March 8 is International Women’s Day – so let’s talk about women and investing!
It’s not hard to see that the investment industry is male-dominated.
Fewer than 15% of investment bank traders are women. And according to Credit Suisse’s Women in Senior Management study, the percentage of women on the boards of publicly-traded companies averages just 12.7% globally.
Yet, there’s mounting evidence to suggest women improve performance – both at the corporate level and on the trading floor.
- MSCI’s Women on Boards study showed companies with strong female leadership generate stronger return on equity (ROE) – 10.1% versus the 7.4% of their male-only counterparts.
- Credit Suisse’s study showed that, among large-cap stocks, investing in companies which have at least one woman on the board leads to five percentage points in outperformance.
- Professors Brad Barber and Terrance Odean, in their 2001 paper titled Boys will be boys: Gender, Overconfidence, and Common Stock Investment, showed men trade 45% more than women, leading to a 59% greater reduction in profitability compared to women.
Now, since you can’t argue that women have better access to investment education or training than men, you must wonder if their performance-evidenced advantages are innate.
Are women born to be superior risk-takers?
Many psychologists and evolutionary biologists say, “yes!”
In her 2010 paper, Close Women, Distant Men, psychologist Helen Stancey proved two key findings:
- At 20 inches away, women have more accurate eyesight than men.
- At 40 inches away, it’s the other way around.
That discrepancy has been chalked up to the fact that pre-historic man evolved to be a hunter, which required tracking and attacking moving prey from great distances.
Meanwhile, the pre-historic woman evolved to be a gatherer. And that task called for locating stationary resources in nearby surroundings, where superior near-distance eyesight was more favorable.
But as I see it, this is just one of the many differences between men and women that can be explained by our evolution-driven past. And most of the differences that come to mind easily have to do with risk taking.
Generally speaking, women are more risk-averse than men.
And, related to that, men are overconfident, more so than women.
To be a successful caveman, you had to take down a wildebeest on the African plains… and to do that, you were better off being overconfident in your ability to do so, and blind to the risk that you might instead get impaled and bleed slowly to death.
Essentially, the best cavemen were bold and brave.
That worked fine for men in pre-historic days. But today, those “alpha male” traits tend to work against investors who try to “hunt” their way through the market.
Just as there were endless threats to the physical safety of pre-historic man, there are endless ways in which financial markets can separate you from your hard-earned cash.
Women tend to have a healthy respect and humility toward the uncertainty and risk inherent in the world… and financial markets.
Men… well, we tend to swing from vines and beat our chests – overconfident in our abilities and under appreciative of unforeseen risks.
The good news is… just because men and women are “hard-wired” in different ways doesn’t mean we can’t learn and implement the “lady-like” traits that improve investment success.
Here are three of them…
#1: Don’t Risk Too Much
Conservative position-sizing is key to avoiding what we call the “risk of ruin” – a.k.a., losing all your money.
Obviously, if you invest everything you have in one trade and something goes wrong… you’ve lost it all. But if you invest a more reasonable share of what you have – say, 10% – and the market throws you a curveball… you’re still in the game, with the remaining 90% intact.
You’ve “lived to fight another day,” as wise traders say.
Bottom line: If your position-sizing is too aggressive, you’re probably falling victim to your alpha-male tendency to underestimate risk… and you probably won’t survive for the long haul.
#2: Learn to Take a Loss
Some people say men can’t admit when we’re wrong. (And I’ll never admit that it’s true [wink]).
Seriously though, all investors are better served by checking their egos at the door.
Taking a loss on a trade doesn’t mean you’re “wrong.” It doesn’t mean you’re “stupid,” or a “bad investor,” either.
It simply means you lost money on that particular trade. (And if you followed Rule #1, you didn’t lose all of your money).
“No one trade can make or break us,” is the unofficial mantra of systematic investing.
If you can handle the emotional trauma of taking a loss – whether you’re a man or a woman – you’ll be resilient enough to stick to your strategy. And that’s a must if you want to win in the end.
#3: Follow the Rules!
A proven, “rules-based” investment strategy is only valuable if you follow its rules.
That seems obvious, but you’d be surprised by how hard that is for folks who lack the psychological fortitude and discipline required to follow a systematic strategy.
And, of course, there’s evidence to suggest women are better at following rules than men.
One study monitored the trading activity of more than 700 junior investment bank traders. The participants were given specific “rules” that they were told not to break – essentially, times of the day when they were prohibited from making trades.
That study showed the men broke the rules 2.5-times more frequently than women.
And guess what… the excessive rule-breaking led the men to underperform the women in net returns.
That doesn’t surprise me at all!
So that’s the deal, ladies and gentlemen…
As I see it, you certainly don’t need to be a woman to be successful at investing, although it may help.
More importantly, everyone can benefit from being aware of, and avoiding, the most damaging “caveman” traits, like overconfidence and excessive risk-taking.