Sunday, July 28, 2013

An essay on The Psychology of Selling in the Stock Market

Anyone who has been in the Stock Market for the past 10-20 years can tell you how volatile the markets are. They have seen and rode many bull runs where it can go straight up or bear runs where the market can go straight down in a matter of days. In between they also experienced the roller coaster stock market where the markets move up and down daily. Stock markets have grown much more volatile nowadays as compared to say 10 years ago because due to structural changes in the market. Due to the explosion of the internet, stock market information such as company announcement on earnings, corporate activity and other disclosures are transmitted almost instantaneous.

What used to take days can now be accomplished in seconds. Moreover due to the changes in our lifestyles everything needs to be done ‘here and now’. We have faster mode of transportation, communications, turnover in business and even our food are prepared much quicker like those in the fast food chains. As a result trading in the stock market has also quickened. With the arrival of online trading orders used to take minutes to complete can now be done in seconds.

Case for Buy and Hold

However many investors are still belonging to the old school where ‘buy and hold’ is the investing mantra for success. What you do is basically scan and select stocks that satisfy certain fundamental criteria such as good and continuous dividend yield, earnings, promising market and industry outlook and so on. Then you jump in and grab a few lots and hang on to it for whatever time period you reckon is reasonable or until your profit target has been reached. This buy and hold or rather known as strategic asset allocation revolves around a strategy whereby an investor who hold his portfolio long enough it will be able to generate returns equivalent to its average past returns. According to the theory, by holding long term it will help the investor overcome the short term risk associated with the market downturn.

Unfortunately the wait may be too long and the return may not be realized. The problem is many a time we don’t manage to sell and we end up where we began. To illustrate we present you the following chart for the Jakarta Composite Index as from Nov 2012 to July 2013.

As from the above say if you have bought stocks during the low of last year which is during the period of October to December and did not sell during the run up from January till the end of May this year. Then you would have missed a profit potential of more than 1000 points (5243 – 4222). In other words you are back to square one. I am sure you will regret for not selling in between those period. Unfortunately this has been the mistake committed by many investors during their trading career.

One thing to remember in stock market trading is that selling well is as important as buying well. To complete a transaction you need a buy and a sell if not you will be forever holding to paper profits as illustrated above.   Surprisingly this topic is not covered much in investment books and trading courses. In short, there are not much literature written about this topic probably it is a bit too taboo. All we are taught is how to protect our profits by moving our sell target or protective stops higher and cutting losses. There is not much mentioned on the psychology of selling and the reasons why selling is so difficult.   

Why Selling is so difficult?

There are many reasons preventing investors from making a sale and below are some of them. Some of them are due to internal which has to do with the investor’s psychology and external such as the broker or the brokerage firm.

First, it was the bonded feeling that was created when we hold our stocks for too long. When we keep something for a period of time we tend to get close and emotional to it. As an example if you have kept a pet say a cat or a dog for a period of time, there will exist a mutual feeling or understanding between them and us. Similarly in stock market investing there are certain nostalgic feelings that prevented us from liquidating our stocks even though it has past its prime. Reasons may be,
  1. the stock had treated us well by generating hefty profit earlier on
  2. someone is working in the company
  3. inherited from your parents
  4. still a darling among our investment circle of friends
  5. there is always hope for a comeback

Second, is the inability of us to admit that we are wrong. Selling means there is a complete reversal of our strategy. When we bought earlier we are in the consensus that it is going to go up due after our exhaustive analysis.  It is only a natural response psychologically that we feel nice and achieved a sense of fulfillment when we sell at a profit while we feel painful when we sell at a loss. This is because we tend to find ways to maximize our comfort while at the same time reduce our suffering.

Hence, selling other than for a profit meant we made a wrong decision earlier. Nobody likes to admit that they are wrong and hence we tend to shun selling. Buying always comes with the hope for gain and the possibilities of greater thing to come. Selling means there is an end to this story or an end of the game and thus diminish any hope for the possibility of the stock to stage a comeback.  Hence there is always a resistance to sell.

