Dr David Chambers – Cambridge Judge Business School
RP: Hello there. It’s very tempting to try to beat the market to see if you can get in just before prices start to rise, and out again as they’re about to fall. But you shouldn’t try. Why not? Because no one can do it successfully with any degree of consistency.
Take the legendary economist John Maynard Keynes, for example. Between the two World Wars, Keynes was a prolific investor – mainly on behalf of King’s College, Cambridge, of which he was a Fellow and Bursar.
DC: Keynes ran portfolios both for himself and for his college amongst other investors for about a quarter of a century, and one of the key things that he learned about investing was the great difficulty – or, indeed, the futility – of market timing. So by market timing what we mean is trying to pick the points when you should be in or out of the equity market, as opposed to being in bonds or cash, for example. Because those were the three major asset classes that were available to him, in addition to property, in the 20s and the 30s.
RP: You’d have thought that Keynes, of all people, would at least know when to be cautious and when to invest more aggressively. But even he found it just too big a challenge.
DC: He pored over economic and industrial statistics and indeed he founded the premier economic and statistical service of its day. Despite all those advantages, as well as being a great economist, he found it very difficult to time when to get in and when to get out of the equity market; and probably the prime example of that is that, in October 1929, when the London stock market crashed along with New York, he was still very heavily into equities in his discretionary portfolio.
RP: The moral of the story? If Keynes couldn’t time the market, the rest of us shouldn’t even try. We should also be extremely wary of altering our portfolio on the basis of what economic experts might say.
Incidentally, Keynes’s investment record is fascinating on a number of levels. For example, he was one of the first to advocate that long-term investors should invest primarily in equities. He also understood the benefits of overweighting in value and small company stocks long before they became widely accepted.
David Chambers has written widely on this subject. You’ll find details of his work by going to his profile on the Cambridge Judge Business School website, and clicking on “Selected Publications”.