Wednesday, April 04, 2007

Keynes, Investment Advisor

Keynes was a great economist and a very successful investment manager, but I think this statement of his is glib and ill-considered.

I am in favour of having as large a unit as market conditions will allow...To suppose that safety-first consists in having a small gamble in a large number of different [companies] where I have no information to reach a good judgement, as compared with a substantial stake in a company where one's information is adequate, strikes me as a travesty of investment policy

As quoted by Peter Bernstein in "Capital Ideas".

You would not be pleased with the performance of a share which generated a return of 2% when the market returned 4%. Hence, to say that you have adequate information about a company which you intend to invest in means that you know not only how well its will perform, but how well the other shares in the market (and even assets such as real estate, bonds, and gold) will perform. This means that we need adequate information not merely about the company which we are considering investing in, but also in every other company we might choose to park our funds in.

Even if we merely concerned about the absolute performance of one particular firm's shares, that depends on how its products (not its shares) will do in the marketplace vis-as-vis the products of its competitors. Again, we need information about more than that particular business.

All arguments for diversification, and passive investment

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