As he had demonstrated in the early 1930s wrestle with the board of the P.R. Finance Company, Keynes began by explaining why he no longer believed in market timing driven by his credit cycling theory:
We have not proved able to take much advantage of a general systematic movement out of and into ordinary shares as a whole at different phases of the trade cycle. Credit cycling means in practice selling market leaders on a falling market and buying them on a rising one and, allowing for expenses and loss of interest, it needs phenomenal skill to make much out of it.
. . .
As a result of these experiences I am clear that the idea of wholesale shifts is for various reasons impracticable and indeed undesirable. Most of those who attempt to sell too late and buy too late, and do both too often, incurring heavy expenses and developing too unsettled and speculative a state of mind, which, if it is widespread has besides the grave social disadvantage of aggravating the scale of the fluctuations.
(In a note to his student Richard Kahn that accompanied the letter sent, Keynes mourned the failure of market timing strategies based on credit-cycling, writing, “. . . I have seen it tried by five different parties . . . over a period of nearly twenty years. . . . I have not seen a single case of success.”) He went on in the letter to King’s College to describe the core of his philosophy in three principles that he believed would result in sound investing. He proposed:
1. A careful selection of a few investments (or a few types of investment) having regard to their cheapness in relation to their probable actual and potential intrinsic value over a period of years ahead and in relation to alternative investments at the time;
2. A steadfast holding of these in fairly large units through thick and thin, perhaps for several years, until either they have fulfilled their promise or it is evident that they were purchased on a mistake;
3. A balanced investment position, i.e., a variety of risks in spite of individual holdings being large, and if possible, opposed risks.