Are there differences in the way men and women invest? In a roundabout way, this is the topic of financial editor and writer LouAnn Loften’s book, Warren Buffett Invests Like A Girl. Loften studied the habits of the world’s most renowned investor and compared them to the latest research about men, women, and money. The results?
Whether you are a woman or a man, the key lessons are the same: Temperament is one of the most important factors in approaching an investment, and therefore may impact potential future investment return. Loften found that, like Buffett, women have a bias towards a calm temperament, have a longer-term outlook, emphasize research, trade less, and remain steady under pressure.
There have been many studies over the years about behavioral biases in investing, and how these biases affect investment results. Some of the more common biases for both men and women are:
- Confirmation Bias:
People like to think that they carefully gather and evaluate facts and data before coming to a conclusion. But they don’t. Instead, they tend to reach a conclusion first, and then afterward gather facts and fit those facts in a way to support their pre-conceived conclusion. When the conclusion fits with their desired outcome (which it usually does), so much the better. For example, an investor hears about a hot stock or fund from an unverified source and is intrigued by the potential returns. That investor chooses to research the stock in order to “prove” its touted potential is real, and finds nothing but green flags about the investment (such as growing cash flow or a low debt/equity ratio), while glossing over financially disastrous red flags, such as loss of critical customers or dwindling markets.
- Choice paralysis:
Intuitively, it seems the more choices an investor has, the better. However, studies show that too many choices can lead to decision paralysis due to information overload. For example, participation in 401(k) plans among employees decreases as the number of investable funds offered increases.
- Recency bias:
People tend to extrapolate recent events into the future indefinitely. Some investors watch a bull market run along, and forget about the cycles when it didn’t. As far as recent memory serves those investors, the market should keep going up. When the market is down, those same investors become convinced that it will never climb out, so they want to cash out their portfolios and stick the money in a mattress. They “know” the market isn’t going back up because the recency bias tells them so. But then one day it does, and they are left on the sidelines. At Tarbox, we focus on the long view and consider as many factors as possible (the market goes up AND down), and allocate client portfolios accordingly.
Men, women – people in general – approach many things differently. Investing is just one of them. Understanding the motivations and emotions that influence decision-making can help to make better, more profitable investment decisions.
Many people have come up with complex variables while trying to uncover Warren Buffett’s valuation models, his trading secrets, and have spent hours quizzing his inner circles. Maybe they have overlooked what matters most.
When asked if he “invests like a girl”, Buffett replied: “I plead guilty.”