Third, holding on to loser always presents us with hope. When our portfolio is making money it gives us pleasure thinking that we are smart and we made the right decision by buying low and selling high. We are at the top of the world thinking of how we managed to beat the professionals, we are getting rich and we found our money fountain. We are at our emotional high and thinking of when are we going to change our old car, move to a bigger house, taking an exotic holiday but unfortunately such day dreaming never lasts. When the market turned, our stocks will go down and also our portfolio. The next thing you know is that you are now hoping that the market will not go down any further and you tend to hang on to whatever paper gains you still have. In actuality, this is the time to sell so that we can gather whatever capital we have to wait for the next buy opportunity. This will help make our opportunity cost option open.

However most investors tend to hold on to their losses because they not only made us poorer but also affects us psychologically like being stupid or foolish. Hence the best solution is to hang on because it is less painful.
Fourth, this may be due to the conflict of interest between the brokerage firm and their clients. To them the corporates are more important than their retail customers. This is because the investment banking side of the brokerage firms is doing a lot of business with them such as advising them on rights issue, mergers and takeovers, debt restructuring and so on. The revenues they generate from these activities are much more as compared to the commissions from retail market. The brokerage firm’s research analysts are also biased in their recommendation to buy or sell a particular company’s stocks. Sell recommendation are rarely issued because if they do then it will sour the relationship between the brokerage firm, investment bank and their customers. Future business dealings between them will be highly unlikely.

Another problem with the security industries is that in order to toe in to their marketing effort they tend to concentrate their effort on buying while the other side of the equation which is selling is completely ignored. Even when the topic on cut loss using the stop loss strategy was discussed the how and when part of the equation was seldom follow up in detail.

Another strategy used by brokerage firms to downplay a stock market fallout is to tone down the urgency to act. So instead of issuing a sell order they turn to other words that are more subtle such as,

  1. hold
  2. underperform
  3. long term buy
  4. perform in line
  5. market weight
  6. underweight

Thus, customers can almost never hope to receive sell recommendations from their brokerages.

Fifth, there are other less important reasons preventing us from selling such as phobia of overcoming commission, tax purposes, protect your ego and perfectionism.


In short, in order to become a more successful investor you must first learn to become a better seller. You must find ways to overcome you greed and fear that affects you psychologically. Success in investing is not easy because selling is more challenging than buying. You must find ways to overcome your resistance to selling. One tip from me is that whenever I wanted to sell I always asked myself. ‘If I am selling it now, would I be buying it again today’? 

Till now and Happy Trading !

Wednesday, July 17, 2013

China - the World's Emerging Financial Superpower

China's financial might takes shape

Updated: 2013-03-08 07:10

By John Ross (China Daily)


Before long the Chinese will dominate list of 100 top influential people in finance

The US magazine Worth published a report recently analyzing the 100 most powerful people in global finance. Four were from China: Shang Fulin, chairman of the China Banking Regulatory Commission; Zhou Xiaochuan, governor of the People's Bank of China; Lou Jiwei, chairman and CEO of China Investment Corp; and Jiang Jianqing, chairman of the Industrial and Commercial Bank of China. They were ranked 14th, 15th, 27th and 31st.

That only four of China's top financial figures were included in the list shows how much understanding of the power of China's financial and banking system still lags behind its reality.

To grasp the underlying dynamic of the global financial industry it should be noted that it is a mistake to understand the strength of China's economy by statistics (such as the facts that China produces as much steel as the next 38 countries combined; more cement than the rest of the world put together; that it is the world's largest market for TVs, refrigerators, mobile phones, cars; or that it has more than twice as many Internet users as the US).

These figures are impressive but far from illustrate the real core of China's economic power. The real center of its economic strength, which determines both its domestic and global expansion, is unparalleled financial strength.

