Keynes on Investment Objectives, Philosophy, Policy and Performance Monitoring

Although Keynes did not prepare an explicit investment credo, there is enough material in his writings to produce an integrated account of his Approach to Portfolio Management under the four headings in the title. The starting point is Keynes’ philosophy, the central conception being that the world is characterised by uncertainty, not risk. A natural question, then, is how would individuals behave to save their faces as rational, economic men? Rejecting the conventional answer, Keynes developed an investment policy with Three Principles, all based on his philosophy. Inherent uncertainty had implications for individual and collective behaviour in financial markets and, hence, for asset pricing. Rejecting the notion of market efficiency three decades before it was defined, Keynes devised an operational concept of intrinsic value as the foundation for security selection. His Principles, to which one on income can be added, provide the template for portfolio monitoring, demonstrating that the Four–Part Schema indicated by the title is logically consistent and self–contained. By contrast, the Five–Stage Process of the Conventional Approach has no place for philosophy, is based on risk not uncertainty and is driven by ex post measurement