JM Keynes: Currency Trader

From Neil Irwin at the NYT:

But winning big in currencies is harder than it looks — even if you happen to be one of history’s greatest economic thinkers.

That’s the conclusion two scholars reached after scouring the records of John Maynard Keynes, the British economist who, when he wasn’t advancing economic thought in the 1920s and 1930s, spent a great deal of time investing in stocks and currencies. At the peak in 1936, Keynes had more than 250,000 pounds invested, the equivalent of $23 million today.

But even while writing a treatise that would be one of the foundational texts of 20th-century economics (“The General Theory of Employment, Interest and Money,” published in 1936) and hobnobbing at the highest levels of global finance, his returns were pretty, well, mediocre. He had an average annual return of 8.9 percent from 1920 to 1927, and a mere 2.5 percent from 1932 to 1939, according to research by Olivier Accominotti of the London School of Economics and David Chambers of the Cambridge Judge Business School newly published in The Journal of Economic History.

(…)

Keynes bet that the United States dollar would appreciate — just before Franklin Delano Roosevelt abandoned the gold standard in 1933, a move that caused the dollar to lose value. Keynes did correctly predict that France and the Netherlands would eventually abandon the gold standard in the 1930s, leading to declines in the franc and guilder. But he was early, and so incurred years of losses on the trade before his economic foresight paid off.

“In many cases he called currencies right in terms of direction,” Mr. Chambers said. “But his great frustration was how to time a trading position. That was the thing he found most difficult.”

This is a good point about investing: even if you’re right on the big picture, you still need to get the timing right. In The Big Short, the guys were right but they had to wait and wait and suffer big losses until they hit their payday.

From the final day of trading in 1986 until April 12, 1988, the Dow gained 11.3%. True, it wasn’t in a straight line.

Posted by on January 13th, 2016 at 8:40 am


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