The 6 Investing Principles of John Maynard Keynes ｜ FAST Graphs

Hello, everybody. This is Chuck Carnival, co-founder of FastGraphs, the Fundamentals Analyzer software tool. And this article, or this video, excuse me, was inspired by an article that I saw in the Wall Street Journal, which talked about investing with John Maynard Keynes. And Keynes, for those of you who aren't familiar, he was really, the Keynesian School of Economics talked about big government being involved in spending and trying to do things to control the economy. And actually, I'm an old-school guy. I'm a Milton Friedman guy who was laissez-faire, you know, hands-off. I believe that the economy ran best with less government intervention than it had. So I was never really a fan of John Maynard Keynes initially, but in my early parts of my career when I was first studying economics. But as I matured, got a little older, I discovered that John Maynard Keynes was actually a value investor just as yours truly, aka Mr. Valuation, is. And so I started to change my attitude. So I describe it as a love-hate relationship. I hated his basic economic theory of government intervention into the economy by increasing spending and doing other things where the government was being involved versus my hands-off, laissez-faire, you know, Milton Friedman-type economy. But yet we were soulmates. In fact, John Maynard Keynes had a very successful career as an investor. He also had some real problems as an investor. At one point, he lost, you know, during the Great Depression, he lost over 80% of his money. So, you know, there were some real issues that John had to live through like all of us as investors do. We learn from our mistakes and we learn from the school of hard knocks, if you will, what we were, you know, taught by the market over many years. And I've been doing this now for, I'm in my 50th year, actually, I know I look a lot younger than that, but I'm in my 50th year as an investor. And when I looked at the article I saw in the journal and I read John Maynard Keynes' six key principles of investing, they really serve as a great outline for my own investment philosophy. So I thought it'd be fun for me to go ahead and go through John Maynard Keynes' six principles of value investing, because he became really a Buffett, Ben Graham-type investor in his later years, which, you know, these are the types of investment philosophies that yours truly advocates and promotes and talks about. So let's go ahead and look at John Maynard Keynes' six principles of investing, if you will. And I made a little slide here for you. The first one was focus on the intrinsic value of a stock represented by its projected earnings. I talk a lot about forecasting being the key to successful investing. The second principle was make sure you have a large margin of safety between the price you pay and that intrinsic value calculation. Now, this is one of the ones that I think that investors really ignore the most. Even people that profess to be value investors will, you know, get impatient with the market and they'll kind of forget about the margin of safety principle. I think it's a bedrock foundational principle. And third is think for yourself and even be willing to be a contrarian if necessary. I made an offer to quote once in an article I published. I said, you know, a lot of people run with the herd and they take their leave from stock price action. If prices are going up, it's a good stock. If prices are going down, it's a bad stock. But I said the problem with running with the herd is that your ultimate destination is the slaughterhouse. So I do believe that it is important to be a contrarian, especially when the markets are misbehaving. And then number four was maintain a steadfast holding of stocks to limit transaction costs. This is another way of saying, you know, buy and hold, you know, buy and hold is really germane to being a value investor because if you're buying and holding, it simply means that you're investing as a partner shareholder in the business and you're not playing the stock market. And I think that's critically important. And then concentrate your portfolio in a few great companies. You know, there's been studies done. I've written about this recently and blogged about it recently that, you know, you know, the studies indicated that after once you get past 16 holdings, you've basically gotten all the benefit that diversification offers. And Peter Lynch in his great book went up on Wall Street, warned us that, you know, you won't want to participate in diversification. You want to have a portfolio that's concentrated, but diversified enough to protect you, but concentrated enough so that you can know a great deal about the companies that you're investing in because knowledge is truly power. And then finally, you know, have the right temperament, balancing equanimity and patience with decisiveness. You know, you know, I also say often that, you know, a portfolio is like a bar of soap. The more you handle it, the smaller it gets. You don't need to be impetuous with your investing, but at the same time, you need to be level headed. You know, you need to apply common sense and good judgment and reasoning and you need to have the proper tools to make those decisions. I think Buffett put it so eloquently once when he talked about it doesn't require a stratospheric IQ or inside information or anything like that. You just need to have the temperament that allows you to remain calm in very tumultuous markets. So these are John Maynard Keynes' six key principles of investing. And so what I'd like to do now is go ahead and go through those with some examples for you. So let's start with number one, focus on the intrinsic value represented by its projected earnings. I think this is extremely important. So I'm using Apple here. Apple is one of my favorite stocks. I owned this stock for many, many years. I made a lot of money. I recently sold the stock because I felt it became dangerously overvalued. And