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Stock Market Investing Lessons From John Keynes

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Stock markets in India are currently experiencing severe turbulence with the number of Coronavirus cases and related fatalities escalating worldwide and America taking over as the latest epicentre.

In such difficult times, even the most fundamentally sound stocks have taken a hit too, raising some doubts of uncertainty about what lies ahead in the minds of many stock market investors.

Well, in such a situation, history and the experience of successful stock market investors offers some invaluable lessons.

We all have heard about the success story of legendary investor Warren Buffett who not only created wealth from equity investment but created a vast empire. But not many are aware that apart from Benjamin Graham, Warren Buffett to a greater extent was also influenced by the investing style of John Maynard Keynes, a famed economist and a successful stock market investor.

Apart from being a successful investor, Keynes was also the fund manager of the Chest Fund which managed to generate an average annual return of over 12%, growing from 30,000 pounds in assets in 1924 to 3,80,000 pounds by 1946.

Now, this is definitely a remarkable achievement because this growth happened despite the great economic depression of 1929 and World War 2.

Here are some priceless investing lessons from John Keynes, which every serious stock market investor should definitely know:

Lesson #1 Don’t panic during stock market corrections

In a letter to his business associate, Keynes wrote “I don’t think it is the business, far less the duty, of an institutional or any other serious investor to be constantly considered on whether he should cut and run on a falling market… An investor is aiming, or should be aiming, primarily at long-period results & should be solely judged by these.”

In simple words what it means is that when the stock market is on a correction mode (like what we are experiencing currently), it makes no sense for a serious investor to try and reduce his losses by selling off his portfolio. Rather than looking at the notional loss, one should remain invested for long term benefits.

Lesson #2 A balanced adequately diversified portfolio of fundamentally sound stocks is all one needs for wealth creation

” With passing time, I get more convinced that the correct method of investment is to put fairly large sums into enterprises which one thinks one knows something about & in the management of which one thoroughly believes.”

Keynes believed that by investing in well-managed companies with an established business model, anyone could create wealth over the long term.

 To start investing in a balanced adequately diversified portfolio click here.

Lesson #3 Investing and speculation are two different things. Don’t mix them

“Investing is an activity of forecasting the yield over the life of the asset whereas speculation is the activity of forecasting the market psychology.”

According to Keynes, speculators base their investment decisions on how the stock market will react to a particular stock in the short term. Rather than looking at the stock prices for buying or selling a stock, a serious investor should think of the underlying value behind the stock and the potential yield it can generate over the long term.

Read more about the difference in investing and speculation here.

Lesson #4 Stay away from herd mentality in stock market investing

“It is the one sphere of life & activity where victory, security and success are always to the minority and never to the majority”.

Keynes states that the majority of investors tend to be influenced by the mass psychology of the stock market while investing, so they end up investing in or selling those stocks which are trending. According to him, only those stock market investors who remain unperturbed by such mass psychology and invest on the basis on genuine long-term expectations in good businesses can be successful.

Now that you have read about these priceless investing lessons from Keynes, it is time to ask yourself some questions:

1) Is the notional loss in my stock market investment portfolio making me panic?

2) Am I invested in a well-diversified portfolio of good quality stocks?

3) Am I overreacting to the current situation?

4) Are my stock market investment decisions influenced by what I see or hear from others?

In a nutshell, these four valuable lessons from Keynes is all one needs to brave the current storm, which has engulfed the equity markets. Keep in mind that most of this form the basic tenets of value investing which has helped not just Keynes but also other successful investors like Graham and Buffett withstand and overcome difficult situations in the past and emerge successfully.

Remember, tough times don\’t last, tough people, do.

Read more:  How Long-term investing helps create life-changing wealth – TOI.

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