Peter Hodson: Be prepared for some stereotyping, but studies have repeatedly shown these reasons to be true
The fearless girl statue in front of the New York Stock Exchange. Photo by Johanne Eisele/AFP via Getty Images Psssst … don’t tell my wife, but it has been proven, time and time again, that women are better investors than men.
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Even though the investment industry is very male-dominated, and (I’m generalizing here) the male member of a male/female couple typically runs the household finances, women actually do better when it comes to picking stocks and investing for the long term.
Why is this? Here are five reasons. Be prepared for some stereotyping, but, remember, it’s not me, it’s the academic studies that have repeatedly shown these reasons to be true.
Patience/nurturing Women investors tend to have far more patience than men when it comes to investing. Call it the mothering instinct, or whatever, but women are more likely to give an investment the time it needs to perform well. Men, on the other hand, watch quarterly earnings too closely and will often sell an investment at the first sign of trouble.
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Article content Women tend to see the longer-term picture, and can often look beyond short-term problems. This is very important, as many stellar long-term stock performers have had absolutely brutal drawdowns on their way to investment success.
Less need to prove themselves A big stereotype here, but male investors often need to prove something. It is the ego that gets in the way of investment success. As a portfolio manager, I have seen some male managers insist that they “are right, and the market is wrong,” much to the detriment of their portfolio, and often to the detriment of their entire careers. Managers who think like this tend to double down when a stock gets hit, potentially amplifying losses when things don’t work out. Hint: the market is always right.
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Article content Ego causes male investors to take bigger risks in general, trying to prove they have the guts to tough it out with giant stock positions. Ego also causes men to have a big issue with confirmation bias: that is, only listening to the arguments that support their position, and not considering alternative views, even though every single stock trade has an opposing viewpoint.
More willing to admit to mistakes This is a biggie and is somewhat related to the point above. Men do not like to admit mistakes. Ask any woman. This is the “it’s not my fault” syndrome. Men will blame the market, short sellers, the United States Federal Reserve, a company CEO or anything or anyone really, rather than admitting that, yes, they were wrong and they shouldn’t have bought that loser stock.
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Article content A big part of success in investing is protecting your capital. Quickly exiting losers can be the absolute difference between a great portfolio or a ho-hum one. Keep in mind that most stocks actually decline, and it is the few winners that make up most of one’s overall positive returns. Getting rid of losers quickly increases your odds of populating your portfolio with winners.
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Article content There is no rule that says you have to be active. Trading adds costs, results in taxes and, thus, less capital is available to compound over the years. This is particularly true in market corrections, such as we saw in January. Many male investors shifted their portfolios to cash, or moved their stocks from growth to value, because that’s what everyone was doing and they couldn’t just sit there and watch the declines. Sometimes, that’s all one should do.
Research more diligently Men often like to take a flyer on a highly speculative stock, whereas studies have shown that women actually do much more research before buying a company. Not all are financial analysts, but women read more, study a company as much as they can and understand the risks of investing. Men, simply, don’t.
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Article content More stereotyping here, but many men buy stocks like they buy groceries or clothes: grab the first thing they see that remotely resembles what they need. Of course, not knowing what you are buying is a good recipe for failure, and women (on average) are simply better researchers.
Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also associate portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)
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