He Understood Why Newton Failed at Stocks, Then Went Bankrupt Twice Himself

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At the end of the last article, I said someone had understood why Newton lost. Instead of cursing human madness, he chose to study it. Then he rose from the wreckage and defeated the market using a completely different method.

This man traded foreign exchange every morning from bed. Not a metaphor. He literally lay in his dorm room at King's College, Cambridge, wearing a silk robe, eating breakfast while phoning his broker to place orders.

His name was John Maynard Keynes (1883–1946). Textbooks only tell you he invented macroeconomics. What they don't tell you: before becoming the father of economics, he was a speculator who went bankrupt twice.

The Prophecy at Twenty-Seven

In 1919, World War I had just ended. Keynes was the British Treasury's representative, seated at the Paris Peace Conference negotiations. What he saw made him so furious he resigned. The Allies demanded reparations from Germany amounting to two and a half times Germany's annual GDP. Keynes did something very simple: he ran the numbers. It was physically impossible to pay.

He quit his position and spent two months writing a book: _The Economic Consequences of the Peace_, predicting that the Treaty of Versailles would not bring peace, but would instead drive Germany to the brink. Twenty years later, Hitler rose to power and World War II erupted. Keynes was only thirty-six when he wrote that book.

First Bankruptcy: Right Logic, Wrong Timing

In 1920, Keynes decided to put theory into practice. He foresaw that postwar German inflation would spiral out of control and the German mark would crash, so he borrowed heavily to short the mark. His logic was completely correct — the mark did eventually collapse, with 1923 hyperinflation pushing a loaf of bread to 100 million marks.

But markets don't follow logic's timetable. In early 1920, the mark rose instead of falling. Within months, everything was wiped out.

If you remember only one thing, remember this: Keynes's analysis was right. He lost on timing, not on judgment. And that's precisely the market's cruelest feature: being right too early is the same as being wrong.

The Question Newton Never Asked

An ordinary person's story would end here. But Keynes did something Newton never did. He didn't blame the market for being irrational. He asked a question:

The market is clearly wrong — why can it stay wrong for so long?

Keynes spent years observing markets and reached a conclusion: equilibrium theory is garbage. Markets aren't precision calculators. Markets are groups of people making decisions — and people fear, get greedy, and follow the herd. Prices reflect not "true value" but "what everyone thinks it's worth."

He later used a famous metaphor: investing isn't picking the face you think is most beautiful — it's picking the face you think most people will think is most beautiful. This is the "beauty contest theory." You make money not because you're right, but because you correctly guess what others think.

The Great Depression: Second Wipeout, Then Walking the Other Way

In the 1929 crash, Keynes's net worth plunged over 80%, leaving him with less than £8,000.

This was his second time being flattened by the market. This time, he had nothing left to blame. He finally, completely, gave up trying to predict market direction. Since the market in a panic smashes good and bad companies alike, the smartest move is to wait for the panic and then pick up the good companies that were killed by mistake.

And that's exactly what he did. After Wall Street crashed, while everyone was panic-selling, Keynes walked in the opposite direction. He opened company after company's books, cherry-picking those still profitable with healthy cash flows but trading below net asset value, buying them one by one. People called him crazy. He said: you're the crazy ones.

This method later got a name: "Value Investing." Most people think Warren Buffett's teacher Benjamin Graham invented it. But Keynes was doing this at Cambridge when Graham was still teaching at Columbia. Keynes beat them by nearly a decade.

Within six years, he went from under £8,000 to over £500,000. By the time he died in 1946, the King's College Cambridge fund he managed had averaged a 13.2% annual return, while the British stock market over the same period gained less than 1%.

An economics professor who placed orders by phone while lying in bed beat the entire City of London.

The Hijacking of Keynes

Keynes's core argument in _The General Theory of Employment, Interest and Money_ is: when markets fail, the government should step in and spend, using public expenditure to fill the gap in private demand. Roosevelt's New Deal used this logic. After the 2008 financial crisis, global central banks' quantitative easing used the same logic.

But posterity only heard four words: "government should spend." As for when to stop and how to stop, they chose selective deafness.

Keynes actually opposed big government. He opposed planned economies. He opposed socialism. He was a liberal who simply believed free markets occasionally need a safety net.

Finally

Keynes has a famous quote: "In the long run, we are all dead." This line was originally a critique of classical economists who only knew how to say "the market will correct itself in the long run."

Keynes's story and Newton's story tell two sides of the same thing. Newton couldn't use rationality to understand the market and lost his life savings waiting for it to come back. Keynes lost too — and lost worse. But Keynes did something Newton was unwilling to do: he admitted he was wrong.

His secret was just one thing: not better predictions than others, but greater willingness to admit he couldn't predict.

Next time the market crashes, will you think of Newton, or Keynes?

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_—Kinney's Wonderland_