China has yet to overtake the US in GDP, but the annual sum of China's finance available for global or domestic investment - its savings - is already twice that of the US. As the chart shows, China's savings in 2011, the last year for which comprehensive figures are available, were $3.6 trillion (2.8 trillion euros), double that in the US.

But savings are the raw material of the financial system. It is this huge flow passing through China's banking system that is making China the world's financial superpower. China's $3.3 trillion foreign exchange reserves, easily the world's largest, are a powerful adjunct but it is the year-after-year generation of domestic finance on a scale that has no international parallel which is the unmatched core of China's economic strength.

To see the dynamic this is creating in the global finance industry it is useful to compare the main indices for banks in China and the US. When this year's figures are published they will further reinforce these trends.

US banks reporting last year were still ahead of China's on revenue - $550 billion compared with $404 billion, and on assets - $10,079 billion compared with $9,895 billion. But on profits China's banks had already overtaken their US competitors, $105 billion compared with $68 billion. China's banks also held the lead in stock market valuation, $992 billion to $847 billion.

At the beginning of this year, both China (ICBC, China Construction Bank, Agricultural Bank of China, Bank of China), and the US (Wells Fargo, JPMorgan Chase, Citigroup, Bank of America) had four out of the world's top 10 banks by market capitalization. But the total valuation of the Chinese banks was $706 billion compared with $620 billion. ICBC is the world's largest bank by both profit and capitalization.

In other financial fields - insurance, mortgage lenders and credit cards - the US still maintains a lead over China. But in core banking strength there is essentially no difference between China and the US.

But by every indicator the rate of growth of China's banks is many times higher than that of their US competitors. By revenue China's banks were 16 percent as large as US banks in 2007, and by last year they were 74 percent as large. By assets the corresponding figures were 30 percent and 98 percent, by market valuation 43 percent and 117 percent, and by profit 17 percent and 155 percent.

China's far more rapid buildup of domestic finance means that the balance will progressively and rapidly move in favor of its institutions. So before long China's banks will overtake US banks on all measures. China's underlying financial strength is rapidly being transformed into institutional strength in its banking system.

Where US banks traditionally held a strong lead over China is that China's were essentially domestic banks but US banks operated globally. However, this is beginning to change as China's banks go global.

First to globalize were China's development banks. During 2005 and 2011 China Development Bank and Export-Import Bank of China provided more than $75 billion in loan commitments to Latin America.

But now globalization of China's commercial banks is proceeding rapidly. By the beginning of this year, ICBC operated in 39 countries with overseas assets of $170 billion, a 30 percent increase on 2011. The stability and state guarantee of China's banks is attractive compared with the continued scandals from US and European competitors, making it clear that developing the necessary management skills is now the primary difficulty in expanding China's banks' overseas operations.

China's banks have so far concentrated on developing countries. For example, key acquisitions were ICBC's purchase of a 20 percent stake in Standard Bank, South Africa and Africa's largest bank. The advantage of the combination of Standard Bank's local knowledge throughout Africa and ICBC's huge financial firepower is evident. ICBC's shareholding in South Africa Standard Bank also made it easy to buy Standard Bank's Argentinian subsidiary, consolidating ICBC's position in Latin America.

But the financial strength of China's banks gives them the opportunity to directly expand operations in developed economies.Last year ICBC carried out China's first takeover of a US bank with Bank of East Asia. The international expansion of yuan operations - with the world's largest foreign exchange dealing center, London, trying to compete as an offshore operator with Hong Kong and Singapore - centrally involves China's banks.

Globalization of China's banks cannot be instantaneous. But the problems involved are time in acquiring permits, training management, creating infrastructure and other things, rather than fundamental financial strength. Overcoming these difficulties, given the unparalleled financial muscle that can be applied, is simply a matter of time.

