“When the facts change, I change my mind. What do you do, sir?”
It’s unclear if John Maynard Keynes – one of the world’s greatest economists – ever said precisely these words that are popularly attributed to him.
Certainly, they don’t appear in his writings.
Fellow economist Joan Robinson – with whom one of my own economics professors was acquainted, I recall – knew Keynes well, and she recalled him saying words very close to these when once accused of inconsistency.
Yet although most people think of Keynes as an economist, he was actually also a fairly shrewd investor.
Research I’ve seen highlights that by the time Keynes died in 1946, his management of a fund on behalf of King’s College, Cambridge, had turned £30,000 into £380,000 over 22 years – at a time when the overall stock market fell by 15%, thanks to the crash of 1929, the Great Depression, and World War Two.
Sage words
I’m quite fond of Keynes’ remark: as waspish put-downs go, it’s difficult to beat.
But I’m also fond of Keynes’ remark for another reason.
Because, turned on its head, Keynes is actually dispensing invaluable investment advice.
In other word, if the facts haven’t changed, then don’t change your mind.
And quite a lot of the time, the basic facts aren’t changing.
Mood-driven, not fact-driven
Spend any time on investor forums, or talking to investors, and it’s not difficult to spot ample examples of people flip-flopping around, changing their minds on the flimsiest of evidence.
And often, in fact, on no evidence at all – just gut feel, supposition, or simply irrational exuberance or gloom.
They are, in fact, the very manifestation of ‘Mr Market’, introduced by legendary investor Benjamin Graham in his 1949 book The Intelligent Investor, who was memorably both teacher and mentor to Warren Buffett.
‘Mr Market’, in essence, is someone who every day shows up at your door, variously influenced by euphoria, gloom, or apathy, and names a price at which either he will buy your shares, or sell you his shares.
When he’s euphoric, the price is high. When he’s gloomy, the price is low. When he’s apathetic, the price reflects fair value.
But either way, what’s driving his viewpoint is his mood, not the facts.
Uncoupled from reality
Benjamin Graham openly characterised Mr Market as manic depressive.
And the job of the contrarian investor, Graham wrote, was to buy when Mr Market was depressed, and sell when Mr Market was euphoric.
Warren Buffett – who incidentally acknowledged the influence of Keynes on his own investing style – memorably says much the same thing: we all know his quote regarding being greedy when others are fearful, for instance.
The market, in short, is not always rational: investor sentiment does not always accord with the facts.
But if the facts haven’t changed – then why?
The facts; just the facts
What does all this mean for your own investment portfolio?
Simple: focus on facts, not feelings. And if the facts haven’t changed, there’s little need to do anything.
Moreover – as I’ve said before – doing nothing often turns out to be the smartest course of action, as real-life behavioural investing studies have shown.