It’s not what a man don’t know that makes him a fool, but what he does know that ain’t so.
It ain’t me
It’s the people that say
Men are leading the women astray
But I say, it’s the women today
Smarter than the man in every way
— King Radio (a.k.a. Norman Span)
As a man, what I am about to say really hurts. Some of my male colleagues will likely call me a traitor to my sex, but I don’t care. The truth is my mistress and I will not betray her. Here goes: women are better investors than men. Ouch. It hurt even more than I thought it would.
Women earn net returns that are reliably higher (by nine basis points per month or 1.1 percent annually) than those earned by men.
Men, don’t totally despair. The study found no evidence that women were better stock pickers than men. In fact, neither men nor women were able to beat the stock market indices. The study found that both men and women chose to purchase stocks that underperformed the stocks they chose to sell. In other words, for both sexes, trading was, on average, a losing game. Men underperformed women because they traded more — 45 percent more. Why did men trade more? Over-confidence. Both men and women have an inflated opinion of themselves, thinking they can beat the market, but men suffer from this affliction to a larger degree. Whereas 63 percent men classified themselves as having extensive investment experience, only 48 percent of women felt that way about themselves.
Interestingly, married men are less overconfident than single men and thus trade less often and have better-performing stock portfolios. Men losing confidence after marriage makes perfect sense since wives are quite eager to constantly remind their husbands about their glaring and innumerable shortcomings (at least that is my personal experience).
Lastly, the study found that men were greater risk takers, investing in more small-cap and higher volatility stocks than women. The result was that women’s greater risk-averseness made them less likely to suffer big losses. As I demonstrated in my article entitled “The Great Investment Truth,” the best value investors (including Warren Buffett) are risk-averse because they realize that avoiding big losses is the key to amassing great wealth.
Not a Fluke
Now, some men may dismiss the UC-Davis study as a fluke. Sorry, guys. A 2005 Merrill Lynch telephone poll of 1000 men and women found similar differences:
- Men are more likely than women to cite greed (32% of men vs. 16% of women), overconfidence (33% vs. 20%) and impatience (28% vs. 19%) as investment mistakes they have made;
- Women are far less likely than men to hold a losing investment too long (35% vs. 47%) or wait too long to sell a winning investment (28% vs. 43%).
- Men are more likely than women to allocate too much to one investment (32% vs. 23%), buy a hot investment without doing any research (24% vs. 13%) and trade securities too often (12% vs. 5%).
The Merrill Lynch study concluded:
Men tend to make what we call the “glamorous” mistakes like riding winners down, holding onto losers, buying on a tip or putting too much money in a single investment. These bigger, systemic failures do the greatest damage to investors’ portfolios.
Whatever You Do, Don’t Panic!
A 2009 Vanguard study found that men were 10% more likely to panic and sell their stocks at the bottom during the 2008-2009 bear market than women were. This conclusion may seem to contradict the Merrill Lynch finding that men are more likely to hold on to losing investments too long, but it really doesn’t. Both can be true, depending on the market environment. Only if the market is in freefall will men panic and sell out at any price. In a normal market, men’s overconfidence makes them stubborn and they refuse to admit they were wrong about an investment and will hold on.
Women Don’t Overpay
Lastly, a 2008 University of British Columbia study found that women CEOs are much less willing to pay a high price when acquiring another company. In fact, the takeover premium paid by women CEOs is over 70% less than that paid by men CEOs. Translated to the stock market, this could be construed as another example of women being more risk-averse than men. For a value investor, the price paid for a stock is critical; it must be sufficiently below the estimated intrinsic value of the stock that the chances of making a profit are high. The study concludes that “the results are consistent with women having a more realistic sense of corporate value.” In contrast, men may be willing to overpay for an acquisition because of ego and the desire to build a corporate empire.
I Want an Explanation!
The question remains: why does the average man suffer all of these emotional problems that get in the way of good investing? Ironically, a Colorado State University study suggests that men’s overconfidence problem could stem from their privileged status in society with regards to job advancement, earnings, and power.
The paper offers an alternative biological explanation: women are wired for child-rearing and elderly care and consequently are more risk-averse to ensure that those under their care are protected. In contrast, men are wired to be aggressive and take risks in order to hunt prey and attract mates. Whereas child-rearing requires a long-term perspective, hunting and mating is in the here and now and requires quick thinking and decisive action.
Good Investing Habits Can Be Learned
Whatever the reason for female outperformance, the good news for men is that nothing is set in stone. Men are intelligent and can consciously fight against their cave-man tendencies in order to become better investors (i.e., invest more like women). All one has to do is look at Warren Buffett – a man and arguably the greatest value investor of all time – to know that it can be done. To learn more about the investment benefits of taking a long-term perspective and being risk-averse, please read my article entitled “So, You Want to Be a Value Investor?” The benefits of humility are discussed in Steak n Shake.
A Sliver of Boy Power
I can’t end this self-loathing article without providing us men with a ray of pride: men appear to make better traders. A 2008 study by British researchers at the
The bad news is that KCI’s team of top analysts is composed of all men. The good news is that they are all positively effeminate when it comes to investing.