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My Two Cents

Keynes, the investor

Chris Farrell Feb 22, 2009

I got this question the other day: “We just hit the bear market low that we hit on Nov. 20. Is this the bottom? Is now the time to jump into the market?” JOHN, MINNEAPOLIS

Here’s my answer in the Star Tribune.

Ah, I wish I knew. It’s impossible to know whether the market is hitting bottom now — or might do so several years from now. And these are unnerving days, with fears of an extended recession replaced by growing worries of a depression.

That said, there is a discernible rhythm over the long history of the markets. Specifically, the despair that marks financial catastrophes often sets the stage for better returns later on.

“Markets tend to overshoot in both directions,” the late financier Leon Levy wrote in his memoir, “The Mind of Wall Street.” Levy’s book, published in 2002, remains a smart conversation about markets, psychology and economics. Of course, there’s no guarantee that the stock market will revive this time around. But it seems a reasonable bet considering the country’s history of innovation, an educated workforce, entrepreneurial traditions and the determination of the White House and the Federal Reserve to stop the economy’s downward momentum.

Take the stock market debacle of the Great Depression: The Dow’s 17 percent drop in 1929 was followed by a 34 percent decline in 1930, a 53 percent drop in 1931, and a 23 percent fall in 1932. Still, young investors bold enough to gamble on stocks during the Depression would have seen their stake grow tenfold by the time they reached retirement in 1957, notes Oxford historian Niall Ferguson.

The famed economist John Maynard Keynes speculated on a rebound. He had a portfolio worth about $40,000 after losing 80 percent of his money when commodity prices collapsed in 1928. Keynes believed that President Franklin Roosevelt would revive the U.S. economy “He shifted his strategy from short-term speculation to long-term investment and, at the lows of the Depression, put together a concentrated portfolio of a select number of British and American equities,” writes Liaquat Ahamed in his new book, “Lords of Finance.”

By 1936, Keynes’ net worth was close to $2.5 million — the equivalent of $30 million now, Ahamed writes. “Lords of Finance” is well worth reading.

Even if optimism is the right strategy, the big problem is that the timing of the stock market recovery is uncertain. That’s why the proverbs that preach diversification and dollar-cost averaging remain good advice for anyone investing for the long haul.

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