"It is the one sphere of life and activity where victory, security, and success is always to the minority and never to the majority."
-- John Maynard Keynes, on investing
You may know that John Maynard Keynes is one of the most important economists in history, someone whose theories and thoughts affect, quite literally, the lives of billions of people. What is perhaps underappreciated about Keynes is his brilliance and incredible long-term performance as an investor -- an experience that can teach us a thing or two about how to handle the present market environment.
From 1924 until his death in 1946, Keynes grew the King's College Chest Fund at a 12% per-year clip. That may not sound spectacular until you consider two facts. First, all dividends generated by the fund were used for spending at the college rather than reinvested. Second, he accomplished these results during a period that included the Great Depression and World War II. Over the same period of time, the British stock market declined by 15%.
As with any success story, there are a number of reasons why this was so. Among them, Keynes took a long-term view and took particular solace in having his thinking openly questioned, or even mocked. Keynes' notion of risk was also entirely at odds with prevailing thought at the time, or even today. He favored holding relatively few companies that he knew quite well, deriding those who "think that one limits one's risk by spreading too much between enterprises about which one knows little and has no reason for special confidence." Furthermore, Keynes' thought process was remarkably contrarian. He once noted that when he could convince his investing committee that a company offered good prospects, in his experience it "is actually the right moment for selling it."
Most important, however, is probably the fact that King's College ever allowed Keynes to earn those long-term returns. See, between 1927 and 1931 the value of its invested assets declined by half, deeply underperforming the already lousy returns of the British stock market. These were the first four years that Keynes ran the fund. Yet Keynes was not fired -- something he surely would have been in today's data-masquerading-as-information, short-term-focused world. It is our opinion, however, that short-term investing results are more than anything else random and sound processes and contrarian thinking always pay off over long periods of time -- a fact that underscores everything we do day to day.
Now on to the current state of things
Not surprisingly, our team here at Motley Fool Asset Management was nervous about the market earlier this year -- nerves that found expression as a larger than normal cash position within the funds. Given recent market events, it's clear that we were right to be nervous. And I'll be honest with you: We're still nervous.
There are, after all, plenty of good reasons to be nervous. The markets have been extremely volatile because of the situation in Greece. As I've noted in the past, I and others see no mathematical way for Greece to avoid a default. Fear of this unprecedented event (and, frankly, some trader-based insanity) is what is pushing on world markets. The worry is that a Greek default would cascade into a massive debt-driven collapse in markets throughout the globe. During the Cold War, they called this the "domino effect." In nuclear war it was "mutually assured destruction." In college sports it's called "realignment."
I've found over my career as an investor that the times when I feel nervous are also the times when I find the best and most profitable opportunities. It's for that reason that our team has actually been using our cash over the past month to buy stocks. Be clear: This is the opposite of what most other market participants are doing, with hundreds of billions of dollars recently being pulled out of stocks, bonds, and mutual funds.
This is happening because the fear trade is on. While many commentators have opined that the rise in demand for U.S. Treasuries even after Standard & Poor's downgrade is a direct refutation of said downgrade, that view is nonsense. The truth is that Treasuries are where people stash money when they are scared out of their minds. How do I know people are scared? Because the other asset showing large appreciation is gold, another scaredy-cat asset, one which has a thesis that is diametrically opposed to that needed to hold Treasuries. Both cannot be right, but oddly enough there are plenty of outcomes that will render both of them wrong.
So we are buying stocks for two reasons. First, we see a market environment in which there are enormous disconnects between how much companies are worth and how much they're selling for. That's the easy reason and the one entirely in our control. Put simply, where there is fear, there is opportunity.
But the second reason is far more important: We are buying stocks because we can. We still have capital to put to work at a great time to be putting capital to work -- a welcome position that many funds today do not share.
The unstoppable rarely is
Of course, if the global financial system collapses, it probably won't matter that we were buying stocks. There are, fortunately, reasons to be optimistic.
With regards to Europe, find solace in the fact that "unstoppable" contagions have historically proved to be anything but. In this case, the EU announced another round of aid to help Greece and the rest of the European financial system as October began. It is easy to scorn such a move as being "bailout No. 42," but it cannot be avoided that, at last, Europe is taking an extremely aggressive move to stem the crisis. Although the most likely outcome still remains that Greece will be unable to sufficiently get its financial house in order in time to avoid some kind of "restructuring," the world will not end when that happens.
I was reminded of this recently when I sat down to talk with Elon Musk, the CEO of Tesla Motors (NAS: TSLA) . Actually, calling Musk the "CEO of Tesla" is kind of like calling Joe Montana "the former quarterback of the Kansas City Chiefs." It's true, but it greatly understates Who. This. Guy. Is.
Following college, Musk set out to address three great problems: the Internet, clean energy, and space travel. He co-founded an Internet publishing software company, selling it at the age of 24 for about $30 million. He then co-founded PayPal, which revolutionized microtransactions online. Then in 2002, with $100 million of his own money, Musk founded SpaceX, which became the first private company to put a payload into orbit. His goal is to reduce the cost of human spaceflight by 100 times, and already SpaceX's cost is around a third of the government's. NASA recently gave SpaceX a contract for at least $1.6 billion.
Then there's that Tesla thing, which Musk again founded with his own money. If it is successful, Tesla will revolutionize the zero-emission vehicle market. This year, Toyota (NYS: TM) signed a $100 million contract to have Tesla provide drivetrains for its RAV4 electric vehicle. Why doesn't Toyota build them itself? Because it couldn't. Last, but not least, Musk funded and founded SolarCity, a clean energy company that Musk is attempting to turn into the "Dell Computer of solar energy."
If Elon Musk succeeds, if his investments are productive, the amount of wealth generated for society will be manifold higher.
And that's the point
I felt honored to speak with Musk because this is a man who has invested his own wealth and talents behind several ventures that have already enhanced, or promise to enhance, the lives of millions of his fellow beings. That's the power of innovation and ingenuity, and it's those traits that will help the world solve and then outgrow its current set of serious problems.
Will it happen overnight? Of course not -- and it may be a bumpy ride. But my team and I feel strongly that the best way to position our capital for the long term is to be long the entrepreneurs and corporations that are making lives better every day around the world. We hope you agree.
Editor's note: Bill Mann is not able to engage in discussion on the boards or in the comments section below. Bill does not own shares of any companies mentioned.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.