How should the situation be summarized? It is sometimes assumed manufacturing is China's strongest industry. This is a mistake. China is the world's largest manufacturer and largest manufacturing exporter. But a substantial part of China's manufacturing output, and half its exports, are still by foreign companies. It will take significant time to build the power of China's own manufacturing companies. But the foundations of China's banks are already those of an emerging financial superpower. It is only a matter of time, a rather short one, before that translates into an equivalent strength of China's global finance companies.

Within a decade a list of the 100 most influential people in world finance will not contain four from China. It is likely to be dominated by figures from China.

The author is a senior fellow at Chongyang Institute for Financial Studies, Renmin University of China, and former director of economic and business policy for the mayor of London. The views do not necessarily reflect those of China Daily. 

(China Daily 03/08/2013 page9)

Saturday, July 13, 2013

The successful Strategies of Stock Market Investing by Famed Economist John Maynard Keynes

Keynes points the way back to the future, says Karl-Heinz Thielmann of Long-Term Investing Research

By: Karl-Heinz Thielmann,

08 May 2013

Karl-Heinz Thielmann, at Long-Term Investing Research AG (Institut für die langfristige Kapitalanlage), says today's fund managers could learn from the experiences of economist John Meynard Keynes during the 1920s, 1930s and 1940s.

John Maynard Keynes (1883-1946) is still one of the best-known economists of all times. His analysis of the worldwide economic crisis in the 1930s laid the foundations of modern macroeconomic theory and influenced a whole generation of economists. Policy recommendations derived from his theory influenced the monetary and fiscal policies of the economically most significant nations for decades. In addition, he developed basic insights into how economic decisions can sometimes become irrational. The concept of "animal spirits", which has become popular in recent years, is due to him. In addition, he developed basic ideas about how uncertainty and non-knowledge affect economic behaviour.

Indeed, his views on the business cycle and how to control it were and are still seen as very controversial. The fact that his theory mainly concentrated on the effects of demand and neglected incentives on the supply side caused a radical turning away from Keynes, particularly in the 1980s. However, in the meantime, there has been a renaissance of his thoughts, in particular due to the 2008 financial crisis and its consequences. His considerations about uncertainty play a particularly big role in many recent research projects.

His role as fund manager and his significance for the investment world are less known, but relatively undisputed. His importance is based not only on the fact that he was one of the pioneers in the 1920s and 1930s who introduced shares as an acceptable investment form for institutional investors. Furthermore, he also developed an investment style which decisively influenced very different investors such as Warren Buffet, George Soros or David Swensen in later years. Above all, however, the outstanding performance of his investments was responsible for his fame. During difficult years of depression and war he was able to achieve positive returns with share investments and considerably outperform the whole equity market.

There are varied statements about the magnitude of his outperformance. The most common is that Keynes succeeded in beating the British stock market by approximately 11% p.a.. However, more recent calculations indicate that this number is based on comparisons with unrepresentative indexes, which do not include dividends. It is more realistic to assume an above-average performance of approximately 5.4% annually. But even this number is so outstanding that Keynes can rightfully be considered one of the greatest investors of all times.

His achievement is even more note-worthy, because fund manager was only his second job while his main activity was economics professor. Indeed, it was not easy for Keynes to become an outstanding investor. Before his winning streak started, he experienced some failures; nevertheless he learnt from these, drawing the right consequences.

Keynes in the 1920s: the change from hazardous trader to investor

John Maynard Keynes was born as a son of an economics professor in Cambridge in 1883. His mother, one of the first female college graduates in Great Britain, was involved in different social initiatives and also politically active. In 1932, she was appointed mayoress of Cambridge, the second woman to occupy this position. Although hindered by long phases of illness, Keynes was a very successful schoolboy and student. In 1906 he entered the civil service. Appalled by its inefficiency and incompetence, he left after two years and began his academic career in Cambridge. He became economic adviser to the British government, but withdrew from his position as political consultant in 1919 because he rejected the hard action against the war loser Germany. On account of his experiences with politicians, he retained a deep aversion to this profession, which is reflected in some of his famous statements, such as: "You have not, I suppose, ever mixed with politicians at close quarters. They are awful... their stupidity is inhuman...." or "... a Government I despise for ends I think criminal".

