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In 1925, when reviewing a study by Edgar Lawrence Smith, John Maynard Keynes revealed his attraction to common stock investing.1Challenging the conventional view that such stocks were too risky for general investors, he wrote:
The results are striking, [sic] Mr. Smith finds in almost every case, not only when prices are rising, but also when they were falling, that common stocks have turned out best in the long run. . . . This actual experience in the United States over the past fifty years affords prima facie evidence that the prejudice of investors and investing institutions in favour of bonds as being "safe" and against common stocks as having, even the best of them, a "speculative" flavor, has led to a relative overvaluation of bonds and undervaluation of common stocks.2
The Smith study, entitled Common Stocks as Long Term Investments (1924), provided the first quantitative evidence on the extra return to be gained from a diversified portfolio of common stocks compared with that on a portfolio of corporate bonds, over the period from 1866 to 1922. At the time, institutional investor portfolios such as those of U.S. university endowments were dominated by bonds, mortgages, and real estate and had a very low weighting in common stocks.3Today, in contrast, such investors characterized by a long-term investment horizon have a strong bias toward equity and equity-like investments.4
Prior research has shown that Keynes was an innovative investor. He was among the first to exploit the new forward exchange market when speculating in currencies for himself.5At King's College, Cambridge, he made a substantial allocation to U.K. ordinary shares for the endowment, while other Oxbridge colleges stuck with bonds and property.6This article aims to examine how Keynes approached investing on Wall Street. To what extent did he follow his own advice and invest in U.S. common stocks? From where did his investment ideas spring? And how did he navigate his way through the troubled waters of Wall Street after 1929?
We address these questions by exploiting the complete record of the transactions Keynes undertook when running the endowment of King's College. He also traded U.S. stocks for his personal portfolio.7However, these latter records are not...