Forbes India 15th Anniversary Special

In Praise of Lord Keynes

Investors running to catch the stock market rally have brought the master's words to life

Published: Dec 2, 2009 08:20:00 AM IST
Updated: Feb 21, 2014 12:37:27 PM IST

Reading Robert Skidelsky’s magisterial and incredibly stimulating guide to the second coming of Lord Keynes (Keynes: Th e Return of the Master) has been truly apocalyptic. Lord Keynes famously compared stock exchanges to a beauty contest. In his view, the trick was not to identify the most beautiful face but rather guess which one the other judges would find most appealing.

Two approaches to investing follow from this metaphor. First — speculation — which requires deep study of the current fads and prevailing fashions that hold sway over other participants. Second — owning a valuable business — which needs a detailed understanding of what an enterprise stands for relative to its current worth. Somewhat strangely, speculation relies on “accurate” forecasting whereas investing is driven by top-drawer business analysis and a keen understanding of what creates economic value over the long term. Amazingly, Lord Keynes foresaw the consequences of the increasing influence of “institutional” investors and by default, Wall Street.

The importance of peer group reviews and benchmarking in assessing investment performance and the intellectual succour derived from closet indexing are the quintessence of the insight on judging “beauty”! And so the onward march of an exclusively “relative” view gains strength every moment as the pushers push those still whispering about absolute returns into the shadows.

Pinch yourself for a moment and it is possible to believe the financial markets have returned to normal. Analysts are cock-a-hoop about 25 percent plus bottom-line growth in the second half of the year as they quickly dismiss the damp squibs exposed by the Q2 performance of India Inc.. Not surprising, given that the fi nancial numbers for the second half of 2008-09 were an unmitigated disaster! The index of Industrial Production is almost back to double digit growth. Oil prices seem reasonably stable in the $75-$80 range and seem to suggest that global demand is not quite as wobbly any longer. The rupee is hitting new highs and the RBI appears to be a role model for other central banks in more ways than one! Finally, and perhaps most importantly for the speculators, Warren Buffett pronounced the Great Recession to be dead on November 13. Since savvy investors “hear” with their grey cells rather than their “ears”, some heard the proclamation from the sage of Omaha as being, “Let the good times roll.”

While the recovery in equity markets has been impressive, its resilience also remains suspect. The lop-sided nature of the rebound, led by the most cyclical and volatile stocks, appears to owe more to the feelings of investors who got left behind in April/May rather than to considerations of fundamental value. Government stimulus programs, incredibly lax monetary policy round the globe and the belief that developed economies are now immune to serious damage are vital props for the confidence of investors. Though central banks seem quite happy to keep re-filling the punch bowl for all the guests at the party in the near term, the cost of fiscal stimulus is causing considerable angst among conscientious policy makers. And lastly, the developed world is just barely crawling out of the tunnel and remains seriously bruised and dishevelled as of now. Given these circumstances, very few opportunities exist for the sensible investor.

Balkrishna Industries (Rs. 405) is a rare exception which benefi ts from a dominant presence in a quirky niche — tyres for “off -road” vehicles! The stock trades at just over 6 times 2010 earnings despite having consistently achieved a return on equity in excess of 25 percent. Perhaps value is not where the market currently chooses to think it is.

Keynes spent much of his life tackling the question of how one acts in the face of uncertainty. Despite being mathematically gifted, he was loath to rely on quantitative chicanery and esoteric models based on simplistic assumptions. As he said in a 1938 essay (My Early Beliefs) : “Civilisation is a thin and precarious crust, erected by the personality and will of a very few, and only maintained by rules and conventions skillfully put across and guilefully preserved.” Could he have been influenced by his experiences in investing? Absolute returns for the unconventionally right!

(This story appears in the 04 December, 2009 issue of Forbes India. To visit our Archives, click here.)