back to Skidelsky, “In the 1920’s Keynes saw himself as a scientific gambler. He speculated on currencies and commodities. His aim was to play the cycle. This was the height of his “barometric” enthusiasm, when he believed it was possible, by forecasting short term rhythms, to beat the market. The gambling instinct was never quite extinguished.”

But Skidelsky goes on,

“By the 1930’s (Keynes) was prone to dismiss this kind of activity as a mugs game. “I was the principle inventor of credit cycle investment,” Lord Skidelsky quotes Lord Keynes, and “I have not seen a single case of a success having been made of it.” Hmm. “Credit cycling meant valuing shares relative to money, or as Keynes put it, valuing them by last week’s results, rather than by their long term prospects.” By 1938, Keynes was going so far as, “I feel no shame still owning a share when the bottom of the market comes. I should say that it is from time to time the duty of a serious investor to accept the depreciation of his holdings with equanimity and without reproaching himself. Any other policy is anti-social, destructive of confidence, and incompatible with the working of the economic system.” This doesn’t sound like the wheat trader from the decade before, does it? Anyway, Skidelsky finishes with “Keynes’ new philosophy can be summed up as fidelity to a few carefully chosen stocks, his “pets” as he called them.”

The irony here grows really thick. Keynes never admitted to any of this publicly, Skidelsky tracked it down in Keynes’ private correspondence and his monthly statements. To get back to America today, the television prognosticators, half of whom have never read Keynes and the other half can be counted on to bollix up his name, are trying to be the little Maynard who, in fact, never was. And Keynes would have found this completely predictable. He wrote, “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” Keynes, who never liked Americans much, would find it delectable that he is the defunctee they ape, again, the one that never really existed. By the way, Skidelsky goes on to inform us Keynes made 23 times his money from the moment he started ignoring his own economic theories in 1932 and became a value guy. Closeted, to be sure, but one of us nonetheless.