Imagine the economy before 1936 was like a patient that doctors believed could always heal itself. If it got sick (a recession), the prevailing wisdom was: “Just wait. Wages will fall, prices will adjust, and everything will return to normal.” Then came the Great Depression, and the patient wasn't healing. It was getting worse. John Maynard Keynes, a brilliant and unconventional British economist, was the doctor who walked in and declared, “The self-healing theory is wrong.” His book, *The General Theory of Employment, Interest and Money*, was his diagnosis and prescription. It was so influential that it essentially created the field of macroeconomics as we know it today. Forget the complex equations for a moment. Keynes's core message was surprisingly simple and can be boiled down to three revolutionary ideas: 1. Demand is the Engine: The old theory said that supply creates its own demand. If you build a factory, the wages you pay will be used to buy the goods you make. Keynes flipped this. He argued that if people are too scared to spend money—if aggregate demand collapses—it doesn't matter how cheaply you can make things. No one will buy them. Factories will shut down, workers will be fired, and the economy will get stuck in a rut. For an investor, this means a great company can still suffer if its customers simply stop buying things. 2. “Animal Spirits” Drive Decisions: This is the absolute key for a value investor. Keynes argued that investment decisions by business leaders aren't purely rational. They aren't based on cold, hard calculations of future profit. Instead, they are driven by a mix of gut feelings, optimism, fear, and confidence—what he famously called “animal spirits.” When spirits are high, everyone invests, builds, and hires. When spirits are low, everyone hoards cash and waits, even if opportunities look good on paper. This is the source of booms and busts. It's the psychological fuel for Mr. Market's mania and depression. 3. The Stock Market as a “Beauty Contest”: Keynes used a brilliant analogy to describe how the stock market often works. Imagine a newspaper contest where you have to pick the six prettiest faces from a hundred photographs. The prize goes not to the person who picks the faces they personally find prettiest, but to the person whose picks most closely match the average preference of all the other contestants.
> //"It is not a case of choosing those which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be."//
This is a perfect description of momentum trading and market fads. Many participants aren't trying to figure out a company's intrinsic_value. They're just trying to guess what other people will be willing to pay for the stock tomorrow, next week, or next month. The value investor's job is to ignore the contest and focus on the “prettiest” business, regardless of popular opinion. In short, Keynes's *General Theory* painted a picture of an economy driven not by a perfect, self-correcting machine, but by the messy, unpredictable, and often irrational psychology of human beings.
“The market can remain irrational longer than you can remain solvent.” - John Maynard Keynes
While Keynes was a macroeconomist focused on government policy, his work is profoundly important for the bottom-up, fundamental value investor. It doesn't tell you what to buy, but it provides a crucial framework for how to think about the market environment.
You don't apply the *General Theory* with a calculator. You apply it as a mental model—a lens through which you view the market and your own decisions.
The “result” of this application isn't a number; it's a state of mind. The goal is to achieve equanimity—a mental calm and composure that is undisturbed by market turbulence. By internalizing Keynes's lessons, you stop seeing market volatility as a threat and start seeing it as a source of opportunity. You understand that the frantic activity of most market participants in the “beauty contest” is precisely what creates the bargain prices on wonderful businesses that you seek. It helps you build a stronger, more psychologically robust margin_of_safety, because you are prepared for the market's inevitable bouts of insanity.
Let's consider two investors in the face of a hot new industry: “AI-Powered Pet Grooming.”
Mike sees that stocks like “RoboPoodle Inc.” and “CatGPT” are soaring. Everyone on social media is talking about them. He reads analyst reports that are really just trying to guess what other analysts will say. He sees the price going up and, fearing he'll miss out, buys in at a high valuation. Mike's entire strategy is based on the assumption that someone else—the “greater fool”—will buy the stock from him at an even higher price. He is fully engaged in Keynes's beauty contest.
Connie has read Keynes. She sees the frenzy around AI Pet Grooming and immediately recognizes it as a period of extremely high “animal spirits.” She ignores the stock prices and the hype. Instead, she asks fundamental questions:
Connie concludes the valuations are absurd and driven by the beauty contest. She does nothing. A year later, the hype fades, a few competitors emerge, and RoboPoodle's sales disappoint. The stock crashes 80%. The “animal spirits” have turned from euphoria to despair. Now, Connie re-examines the business. She sees a solid company, now trading at a price that offers a significant margin_of_safety. She buys, not because it's popular, but because it's cheap relative to its long-term intrinsic value.