I do want to point out my view of the business hasn't changed at all. The only thing that I'm concerned about now is the valuation. I do not believe this stock makes sense. I believe it's trading well above its intrinsic value. And the orange line on these fast graphs indicate that intrinsic value. By the way, I'm going to go ahead and utilize my new version of fast graphs that we're rapidly getting close to launching this new version. And I just wanted you to get a little taste of it. I'll be going back and forth between both versions throughout this video. But this is the new version that will be coming out. And, you know, what you're looking at here is a historical growth rate. I want you to note that Apple traded the orange line. The P.E. of this orange line is a P.E. of 17.25, which equals the company's growth rate over this time frame. And then the blue line is a P.E. of about 16, 15.9. So, you know, they're really, you know, almost touching each other here. In other words, 16, 17 times earnings has been a good valuation for Apple, you know, since 2011. It's currently trades at 31.7 blended P.E. times earnings, which is, you know, roughly double what its intrinsic value would be. If I was pointing down here to the company's theoretical intrinsic value, I'd be looking at something closer to 70 to maybe 75 dollars a share. And Apple, you know, closed at 122 dollars and 15 cents as of March 31st. So it's obviously an overvalued stock. When I look at it from the forecasting point of view, you know, I get down here again, I get that, you know, I can even get a price as low as 60 dollars a share if it was trading at 15, because the key point that Ben Graham made was represented by its projected earnings forecast earnings growth. And there are 42 analysts I want you to notice that are forecasting about, you know, a rather weak year in 2022 of about 5 percent. This year, we're forecasting 35 percent, followed by seven and a half percent, followed by eight and a half. That comes out to about an 11.91 percent average. Now, when you consider the two trillion dollar, you know, plus market cap of this company, and by the way, market cap is one of the reasons we haven't launched, it's not really working yet on this new program, but the majority of it is. So the point I'm getting at is, you know, this is an extremely large company. For it to grow at 11 or 12 percent a year going forward would be an extraordinary feat. And then analysts, you know, expect a lower number going forward, but that's actually not working. Let me not show you that. So, you know, an 11.91 percent forecast growth rate is great, but that would only give Apple a valuation multiple of about 15, in my opinion. That's not fast enough growth to warrant a P.E. certainly of 31.7. So, you know, I don't consider Apple to be a really great buy here at these levels. And, you know, the idea is that you want to look for projected earnings and you want to look for stocks whose projected earnings give you the opportunity to make money. So I'm going to take a look at an example here for you. I'm going to go ahead and let me get my historical graph. I'm going to go ahead and look at DHI or Dr. Horton Inc., which is a home building company, obviously. And when you look at this stock from a standpoint of its of its future, you see the fact that it is trading at a discount to its forecast earnings growth rate. So when I'm looking at forecast earnings growth here of, you know, 43 percent for this fiscal year, 14 percent for next fiscal year, I have an incredible opportunity here in a company like DH Horton. Home building is very attractive and very hot. But I also want you to notice this stock also has some pretty good momentum. The difference is I can buy it at a blended PE of 11 and a half rather than 31 times earnings. And when I look at the forecast growth rate going out here, I've actually got expectations of higher growth for DH Horton than I did on Apple. You know, I can buy it at, you know, almost a third of the valuation. So to me, you know, that's just extremely critical. Now, the next principle that I want to talk about with John Maynard Keynes was this idea of make sure that you have a large margin of safety between the price you pay and the intrinsic value. So when you're looking at the margin of safety, you're looking for stocks that have a margin of safety. You've got several on this list that do, for example, let's look at the financial company Allstate. You know, financials are trading at a discount to their intrinsic value. You see a lot. I've got Prudential is another one that I can show you here. And what I'm also trying to, you know, focus on here is notice how quickly the new version works. Those of you who are subscribers, you've been frustrated. You know, Prudential had a really good margin of safety. That margin of safety is, you know, closing up right now if you look at the normal multiple. But, you know, this is a 15 multiple stock and I can buy it at a blended PE of 8.6. So, again, I've got a margin of safety here. This is what I want to be looking for. And it's very, very hard to find in today's market. I think that's really, you know, the key point. And then the next principle is that you want to be a contrarian. OK, you want to take a contrarian view. And, you know, most investors take their leave from stock prices. They actually, you know, they like a stock if it's going up. They hate a stock if it's going down. And I get this kind of comment all the time. I can go back to CVS here and I can go back all the way to the beginning of 2014. That isn't the peak price and major performance, you know, and you're looking at a negative 1.6 percent annualized rate of return since December 31st, 2014. So you've got one, two, three, four, five, over six years of very poor performance. But what's not taken into consideration there is the fact that this stock was actually significantly overvalued in 2014. And then it reverted to the mean. And if you measured it since it's been