How the world works
John Maynard Keynes
Not knowing
John Maynard Keynes (Britain · 1883–1946) — Not knowing.
What actually happened?
In 1920 Keynes took positions on several currencies on margin and within months lost almost all his capital; friends and a banker had to step in to carry him through. The man who would later write the General Theory was also a man who could be badly wrong. Afterwards, running money for institutions, he leaned more and more toward holdings he could see clearly and sit with.
What can be counted and what cannot
He drew a line between roulette-type events, where odds can be worked out, and things like the price of copper twenty years on, where no scientific basis exists for a calculable probability. Treat the second as the first and the figure looks respectable but adds no certainty.
Putting next year's industry growth at 8.3 per cent pretends you face a roulette wheel.
Guessing what others will guess
He compared professional investing to a newspaper beauty contest: the winner is not the one who picks the prettiest face but the one closest to the average pick. At the third degree, the clever guess what the crowd expects the crowd to think.
You don't rate a stock, but you're sure everyone expects everyone else to buy it, so you buy it too.
Failing with the crowd is safer
He wrote that for reputation it is better to fail conventionally than to succeed unconventionally. Those who manage other people's money are judged in short windows, so they are more likely to dodge blame than to judge value.
A fund manager who loses with the whole sector says the market fell. One who backs something unloved and loses explains himself for a year.
Own what you understand
In 1934 he wrote that spreading money between enterprises one knows little about does not limit risk. He wanted large sums where he truly understood the business and trusted its managers.
Ten funds in the account, and you can't say what any one of them holds.
How do I use it today?
Pick a bet you are tempted by. On a sheet, make three columns: what I can calculate (cost, term, the most I can lose); what I simply do not know; and whether I want to follow because I have priced it or because I am afraid of being the only one who didn't. Then count how many things in your account you could explain in three sentences, how they earn and why their managers deserve trust. He left one rule: don't write a guess like a calculation, don't treat company as judgment, and don't let a count stand in for understanding.
Deep read
Read alongside
Further
Lines to keep
Of such matters we simply do not know.
Failing conventionally beats succeeding unconventionally, for reputation.
Spread wide enough and you still can't spread out ignorance.