The stock market and investing as a whole has traditionally been a male dominated boys club. The trading floors, corner offices and portfolio management departments have been always dominated by the lads and often bring a locker room mentality infused with testosterone. Consequently, when we look at performance, we have been viewing it through the lens of the alpha male. That's unfortunate because many studies in the past decade have shown that when you drill down, it is actually the women that have demonstrated a strong aptitude and competency for making successful investing decisions than men. It is time to recognize give them their due props. Women make great investors.
“A 2009 study (Finance professors Brad Barber and Terrance Odean) found that female investors made (risk-adjusted) 1 percent more annually. In 2005, a Merrill Lynch study found that women were better investors than men” but concluded, unlike the latest study, that that was because women are less likely than men to hold on to investments too long. Thirty-five percent of women investors who participated in the 2005 study held on too long, versus 47 percent of their male counterparts.”
A recent analysis by professional services firm Rothstein Kass revealed that female hedge fund managers produced a return of 8.95 percent up to the 3rd quarter of 2012 which is much higher than the HRFX Global Hedge Fund index which cashed in with a return of 2.69 percent.
Why do women make great investors? Do they know how to read balance sheets and crunch ratios better than the guys? Do they know something about discounted cashflow analysis that the boys don't? When you dig a bit deeper, the reasons have more to do with personality and behavior rather than education or intelligence. Going through the research, the following themes emerge:
Take Less Risk
Men like to talk a good game, especially when they are around other men. Machismo, bragging, the desire to kick everyone else's derriere drive a lot of men down in the rat race of Wall Street and Bay Street. In order to "win", men are more willing to borrow, and take higher risks to goose returns so that they can stick it in somebody's face.
"In the testosterone-poisoned sandbox of the male investor, the most important thing is beating the other guy; the second most important: bragging about it. The long term is somebody else's problem, and asking for advice is an admission of inferiority. Worrying about risk is for sissies. Leverage is good, since it raises returns -- while the market goes up. Is it any wonder the male-dominated world of Wall Street has boomed and busted every few years for more than two centuries?"
Rothstein Kass seemed to also come across similar observations:
“Female financiers can have particular advantages over their male counterparts, including being more risk-averse and better able to avoid volatility, the report says. The Rothstein Kass hedge fund index, based on 67 hedge funds with female owners or managers, may be a case in point.”
Women on the other hand, tend to not be driven by proving anything to anyone. They tend to be more risk averse primarily because they are less confident about taking risks or perhaps it is because men are too confident in their investing capability. In a paper by Victor Ricciardi, "The Financial Psychology of Worry and Women, the paper observes that women tend to worry more than men regarding finances and hence prefer to stay away from the outer reaches of the risk profile.
“Women wring more profit out of the financial markets because they take fewer risks as investors. They tend to buy and hold, and avoid risky, anxiety-producing investments and frequent trading. This more conservative approach pays off in the long run”
“The women also reported being more prone to stress than their male counterparts; they don't want to engage in the anxieties of on-the-fly trading, another factor that contributes to their more conservative, and ultimately more successful, investment strategies”
“In 2001, a survey of financial analysts and investment advisers found that women felt it was much more important than men did to avoid incurring large losses, falling below a target rate of return and acting on incomplete information. In short, women are more risk-averse than men. And they shy away from uncertainty: Asked whether having ambiguous information would reduce their confidence and raise their perception of risk, 92% of the women said yes, versus just 69% of the men.”
More in control with their emotions
With perhaps the exceptions of certain times of the month, women do a much better job than men in keeping their emotions in check. In times of stress in the stock market, women can be counted on to ignore the hysteria and neuroticism of the market. It's mainly because they are in tune with meeting a financial goal that is tangible to them unlike men who are focused on more ego enhancing benchmarks.
“It's well-documented that women are conditioned to consciously identify and manage their emotions, while men are taught to ignore or suppress them.”
“Emotions like panic, fear, anxiety or even elation (think natural disaster versus release of the new iPad) can lead an investor to make a trade to either offset or enhance her emotions. The problem is that many people who make these trades aren't recognizing their decisions are based on emotion or logic so they can lose a lot of money, says Shull. Because women are more in touch with their emotions, they know when they're not in the right mental state, making them less likely to make a trade or decision when upset, as well as less likely to invest as a way of gaining control in other areas of their lives.”
Check Their Egos at The Door
Building on the themes of risk aversion and emotion, it ultimately comes down to ego and the men who invest do so as an opportunity to talk some smack with their fellow investment colleagues or gym buddies. This bragging comes at very different and subtle levels and so I'm not trying to insinuate that all men like to overtly thump their chests. Women on the other hand have no such interest in this type of childish bravado and machismo. They've got better issues to deal with. As a result, they are less concerned with this form of peer pressure and more focused and critical when they evaluate investment opportunities.
According to Deborah Tannen, who popularized difference theory, “men see the world as a competitive place, while women see it as a network of connections. In the investing sphere, that makes men more likely to make trades and decisions with the motivation of "one-upping" a colleague, while women are (generally speaking) less inclined to do so.”
Understand Who The Players Are
Psychologist Denise Shull referenced the term psychologists use called "theory of mind" in reference to individuals who have a great sense of understanding how other people behave and can use these observations to formulate investment strategies. People who ask why certain behaviours in the stock market occur rather than just reacting to any specific news have shown to have a greater proficiency for making better investment decisions. Women have demonstrated a greater competency in understanding who the key players in the stock market (i.e. the companies themselves, the banks, investment banks, stock analysts, economists etc) and leverage their behavior and actions to making investment decisions that may not necessarily jive with conventional thinking.
"Some investors do the exact opposite of what they need to do: They see a peak or drop in the market and react to those numbers, instead of taking the time to figure out why it's happening. By neglecting to predict the human motivations causing the changes, they may buy stock when it's expensive and sell when they won't make a profit, a cardinal rule of how not to invest."
"But Shull says investors who use what psychologists call the "theory of mind"-the ability to theorize what's going on in someone else's head and predict his actions-can look at stock prices and "read between the numbers," as it were. In fact, research found a correlation between accurate predictions of market activity and theory of mind. "The big missing clue to buying and selling at advantageous times is to ask, 'Why will others be buying or selling at higher or lower prices?'" Shull explains."
"Women, with their natural tendency toward reading others, could use that to the benefit of their investments. "In short, reading the numbers is in fact reading other people, but no one talks about that!" Shull says."
They Get Better
Women may not realize it but aging can be profitable. As women get older these qualities discussed above actually become more enhanced. As women mature, they become more in touch with their emotions. As they gain knowledge, they tend to become calmer with maturity and will react to market gyrations more methodically because they understand how others will behave in those situations and will have a plan in place to exploit those behaviours.
These behavior patterns do not imply that every women will make a better investor so we should not rush out and seek out the first female financial expert we come across nor should we be taking all our financial records and documents and dumping them on our spouse or partners lap and let them figure it out. Men should not also just give up investing. As men, clearly there is a lot we can learn from women. Sadly the financial services industry has not woken up to these realities.The reality is women are playing an increasingly important role in the financial decisions of US households. According to a study by Allianz Life, women control 60 percent of household wealth today, i.e. $14 trillion, an amount that is projected to grow to $22 trillion by 2020. The industry continues to talk down to women and not give them the attention they clearly deserve. Well done ladies!
Ricciardi, Victor, The Financial Psychology of Worry and Women (February 14, 2008).