INSIGHTS

DOES FORTUNE FAVOUR THE FAIR?

Craigs Investment Partners, 12 August 2019

Alongside driving (women have fewer crashes than men), remembering names, coping with stress and achieving top university grades, you can add another area of human endeavour where women perform better than men; investing.

The facts are undeniable

There have been a number of studies over the years comparing the investment performance of men and women. Berkley professors Terrance Odean and Brad Barber did the most comprehensive study we have seen in 1999.

They analysed the returns achieved by 35,000 clients of a major US sharebroking firm from 1991 to 1997. The professors discovered that women investors, on average, achieved an annual return that was 1.4% higher than their male counterparts. This is backed by a more recent study from The Warwick Business School last year, which had this figure even higher, at 1.8%.

Not only that, but while achieving this excess return, women also took fewer risks. The returns on the women's portfolios were not just higher than the men's returns, but they were also less volatile.

In the UK, a further study by Hargreaves Lansdown compared the returns earned by men and women over three years. Women beat men, returning an average of 0.81 % more. They estimated that "If that performance was replicated over 30 years, women would end up with a 25% bigger portfolio." This is helped by women's ability to take a longer-term view; not panicking when markets fall, and looking at proven, versus speculative stocks.

The role of overconfidence

These surveys found that men's investments underperformed because they were driven by, shall we say, 'overconfidence'.

They discovered that women had more diversified portfolios and they favoured more defensive sectors and companies. Men, on the other hand, had portfolios full of 'fad' shares such as mining and technology companies. They also owned fewer companies and were more invested in riskier, small companies rather than blue chips.

Professors Odean and Barber also came to this conclusion. They believe the reason men do worse than women is because men tend to be overconfident in their ability to beat markets. This can lead to excessive trading.

A Merrill Lynch survey in 2005 of 1000 people backs this up. They found that women make the same mistakes as men, but do so less often. Women are far less likely than men to hold a losing investment too long. Men are also more likely than women to invest too much of their portfolio in one investment or buy a 'hot' investment without doing any research.

In the book Fooled by Randomness, Nassim Taleb makes many interesting points about the role of luck in investing. He believes people don't tend to accept the role of randomness in their successes, only their failures. "I did well because I was smart", as opposed to "I had some bad luck and lost money". This suggests men are more prone to being 'fooled by randomness' than women.

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Men need to get in touch with their feminine side

A poll taken by Harris Group for US broker Charles Schwab in 2005 found that nearly half of women agreed with the statement that "investing is scary", which was double the rate from male respondents. Men could learn a lot from this. Investing is scary, and it involves a lot of risk. Men need to learn to have a greater respect for markets and for the risks they are taking.

Investing is not rugby; neither is it hunting a wildebeest on the African savannah. Testosterone is not a good fuel for making investment decisions. Men's biological hard wiring makes them tend to look at the investment world as a competition full of black and white decisions; but in reality, it is not a competition, and it is full of uncertainties and shades of grey.

Success in investment is all about being balanced, having realistic return expectations, taking measured positions, taking our time and thinking through decisions, controlling our greed DNA and not being rash. All traits that arguably lend themselves more to women than to men.

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