“…professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.”
JM Keynes, The General Theory of Employment, Interest and Money (Chapter 12)


The persistent use of bastardised versions of Keynes’ “prettiest girl” metaphor to promote speculative trading is matched, perhaps, only by the cult of momentumism in stock markets themselves (if the google result of “Keynes prettiest girl” is reliable evidence). Yet Keynes was not – far from it - recommending a method with the analogy: he was making analysis.

The full chapter can be found here; abounds with often-quoted JM Keynes specials but, crucially, sets them all in context; and ought to be required reading for anyone active in markets. If only as a hat tip to truth in advertising standards.

Unfortunately, judging by some recent offline correspondence, the link between the promotion of momentum methods and Keynes’ quote is strong. Yet the man himself, after a decade of large ups and large downs with his own prettiest girl methods (based on short term forecasts in the values, relative to money, of currencies and commodities) was wiped out in 1929.

It would be wrong to say he stopped speculating entirely. But the fortune he rebuilt was as a contrarian – notably using negative selling momentum during the severe pessimistic trough of 1932 as a signal to buy and build a concentrated portfolio of companies he judged fundamentally attractive in balance sheet terms. When his will was probated in 1946 over 90% of it was in equity form, shares he had held over the long term (compared to in-and-out momentum devotees).

Much of this is visible in his record as bursar of King’s College, Cambridge. A volatile performance (thanks to the concentrated holdings) but over its existence a great one. And not one that was the result of momentum trading.

NB: Much of the info herein from Robert Skidelsky's fantastic 3 volume biography of John Maynard Keynes.

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