After his break with politics he turned to journalistic activities as well as to the financial markets. In August 1919, at the age of 36, he opened a deposit account with a broker for the first time, starting his career as a speculator. First he traded currencies based on the analysis of economic trends and disequilibria and was very successful. However, in May 1920, he lost everything and registered a net loss of £13,125 (today's value approximately £570,000 or US$884,000) on all of his tradings. Only a short-term loan of £6,500 (today's value approximately £282,400 or US$440,000) and the advance sales of book rights enabled him to escape bankruptcy. One of his most famous quotations describes this experience: "The market can stay irrational longer than you can stay solvent." His experience was one which is also familiar to many people nowadays when they speculate against fundamentally unjustified market developments. Until one gets right, a long and very costly time can pass. Especially if leverage is used, the inter-temporal losses can increase in such a way that the capital can be lost before the markets move in the right direction again.

During the next five years, however, Keynes was able to increase his assets again to approximately £57,000 (today's value £2.92 million or US$4.53 million) with a considerably more risk-controlled trading strategy. He achieved this not only by betting on currency movements, but was also increasingly involved in futures markets for commodities.

During this time, Keynes came to the conclusion that shares had big advantages as long-term investments for institutional investors compared with government bonds and real estate, which were more popular at the time. From 1919, Keynes advised the Nationwide Mutual Life Assurance Society on its investments and from 1923 he advised the Provincial Insurance Company. In 1924 he founded the Independent Investment Company, an investment trust in which he implemented his ideas on how to invest. In the same year he became the sole fund manager for the endowment trust of Kings College Cambridge.

Before this, in 1921, he had already taken over responsibility for the investments and had insisted that the assets were split into two different funds. The first fund was a so-called "restricted" fund, which was bound to regulations on the investment of endowment money and invested mainly in fixed-income securities. The second fund was a so-called "discretionary" fund, for which Keynes was able to select the investments according to his own views. To finance the share investments, some real estate was sold. This "discretionary" fund also became known as the "chest" fund and is responsible for Keynes' fame as an investor, because this fund achieved an average return of 16% p.a. in spite of crisis periods. From 1925, he also structured his private investments similarly to the "chest" fund. However, in his first years as a fund manager, Keynes did not succeed in beating the British equity market. In the second half of the 1920s his investment results were even much worse. First he acted too cautiously, missing some of the stock market rally in the late 1920s. Later, he also failed to anticipate the stock market crash in 1929 and sustained heavy losses. Apparently his macroeconomic approach to investing was resulting in pro-cyclic behaviour. It was only when he fundamentally changed his investment strategy at the beginning of the 1930s that his fortunes improved.

Keynes in the 1930s and 1940s: the long-term investor

Keynes never explicitly explained his investment philosophy. However, he regularly commented on his investment decisions in management reports and public statements. It is therefore possible to draw conclusions on his investment style. A significant change in his attitude towards investing was perceptible at the beginning of the 1930s. In previous years, Keynes had tried to invest on the basis of his expertise in economic trends. From 1932 onwards he completely neglected macroeconomic issues. Instead, he shifted his methodology to identifying fundamentally attractive enterprises and analysing their valuation.

Careful research was a key factor for his investment success. He put a lot of emphasis on the thorough study of business reports and company news. Furthermore, as a leading economic researcher and as a member of the British establishment, he had a wide network of economic experts and managers who continuously provided him with the most recent information about developments of sectors and companies. Personal contacts with top managers were very important for him. Like Warren Buffet nowadays, Keynes considered a trustworthy management to be central for the long-term success of a company. As far as this can be reconstructed today, insider's knowledge in today's sense - the exploitation of confidential information - however, played no role in his investment success.

