What Keynes can teach us about choosing an investment manager

by Michael Tarsala

A new paper from David Chambers and Elroy Dimson reveals that highly influential macro-economist John Maynard Keynes was also a kick-butt investor. It provides today’s investor a couple lessons about choosing an adviser:

  • The freedom to think outside the box won’t guarantee impressive returns, but it may be a prerequisite.
  • Conversely, the financial supermarket’s approach of closet indexing won’t guarantee poor results, but it may preclude really impressive ones.

Surprisingly, Keynes is right up there with some of the greatest investors of all time — Benjamin Graham, Peter Lynch, John Templeton and Warren Buffett. He certainly wasn’t known for his market moves. But in a 22-year period, while also doing his day-job of restructuring the global financial system, he managed to beat the U.K. stock market by a risk-adjusted 8 percentage points a year.

The secret to his success appears to be his contrarian nature, as well as the level of autonomy he had in running the endowment for King’s College at Cambridge.

Autonomy is precisely what a lot of investors are not getting from their investment advisers!

Jason Zweig at the Wall Street Journal puts it this way:

The prime directive at today’s weak-kneed asset-management companies is to ensure that their portfolios never deviate much from average results. That discourages clients from fleeing and enables firms to keep earning fat fees—maximizing their own returns while minimizing those of the clients.

Even more than in Keynes’s day, it is worth hiring an active money manager only if you have the confidence that he or she is a free spirit who will have a completely free hand.

That’s why I am glad to be working at Covestor. We are the money manager supermarket. You choose the manager you want, and their own trades are replicated in your account, move for move.

Many Covestor managers are Keynesian in this sense: They are not household names in the investment management industry. Yet they are independent thinkers, not beholden to the financial supermarket sales approach.

If you haven’t tried it, check it out with a trial account. We offer a range of fundamental, yield-focused, long-short, quantitative and technical strategies with fees starting at just 0.5% of assets.