It’s hardly controversial to note the gap between an economist’s macro policy recommendations and the returns they garner as money managers. As Moshe Milevsky recently noted, Irving Fisher, the first “celebrity economist” and one of the greatest scholars of the first half of the 20th century, announced to the media and world at large that “stock prices are at a permanently high plateau” and that he was quite bullish. That was in 1929.
More recently, Jim Cramer of CNBC (hardly an economist, but arguably a major influencer) so thoroughly missed the calamity to come that he picked the semi-literate ballplayer Lenny Dykstra as one of one of only "four or five people in the world" from whom Cramer would take stock advice. Dykstra was jailed in early March for grand theft auto with another trial scheduled for this summer over alleged bankruptcy fraud.
But The Wall Street Journal’s Jason Zweig seems to have found controversy nonetheless by pointing to the remarkable investing record of one economist that elicits more emotion than most—John Maynard Keynes (left).
In a column over the weekend, Zweig attempted to make the case that Keynes should occupy the same level of sanctity as Graham, Markowitz and other theorists now considered staples of Investing 101. The blowback was so intense it prompted a follow-up column by Zweig on Tuesday.
“Regardless of how you feel about his theories on the need for governmental intervention in the economy, Keynes (1883–1946) long has had a reputation as an outstanding investor,” Zweig wrote in his original thesis. “From 1924 through 1946, while writing numerous books and overhauling the global monetary system, Keynes also found time to run the endowment fund of King's College at Cambridge.”
Over that period Keynes outperformed the U.K. stock market by an average of 8% annually, adjusted for risk, Zweig noted, citing David Chambers and Elroy Dimson, finance scholars at the University of Cambridge and the London Business School, respectively.
Hogwash, some readers commented, insisting Keynes was merely front-running his own economic policies, buying gold “before he debauched the value of the British pound.”
Other readers defended Keynes, ridiculing the notion that Keynes “could have had access to inside information on interest rates and currency values without trading on it.”
But facts are facts (and stubborn things), and Zweig added that Keynes was neither a good nor a bad investor because readers happen to agree or disagree with his investment policies.
His track record as an investor “should be judged just as any other investor’s should be: by the numbers,” and the emotion surrounding this rather obvious observation is really just an exercise in behavioral economics.
“Investors succumb to the halo effect when they let their general evaluation of a person or situation cast a warm glow over their assessment of specific aspects of the same person or situation,” he wrote Tuesday. “If you love your iPhone or iPad, you may well love Apple’s stock price, too, no matter how high it might go. Likewise, liberals who admire Keynes’s interventionist economic theories rushed to defend him as an investor.”
Zweig also pointed to evidence in reader comments of confirmation bias, or the tendency to view all new evidence through the old lens of their existing beliefs, “[disregarding] whatever might tend to disprove what they already believe, even while they point eagerly to any information that reinforces the views they already hold.”
“In short, what you think about Keynes as an economic theorist should have nothing to do with the question of how good an investor he was,” he concluded. “Similarly, investors should always be on guard against the halo effect and confirmation bias. When you ask a question about an investment, make sure you don’t end up answering a different question entirely.”