Keynes was one of the first investors to place emphasis on a thorough valuation analysis. He tried to calculate the "intrinsic value" of corporations and compared this to the stock market valuation.

Furthermore he determined valuation ratios and used them for comparisons with competitors. Although this may seem obvious to us today, it was not common 80 years ago. However, to call him a "value investor" would be too simplistic.

Keynes paid no attention to approximately 50% of the stock market and did not invest, eg, in financial companies or oil shares. It is unclear whether he had basic doubts about certain sectors or whether he simply avoided sectors that he did not know so well. He concentrated on the mining sector and the capital goods industry. It is interesting that these were exactly the sectors that largely benefited from the mega trends of the past in first half of the 20th Century. In this respect Keynes' investment style is very similar to the GARP (growth at a reasonable price) approach of today's investors; he was focused on the growth sectors of his time and in these sectors he preferred relatively low-valued shares.

In this respect he differs from other fundamental investors, for example from Warren Buffet. While Buffet invests in important enterprises from different sectors, Keynes clearly puts the focus primarily on the sector and then, in a second step, on the enterprises. This was also reflected in an increasing trend towards rather low weightings of most of his positions in the portfolio. Thus Keynes never had less than 44 positions after 1932. At the beginning of his career he had relatively few positions and a high concentration on top holding companies. Then, however, this concentration was gradually reduced. However, he still kept high weightings in especially successful shares. For this reason, the frequent appraisal of Keynes as a focus investor is too simplistic. A clear focus can only be identified at the beginning of his career as an institutional money manager. However, when applying sector selection, Keynes only occasionally maintained the focus on single enterprises.

Another important difference to other long-term investors like Warren Buffet is that Keynes was not a classical "buy-and-hold" investor who generally stuck to a position and avoided transactions. At the beginning of his career Keynes changed his holdings relatively often (he reshuffled the complete portfolio approximately once a year) and also traded actively. In the course of time, this changed and the turnover factor clearly decreased. Thus he accumulated significant long-term positions in his favourite enterprises such as Union Corporation, Hector Whaling and Austin Motors. Indeed, Keynes also did not renounce trading even during his last years and opportunistically tried to exploit market inefficiencies. However, his activities were very different to the trading of most of today's investors who try to jump on short-term market trends. With his trading Keynes essentially acted anti-cyclically - against the trend. When he saw excessive stock price movements, he took positions to offset them; after normalisation the trading position was dissolved again.

Beside sector specialisation, two other characteristic features of Keynes' portfolios are noteworthy: on the one hand, avoidance of blue chips - the shares with the biggest stock market capitalisations - and, on the other hand, a clear preference for enterprises with foreign activities.

Nowadays, the segment of small- and middle-size enterprises is also the segment comprising the companies with the biggest growth potential. There are also bigger information deficits than for the well analysed blue chips, so that market inefficiencies can be exploited better.

Keynes had a preference for enterprises earning their money outside Great Britain. This applied to British enterprises with considerable foreign activities as well as foreign enterprises. This approach was very unusual at the time, because globalisation was much less important than today and the stock exchange reflected the much stronger domestic economy. It is unclear whether this preference was based on a deliberate decision or whether this orientation arose implicitly from individual investment decisions. Indeed, this approach is confirmed by today's experience; the enterprises that prove successful on international markets are generally more efficient and more innovative than domestically focused companies.

All together four phases can be distinguished in Keynes' life as an investor:

Keynes as a hazardous trader (1919-1920):

In his first phase on the capital markets, Keynes had the same experience as many intelligent people today. With their theoretical knowledge they believe they can outsmart the capital markets. They try to exploit market trends with risky leveraged products. This may often work out well for a certain time, but it causes these people to overestimate themselves and their abilities. They increase their risk more and more as they are attracted by growing profits. However, at a certain point in time, the markets change. An approach that worked as a recipe for easy money before suddenly fails, resulting in terrible losses.