fairly valued, you know, you're actually you actually would have broke even owning the stock. In other words, including dividend income, that is, you know, the bottom line is valuation matters and it matters a lot. Now you can pick up this stock at a great margin of safety. And that's what you want to look for as an investor. But again, it's based on projected earnings going forward here. We've got very significant rates of return expectations that we could possibly enjoy by looking at a stock like CVS today so that that, you know, that margin of safety is in there. And then, you know, going on down, if I want to maintain a steadfast holding to so I don't, you know, to eliminate late cash, I'm going to use the example here of Oracle, one that I have owned for actually many, many years here. So let me let me show you a point. This if I bought this stock in February, I actually did buy this stock. I'm trying to say in February 27th of 2009. And, you know, if I look at historically, you see the fact that the stock price has tracked earnings. Therefore, I've stayed in the stock. I've been steadfast in my in my holding of the stock. I didn't buy and sell it. I didn't try to, you know, take advantage of every little wiggle, you know, get rid of it when I thought it was a little overpriced or buy it when it was cheap. And as a result, you know, I've averaged a very nice over 14 percent annualized rate of return over, you know, roughly a decade here. So, you know, you want to be a long term, you want to invest in the business and be a long term shareholder, owner of the business, not trying to trade the stock. So I think that was a principle of John Maynard Keynes that I really, you know, focused on a great deal. And then he talks about concentrating your portfolio in a few great companies. So I'm going to go ahead and move here and I'm going to go into the old version of fast graphs here and talk about a portfolio. This is actually a sample portfolio that I actually did build. OK, and I'll show you the details here in a moment. But the key is, you know, I mentioned the fact that I, you know, I believe that once you get over 20 stocks, these are 20 stock. In other words, you know, 5 percent invested in each of these companies at purchase. These were stocks were about a couple of years ago. I'll show you the dates here in a moment. And they were bought and held on to. OK. And all of them, not all of them, but pretty close to most of them had a nice margin of safety. But the point is, I'm going to use this portfolio now to illustrate that by owning 15 or 20 stocks, you can know a lot about each of these companies, number one. But then number two is you could buy them at nice margin of safety. So the first one was AbbVie and I bought these stocks in in the summer of 2019. Most of them about approximately the same date here. And so you can see that by, you know, buying AbbVie here when it was, you know, undervalued and had a nice margin of safety, I'm averaging over 24 percent a year over about a little, we'll call it right at a two year holding period here. And I've got this nice margin of safety and I still believe I've got a lot of profitability left in this company. Another one that I purchased was AmerisourceBurger and I bought it on June 12, 2019. Once again, it's now kind of reverted to the mean by buying it at that margin of safety. I was able to eke out a nice 21 percent rate of return. All I'm really trying to show you here is the power of buying these stocks when they have a margin of safety. Alexion Pharmaceuticals is another very fast growing pharmaceutical company, but I do want to point something out. Growth in the more recent years has slowed down quite a bit. But even then, this stock was still bought with a very nice margin of safety. And this gold line is my cost basis. And so you can see that there's been a nice profit. Now, this one I bought in July of 2020, about a year later from the first couple I made. This is where I had an opportunity and I bought it. I've got a great annualized rate of return, but really, I'm up about 40 percent because I bought this stock when it had a very high margin of safety. Amgen is another one that I bought in 2019. I had a real nice margin of safety in Amgen. I was able to buy it when it was inexpensive. It's still buyable today from a standpoint of being in fair value, but it doesn't offer the margin of safety today that it did when I bought it. So I'm getting a rate of return here. I want you to notice that it's significantly better than the growth rate that the company achieved since I've owned it here because I bought it with a margin of safety, which is also another way, fancy way of saying I bought it when it was significantly undervalued. Ameriprise Financial. I like this example because, you know, I did buy the stock with that margin of safety. If I, you know, I held it from, I bought it in June of 2019. By March of 2020, I was actually down 30 percent on the stock. OK, this is where a margin of safety really earns its keep. COVID, of course, came along. But now if you look at it from the standpoint of just, you know, of what I was able to be able to do, you know, in the longer term here, I'm averaging 35 percent annualized. I'm up over 68 percent total on the stock, despite the fact that we went down. This is what I mean. Just because the stock goes down doesn't mean you're wrong. And just because the stock is going up doesn't mean you're right. You want to be, you know, you want to buy a margin of safety, be steadfast in your holdings. As I said, Bristol Myers is another one that was bought at a very inexpensive price. Here's Cardinal Health. Cardinal Health has still not done a lot, but by buying it at such a low valuation, I do want you to notice that. I'm sorry I missed the first dot here. By buying this stock at such a great margin of safety, I want you to notice that I'm squeaking out a 28 percent annualized rate of return over this year or so that I've held it. And I still believe it has a