The Investment Strategy Group of Contango Capital Advisors provides regular updates on economic and financial conditions. In this issue, we look at some of the fundamental differences in how men and women tend to invest.
“Warren Buffett invests like a girl,” claims author LouAnn Lofton in a 2011 book entitled – not surprisingly – Warren Buffett Invests Like a Girl. Brad Barber of the University of California, Davis, and Terrance Odean of UC Berkeley surveyed 35,000 self-directed accounts. After assessing their results, they came up with the following.
Women spend more time researching their investment choices while taking on less risk than men. They are not as likely to scramble after hot tips or on an investment that simply catches their fancy. Women, the researchers say, are also more likely to seek out information that challenges their assumptions.
Trade and Lose?
It just goes on. Women are more willing to admit what they don’t know, while men tend to think they know more than they do.
Men’s higher confidence (or, as Lofton puts it, “over confidence”) in their investment skills means that they tend to trade more – 45% more – than women do. Excessive trading cuts into profits by running up transaction costs and sacrificing possible tax savings from the long-term capital gains rate. In the study, men’s trading frequency reduced net returns by 2.65 percentage points, compared to the 1.72 percentage points that trading shaved from women’s accounts.
The Barber and Odean study also indicates that women place significantly more emphasis on avoiding large losses, falling below a target rate of return, moving on incomplete or inconclusive information. Asked whether ambiguous information would lessen their confidence and increase their perception of risk, 92% of the women said yes. Only 69% of the men agreed.
The key difference in the two groups, says Lofton, is one of temperament rather than skill.
“You can be the smartest securities analyst around,” she writes, “But not having the correct mindset can absolutely sink you as an investor. All the knowhow in the world can’t correct for bad habits.”
If you have been following our story you will know that we see several more years of volatility ahead. Europe is too bad to mention; China is filled with bad credit and other emerging market powerhouses are struggling with inflation and infrastructure shortages. We are modestly bullish about the US but so many issues remain – perhaps 10 million more foreclosures and ongoing housing price declines, the impending roll-over mountain for commercial real estate debt, the tax and expenditure uncertainty associated with the election – that the near term remains perilous.
At the same time, peering over that horizon, we see a lot to cheer investors. In this nation, gas and gas liquids will transform our economy and the US continues to be the most innovative economy in the world. The emerging markets will resume their growth and be the drivers of the world economy for the foreseeable future. That implies a wealth (no pun intended) of investment opportunities in equities, natural resources and associated supplying businesses.
So what’s “a girl” to do? Handle the near term differently from the long term, of course. For the next few years, money likely to be needed should be invested for capital preservation. What’s left can go to those longer-term opportunities, leaving the investor secure in the knowledge that it won’t need to be liquidated at just the wrong time in a volatile market. In particular, in markets that trade sideways with a lot of volatility, one should not be trading to try to catch the tops and bottoms. The entire hedge fund industry found this out the hard way in 2011. Keep your cool, segregate your near-term and long-term portfolios and hope for Warren Buffett’s tax rate!
This article was prepared by Contango Capital Advisor’s Investment Strategy Group. Contango Capital Advisors is an affiliate of Zions Direct.
IMPORTANT NOTE: Wealth management services are offered through Contango Capital Advisors, Inc. (Contango), a registered investment adviser and a nonbank subsidiary of Zions Bancorporation. Investments are not insured by the FDIC or any federal or state governmental agency, are not deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates, and may be subject to investment risks, including the possible loss of principal value of the amount invested. Some representatives of Contango are also registered representatives of Zions Direct, which is a member of FINRA/SIPC and a nonbank subsidiary of Zions Bank. Employees of Contango are shared employees of Western National Trust Company (WNTC), a subsidiary of Zions Bank and an affiliate of Contango. CCA0212-0018