Keynes as a successful speculator (1920-1924):

Keynes learned from his painful experiences and earned back what he had lost before and was even able to increase his wealth even further. Indeed, he seemed to be substantially more mature, controlling his risks and not getting carried away with reckless speculations. After he had once again accumulated assets of a substantial size, he stopped short-term trading and turned to long-term investments.

Keynes as a global macro-manager (1924-1932):

Privately and in his activity as a fund manager, Keynes now focussed on investments in shares and fixed-interest bonds. However, during this period, he still tried to benefit by applying an investment strategy that involved analysing economic trends. Sometimes he was right and sometimes he was wrong. At the beginning of this period of considerable uncertainties, he was able to achieve comparable yields to the British stock market. In this period he was similar to many current fund managers who try to chase market trends with their funds. Sometimes they hit the trends, sometimes they get it quite wrong. However, all in all, they mainly generate transaction costs and therefore underperform the market over a longer time frame.

Keynes as a company oriented investor (1932-1946):

At the beginning of the 1930s Keynes changed his investment strategy. He, as economist, stopped taking into account economic trends when making investment decisions and focused instead on identifying fundamentally attractive shares. Indeed, he adopted a similar approach to a growing number of value investors emerging in the USA of the 1930s. However, it does not appear that he was influenced by them. It seems that both Keynes and the value investors (the best-known value investor was Graham Dodd with his book "Security Analysis" of 1934) came to similar conclusions at the same time.
It is remarkable for today's times, obsessed with performance measurement and controlling, that Keynes was indeed very unsuccessful twice with his activities on the capital markets. The first time was when he was on the brink of bankruptcy in 1920 and the second time was at end of 1920s when he failed with his approach based on macroeconomic views. It is also noteworthy that his (anonymous) financiers of 1920 as well as the Kings College management tolerated the mistakes and continued to trust him.

It was making mistakes that enabled Keynes to gather the experience that allowed him to become an outstanding investor later. The basic knowledge that one can learn best of all from one's own mistakes does not seem acceptable any more in times of modern risk management. Recently many fund managers who missed some short-term trends in the volatile times of financial crises and the Euro crisis were forced out of their positions or obliged to change their investment policies. Fund managers who miss their performance targets are eliminated fast nowadays. However, only those that have the courage to make mistakes can gather experience and achieve an outstanding performance.

Not only tolerance concerning mistakes would give today's risk managers a heart attack. They are also dominated by benchmark thinking, in contrast to Keynes' investment philosophy. He never used representative market indices as a guideline for structuring portfolios. However, Keynes cared very much about the independence of risk factors. With his preference for uncorrelated risk he anticipated one of the undisputed results of modern portfolio theory.

Keynes' aim was not to replicate the stock market performance. This would have also been relatively dissatisfactory in the crisis periods and wartimes in which he lived. The benchmark thinking of present days, which uses a market index as a guideline for performance and risk measurement, would have seemed odd to him and his contemporaries. He wanted to achieve absolute returns and increase his college's assets. His risk management did not involve naively diversifying investments or performing complicated analytics of correlation coefficients and volatility, but involved avoiding potentially problematic sectors, carefully judging the valuations as well as diversifying single holdings while taking into consideration their specific risk interdependencies.

In this respect it is very doubtful as to whether Keynes would have viewed strong divergences from the market index as a higher risk than would be the case nowadays, where the dominant investment philosophy favours investments close to an index. Keynes was not aware of modern portfolio theory and its conclusions and could not comment on them. However, Warren Buffet, whose investment philosophy is very close to Keynes's philosophy, has done this by rejecting the risk philosophy that has arisen from modern portfolio theory: "The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability - the reasoned probability - of that investment causing its owner a loss of purchasing-power over his contemplated holding period." On another occasion Buffet wrote: "Risk comes from not knowing what you´re doing." At least in his successful period, Keynes always knew precisely what he was investing in.