lot of room to go. And, you know, Crown Cork and Holding, this is a pure growth stock when I bought it. I bought it with a nice margin of safety. It was already rallying. I've got over a 33 percent annualized rate of return built into Crown Cork. And, you know, Cigna was another one that was very inexpensive. You know, it's obviously a health care services company. We all know Cigna Insurance. Up over 28 percent a year. No dividend here. This is pure growth. But by buying it at a margin of safety, I was able to do extremely well. Comcast was another one that went down before it went up. You know, just another good example. CVS is all about being patient and steadfast and using equanimity and patience. And with your decisiveness, I bought this stock. You know, I've seen it go up and down quite a bit since I've owned it. But there are since it was owned in this portfolio, actually, I'm going to make that that distinction here and I'm messing up with my trying to go too fast for you. It's up about 25 percent annualized, mainly because I bought it with such a great margin of safety. That's the critical factor here. FedEx. Now, this is an interesting one, because when COVID came, about the time COVID came, FedEx canceled their deal with Amazon. And the earnings when I bought the stock actually were showing a much higher result. The stocks, you know, I wonder what the analyst scorecard says. Let's look. Yeah, the the numbers came down dramatically. The analysts were missed the estimates. They were forecasting a much higher number than we actually got. So FedEx initially dropped precipitously. And then, of course, now they've kind of regained their traction. Earnings growth was, you know, extremely strong last year. It's expected to be extremely strong this year. And now I've got a really nice profit made on FedEx here. And now this one is probably no longer offers a margin of safety. And the reason I mention that is it would still technically be viable if you're willing to forego the margin of safety. But by buying it with a margin of safety, I really was able to protect myself and do extremely well in the long run. Footlocker is another one where literally their business got shut down. You know, the stock initially was was horrible looking. But, you know, I still believe in the company. I recognize that what had happened to the company was not something that management did badly. It was something was totally out of their control with covid. Anyway, by holding on to this stock and following, you know, the principles of sound value investing and investing with the margin of safety in the first place, I'm making out a 20 percent annualized rate of return. General Dynamics is one that I bought just at fair value. It has been a stock that was overvalued for much of its time. And there was there were times when I could have bought it at a margin of safety. But long story short, I'm eking out a profit. I really like the company. I think it's attractively valued right now. But there isn't the margin of safety that, you know, that I'm professing. Omega Healthcare is a REIT. It was bought with a tremendous margin of safety when I was able to first purchase it back here in March of 2020. And I'm up over 44 percent on this stock and not because the business has done so great. I want to make that clear because I bought it with a margin of safety. That's the message I'm trying to hammer home here. Penske Auto was bought with a margin of safety. They even cut their dividend for a period of time during covid. But now the stock is done very, very well. And you can see that I'm up pretty significantly on Penske as well. So I'm just going to kind of just go through the rest. Principal Financial Group, again, it dropped dramatically. I'm now eking out a little bit of a profit on it. Royal Bank of Canada. This is it trading in the U.S. dollars. Bought it with a decent margin of safety. You can see it's moving back up towards its intrinsic value and doing quite well. And then finally, Snap-on Tools, which is, you know, was a nice software A-rated company, growth-oriented. Bought it at a margin of safety. Bought a little bit on the upswing. And now this is one that I just sold and I'll show it here selling it. But I just sold it yesterday only because I still like the company probably as much as I did when I bought it, but I no longer believe it has the margin of safety. A little bit impetuous with this one, but it's one that I feel like when I'm looking at forecasts here, the forecast, the numbers don't look anywhere near as good as I originally thought, and they certainly don't look as good as their historical numbers. I show this example to kind of speak to the six principle, have the right temperament, balancing equanimity and patience with decisiveness. I decided to make this decision to sell this stock. I felt like I had bought it at a great value. Keep in mind, I would have preferred the price to have stayed along this orange line and I'd have been a happy holder of Snap-on. Anyway, I hope you enjoyed this presentation of the six key principles of Keynes and gave me a chance to talk about some of the more foundational principles of value investing, something I'm very passionate about. You know, I do believe this margin of safety concept is the most important message here of all, and it's one that is so easy, especially in a hot market like we're in today, to ignore. But I believe that there are times when you can invest in almost any company with a good margin of safety if you're willing to be patient enough and let that let the price come to you. Eventually, stocks seek their intrinsic value and they often overshoot them on the upside as well as the downside. Anyway, this has been Chuck Harvell saying thanks for watching. I appreciate you all, as always. You know, give me a like, you know, give me a ring the bell, subscribe if you haven't already, subscribe to the channel. And I look forward to talking with you again real soon. Pat, thanks for watching, everybody.