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Why it pays to invest like a woman
By TEE LIN SAY
DID you ever think testosterone could be a setback in successful investing, risk taking and trading among other aspects? According to a recent research, apparently too much of it is detrimental.
A man with an inlfated ego who asserts his alpha male dominance isn’t a fantastic trader or investor.
The Motley Fool’s Louann Lofton who authored the book: Warren Buffett Invests Like A Girl And Why You Should, Too, pointed out that psychologists and scientists concurred that women have the right temperament to help them achieve long-term success in the market.
In the book, Brad M. Barber and Terrance Odean of the University of California (Davis and Berkeley campuses, respectively) published a groundbreaking study on gender differences in investing in their February 2001 Quarterly Journal of Economics paper, “Boys Will Be Boys: Gender, Over-confidence, and Common Stock Investment.”
By surveying 35,000 discount brokerage accounts over a six-year period, Barber and Odean found several distinct differences in temperament and performance between men and women.
Their paper showed that men tend to be over-confident in their “manly” pursuits. Men tend to think that they know more than they actually do while women are willing to admit that they don’t know everything.
How does this issue of over-confidence translate into successful investing?
Over-confidence often causes men to trade more than women. What does frequent trading do to one’s investment results? Its 90% effort for very little gains. It drags returns, runs up commission fees and ruins good investment decisions.
Barber and Odean found that men traded the stocks in their accounts 45% more than women did. This excessive effort reduced their net returns by 2.65 percentage points, compared with 1.72 percentage points women eroded in their trading accounts. Single men were the worst offenders, trading 67% more than single women.
Here are the eight key tenets of women’s temperament listed in the book:
1. They trade less than men do.
2. Exhibit less over-confidence; men think they know more than they do, while women are more likely to know what the men don’t.
3. Shun risk more than male investors.
4. They are less optimistic and therefore more realistic than their male counterparts.
5. Make more time and efforts doing research on investments, considering every angle and detail, as well as considering alternate points of view.
6. Immune to peer pressure and tend to make decisions the same way regardless of who’s watching.
7. Learn from their mistakes.
8. Have less testosterone than men, making them less willing to take extreme risks, which, in turn, could lead to less extreme market cycles.
When contacted by StarBizWeek, HwangDBS equity capital market head Sherilyn Foong, who has been in the investment industry for more than a decade, explains that women, due to their intrinsic nature of being care-givers and running household budgets, may be inclined towards being more calculative, which lends to their more risk-averse mindset.
“The average alpha male, who is used to the traditional role of being the sole breadwinner, tend to be more decisive and forthright. Hence they would tend to be more aggressive traders.
“An interesting point to note is that the infamous rogue traders, including the most recent case in London are alpha males. These rogue traders have been described as typically aggressive, decisive and confident,” says Foong.
Corston-Smith Asset Management Sdn Bhd managing director and principal fund manager Shireen Muhiudeen is not sure if women are less risk-averse fund managers compared with men.
“In my career, I have had male and female colleagues . I did not detect a trend that the men were bigger risk takers than women. Some of my male colleagues are more conservative than some of the women. All of us are long-term cash fund managers. The fund managers tend to trade less and are more focused on value,” said Shireen.
Prudential Fund Management Bhd chief investment officer, equities, Yvonne Tan feels that in general, women do not take as much risk as men, as women are normally more careful and concerned about losing money.
“Women are more willing to admit mistakes and tend to have better memories of the mistakes they have made. I feel women tend to be more careful, more detail-oriented and more disciplined,” Tan says.
Foong says it’s not that women tend to be a pessimistic lot, but they, especially the older women are more cynical.
“This is a sad attitude but there is no free lunch or prince charming. This also applies to assessing the potential of a stock or company where if something sounds too good to be true, then it probably is.”
Shireen feels that the over-confidence trait is not always a gender issue but is sometimes a cultural as well as a personality issue.
“Some women fund managers I know are known to breathe on bread and turn them into toast. Some of the male fund managers I know are very humble and gentle in their approach, and exhibit quiet confidence,” she said.
Tan adds that she is more realistic in assessing a company or stock.
“I tend to be more sceptical on the earnings guidance by the company, and I look at what could go wrong in a company before considering what could trigger an upward re-rating on the stock,” Tan says.
Foong says that the AQ quotient (adversity quotient) of women, may be higher due to their biological and social role of being care-givers and mothers.
“A young woman will almost immediately learn to adapt to her newborn’s needs as the child grows. This trait of being on her toes constantly is good when it comes to investing,” says Foong.
Shireen does not agree that women are more meticulous.
“I have male colleagues who are extremely meticulous and female colleagues who don’t cover their bases and are sloppy. So, it isn’t a gender issue at all. It is really the case of your nature and willingness to understand the basis of the investment,” says Shireen.
On risk appetite, Foong says that since she is getting closer to her retirement age, she is definitely not a big risk taker.
“However, many of my girlfriends reckon that I have a big risk appetite vis-a-vis our age group . So it’s a matter of opinion,” says Foong.
So what makes a great investors?
“In my opinion, it is the humility to admit that you have made an awful mistake and to have the discipline to cut your losses, no matter how painful it may be,” explains Foong.
Shireen says clarity and common sense must also prevail. “Look for value, understand the business and be realistic,” she says.