Warren Buffett is the greatest investor of all time, we all know that.
But why, exactly, is he so much better? The answer is actually rather simple.
Buffett is so successful because he shuns risk, he meticulously researches, he ignores peer pressure and — most importantly — he learns from his mistakes.
In essence, Warren Buffett is a woman.
Well, not physically…but psychologically. That’s right, the world’s greatest investor shares more strategic investment philosophy with the fairer of the sexes. And it’s been proven over and over that women are better long term investors than men.
Now men, before you start spraying your computer screen with angry spittle, please take a deep breath and hear me out. I am a man, in fact, and I wouldn’t be throwing up the white flag so quickly if I didn’t have any data to back me up.
You may be shocked when you see what researchers have just uncovered…
Girl Power
Let me just start with a few proven facts:
- Women hedge fund managers consistently bank better returns. From January 2007 to June of last year, women-run hedge funds returned 6% while the male dominated funds LOST 1.1%.
- Women do not trade as frequently as men. A study showed that men actually trade 45% more often than women do — and consequently make more bad investments.
- Multiple studies showed women to be far less tolerant of risk, which leads them to do more research on a given investment and hold the investments longer.
- They do not succumb as easily to peer pressure or reactionary market swings.
It’s like H.L Mencken once opined: “Man is always looking for someone to boast to; woman is always looking for a shoulder to put her head on.”
The quote explains much about the two philosophies: men tend to swing for the fences so they can brag about their conquests. Women are happy with the knowledge that they have a strong, comfortable position that allows them to sleep soundly at night.
And — before any of my male readers start sending me a pretty pink petticoat to wear — allow me to temper these controversial assumptions. There are plenty of things that men do better investing wise. But we can boil down the differences between the sexes into a few psychological touchpoints that anyone — man or woman — can add to their bag of investing tricks.
What Women Do Better
So how does Uncle Warren like being compared to a woman? Well, when asked what he thought about being compared to a woman by the author of “Warren Buffett Invests Like a Girl” he didn’t skip a beat…
“Guilty as charged,” he replied.
So, now that we know Warren is cool with the comparison, let’s dig into some specifics…
The most striking evidence I’ve seen of women outshining male investors is a recent study of female hedge fund managers. Rothstein Kass just released their new research report “Women in Alternative Investments: A Marathon, Not a Sprint.” 440 women in the investment industry were surveyed, including managers of private equity and hedge funds, and the findings were startling.
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For the six and a half years ending June 2013, the Rothstein Kass Women in Alternative Investments (WAI) Hedge Fund Index returned 6%, while the S&P 500 gained 4.2% and the HFRX Global Hedge Fund Index dropped -1.1% during the same period.
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Women-owned or -managed private equity funds reported net returns of 14.8% in 2012, topping the Cambridge Associates LLC U.S. Private Equity Index return of 13.8%.
So what do the authors of the study take away from such stark results? According to Meredith Jones, director at Rothstein Kass:
“There are a number of reasons why women-owned and -managed funds are able to produce excess alpha over the alternative investment universe at large. A simplistic explanation is ‘risk aversion.’ In fact, the truth is that women often perceive risk differently than men and, as such, tend to manage their portfolios differently.
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Studies have shown that women trade less, are less apt to market time and have less ego involved in their investments than their male counterparts. The result is less performance slippage from frequent trades, a diminished tendency to sell at the bottom and a more consistent application of their strategies. Over time, this can add up to a meaningful and persistent performance differential.”
Let’s unpack that for a second, starting with the most obvious difference: “risk aversion”. It’s well documented that men take more risks than women. How else would one explain Ultimate Fighting, the Jackass movies, and Anthony Weiner?
One word: testosterone.
“There have been studies that show that testosterone can make men less sensitive to risk-reward signals, and that comes through in this study,” Jones said.
Since testosterone — a natural anabolic steroid — increases aggression, dominance, and confidence, this is really no surprise.
Testosterone levels help explain why men take so many more risks both in life and the stock market. Odds are that if you’ve heard the phrase “go big or go home” it was being shouted by a man hopped up on testosterone. While this level of confidence and aggression is well suited for say, the paleolithic man hunting for prey, it turns into a great liability when trading stocks. It can also help explain the second trend, which is trading far too often. A study out of the University of California found that men traded 45% more often than women.
That level of braggadocio can ultimately be the rope that male traders hang themselves with. More trading often results in more bad investments.
In a study of investment brokerages, two researchers at the Dongling School of Economics and Management in Beijing found that the annual return for overtraders was 11.4%, while the average market return was almost 18%.
Another study out of the University of California found that 20% of investors who traded most actively earned an average net annual return 5.5% lower than those who kept their moves to a minimum.
That shows that overtrading can indeed hurt your overall returns, or at the very least all of that extra work (and extra trading fees) doesn’t add to your bottom line.
So women, while they don’t bank as many big winners on the way up, come out on top by the end of their investing careers.
Ditch Those Losers
Another reason — that some of us may have learned from dating in high school — is that women ditch losers far quicker than men, and are less emotionally attached to their positions.
Much of that phenomenon can also be attributed to overconfidence in men. Simply put, they do not like to admit they are wrong. Think of this as the “asking for directions” phenomenon. Long the joke of shlocky stand-up comedy routines, men really don’t ask for directions when they’re lost; they tend to double down and pretend to know where the hell they’re going and just pray they wind up where they need to be.
I’ll be the first to admit my guilt on that front.
The same goes for the market. Men will hold out hope for losers to turn around and ride them all the way down to a big loss. You see, men are actually far more optimistic than women when it comes to the stock market. For example, there has been only one solitary month since 1978 when consumer confidence of women was actually higher than that of men.
In short, women are more realistic about their positions and will cut their losses instead of doubling down. This is perhaps the most valuable lesson in investing. You need to be able to swallow your pride and accept a loss now and again — especially if you’re a high-risk trader.
As you can see, ladies have a lot going for them with their low-risk investing strategies. But truth be told, they still leave a lot of money on the table by being so conservative. Next week we’ll flip the script and dive into what men do better, and what women can learn from that macho, testosterone fueled trading style.
Now if you’ll excuse me, I need to ask my wife what she’s buying this month…
