Be A Man But Invest Like A Woman…

women-are-better-investors

I have a dream, I have a dream that someday, a majority women are at the helms of our businesses and capital markets. I have a dream that child-rearing, toddler-totting mothers rule Wall Street and investment houses around the globe. I might be a bit biased considering the fact that by design and mind you, by design, I am a dad to two beautiful daughters. But there is so much data and anecdotal evidence that corroborates the fact that women not only are better investors but are more careful risk-takers and business leaders focusing more on sustainable, long-term profit maximization instead of the usual gun-slinging, macho-capitalistic, short-termism that is the norm in today’s male-dominated world of business and the markets. And those protective and nurturing instincts women would bring to the table would make the world a better place, reducing the systemic risks this world endured over the past many decades due to male dominance in business, politics and the markets.

Case in point, Iceland, a country that right until 2008 was rated to be the best place to be a human being on planet Earth by the United Nations Human Development Index. And then it almost went bankrupt when three of its largest banks collapsed, leaving debts more than 10 times the size of that country’s GDP and in turn impinging a lot of grief and misery on its generally happy citizens. The almost entirely male-run banks levered up and gambled customers’ savings into “can’t lose” investments that turned out to be so complex and esoteric that no one had a clue. And no one cared to ask hard questions because everyone was making money hand over fist in the years leading up to the collapse. The only financial company that survived and remained profitable through that episode – Audur Capital, an almost all women run firm. Iceland’s doing fine now because the country learned and put into practice a set of laws requiring that the system is adequately represented by the fairer sex at all levels of government and businesses. A segment from this Der Spiegel link sums this up pretty well…

“The crisis is man-made,” claims banker Halla, 40, who like all Icelanders, is only addressed by her first name. “It’s always the same guys,” she says. “Ninety-nine percent went to the same school, they drive the same cars, they wear the same suits and they have the same attitudes. They got us into this situation — and they had a lot of fun doing it,” she says. Halla criticizes a system that focuses “aggressively and indiscriminately” on the short-term maximization of profits, without any regard for losses, that is oriented on short-lived market prices and lucrative bonus payments. “It’s typical male behavior,” says Halla, who compares it to a “penis competition” — who has the biggest?

That brings us to this aptly titled paper, Boys Will Be Boys by Brad M. Barber and Terrance Odean of UC Berkeley’s Haas School of Business which concludes that men in general churn their portfolios at 1.5 times the rate as women do. And because they trade more often, their returns are lower by as little as 0.94% to as much as 1.44% each year. Most men think that they are in this race and they have to beat this other guy at this ‘game’ especially if that other guy happens to be his brother-in-law. Who cares about the long-term when you get to brag about the killing you just made on that investment with no mention about the rest of the losers you have in your portfolio.

And this is a systemic issue with most men and I can prove that with anecdotal evidence (again).  So we have this debt ceiling debate that is going to be in the headlines sometimes this month. Now we all know what happened the last time around (I think that was the last time around) where the markets took a dive due to an unexpected but temporary stalemate in Congress over this. Now with that as a backdrop, I overheard someone claiming that he sold everything and got out of the markets because that same thing is going to repeat again. And once the market drops, he will get back in. Of course he will. But that was last December and the markets since then have gone straight up. That’s not to say that the markets will at some point not correct. They will but that would not be because of the debt ceiling. That thing is already baked into the expectations. This guy (and it’s always a guy) thinks that only he knows this. But that is so first-level thinking. And then there is someone else I know who did not just sell everything post-Donald Trump’s election but he actually went short on the markets. Ouch.

So enough talking about folks who seem to know what is going to happen but they actually don’t and let’s talk about Long Term Capital Management, a hedge-fund run by financial whizzes, all Nobel-laureates but all male who seemingly had cracked the code and figured out a way to just keep printing money with almost no chance of making a loss. That thing worked for a while until it didn’t. This plot from a Wikipedia page attributed to LTCM is pretty self-explanatory.

LTCM-collapse

Circling it back to women, they tend to approach investing from the safety-first angle. That overconfidence, that self-delusion that they have cracked the code at making a killing in the markets is seldom found amongst women. Women are more likely to ask questions, seek help when needed and in general, don’t tend to go near the “Too-Hard” to understand box (in reference to what lies on the Oracle of Omaha’s desk, assigned to investment ideas and thesis that are too complex, too complicated for him to grasp).

And that is how I invest. That is how we all should invest. I am waiting for that day where I can build a portfolio of mostly women-led businesses that is diversified enough. That day is not there yet but it is coming and we should all welcome it because in this fight between testosterone and estrogen, we want the estrogen to win. Our future is riding on it.

Image credit – Pedro Ribeiro Simões, Flickr