IF YOU'RE so smart, why aren't you rich? That question (which Deirdre McCloskey calls The American Question) exasperates most economists, who model markets better than they play them. One possible exception is John Maynard Keynes, who has always had a reputation as a star-performing investor. A fascinating new paper by David Chambers of Cambridge's Judge Business School and Elroy Dimson of the London Business School takes a closer look at his money-making record. Keynes's Cambridge college, King's, put its endowment under his control from the early 1920s until his death in 1946. Exotic tales of Keynes's highly individual investment strategy have become as legendary as his other exploits, such as earning top marks in the Civil Service examinations after no revision (or his infuriated claim that "I evidently knew more about Economics than my examiners,” after barely scraping into the top ten nationwide in his recently-discovered favourite subject). There are reports of him trading shares from his bed, or buying so much grain that it filled the college's 15th-century chapel. Mr Chambers and Mr Dimson buried themselves deep in the archives of King's College to get a detailed idea of Keynes's performance and trading strategies. He was indeed a very successful investor, beating the market by 8% on average over the 22 years he was in charge of the King's College funds. But this performance is significantly less than the 14.5% excess return that previous studies had found.

Messrs Chambers and Dimson also shed new light on how Keynes invested the King's College money - and here his approach truly was revolutionary.

Up until the early 1930s, Keynes invested on the basis of large-scale macroeconomic predictions. No doubt this seemed sensible: he all but invented the field. Unfortunately - and ironically - it seems that where investing was concerned macroeconomics was not Keynes's strong point. From 1924-32, his buys actually underperformed the market by 4% in the 12 months after purchase.

Fortunately, Keynes had another trick up his sleeve. During the early 1930s he adjusted his strategy towards investing heavily in equities, a radical decision given that it was considered to be an emerging asset class at the time. Mainstream investors in the UK held almost all their investments in bonds, with just 3% in equities in the 1920s and 10% by 1937. American investors were hardly better. Keynes was much more aggressive, with seldom less than half his portfolio in equities and often as high as 85%.

Investing in equities was hugely successful during this period, partly because most rival investors neglected them. In addition, the dividend yield for equities was above that for bonds throughout the period - sometimes as high as 6.2% - so equity investors did not even need to give up on income in their quest for capital gains.

The shift to equities had another beneficial effect, as it allowed Keynes to try his hand at stock-picking. One of the more memorable pieces of Keynes's writing is his description of financial markets as analogous to a type of beauty contest popular in newspapers at the time. The contests required readers to choose the “most beautiful” from a set of published faces; readers which correctly picked the most popular faces won a prize. The trick was to choose not the faces you found most beautiful, but those likely to gain majority approval.

For Keynes, the job of the investor was similar in that the most profitable stocks were those attractive to the market rather than inherently the most promising companies. Indeed, he argued that trying to make serious long-term forecasts about the condition of companies was impossible. Nevertheless he seems to have been a dab hand at it, building and sticking with large positions in such diverse interests as South African mining and Norwegian whaling firms.

The authors of the paper emphasise the value of an institutional set-up that allows one manager to have free rein over the portfolio. In the case of Keynes at least, this certainly seems to have been a good idea - not least thanks to his extensive network of contacts throughout business and government. He also had the confidence to depart from the current consensus, and take advantage of the new asset class of equities in a way few others dared to. Investors looking for modern-day money managers with a similarly individual view had best hope they put their money with someone of similar acumen.