Warwick University Business School (“WUBS”) have conducted a fascinating study on the investment performance of men and women. They show that women perform significantly better with a good sample size and temporal range. They make some interesting remarks on why this might be. I think I can add some extra psychological depth to this — so we can see that female traders appear to have some quite deep natural advantages and they should feel encouraged about managing their own investments.
What WUBS did was collaborate with the share dealing service offered by Barclays Bank. They looked at 2800 investors over three years. There are various ways of measuring stock market performance, but one of the most common is to compare the performance of a portfolio with a relevant stock market index. (I explain what a stock market index is here: What Is A #Bear #Market?)
It is quite hard to outperform an index consistently. This fact is what lies behind the recent strong growth of tracker funds. You may as well buy the index if you can’t beat it. The results from the WUBS study showed that women consistently outperformed the FTSE-100 index and men did not. The male investors returned 0.14% above the index which is basically statistically consistent with having performed equivalently to it. However, I suspect that these investors would have been better off just buying the index rather than paying a lot of trading fees to obtain the same performance.
The female investors outperformed the FTSE-100 by a massive 1.80%. This may not sound much, but it is actually huge. Done over a lengthy period, it would lead to significantly improved results. Let us assume that the FTSE-100 returns 5% a year. If you started with £10,000 and performed as the male investors do, you would end up with £45,000 after 30 years. (It is always important to think long term in the stock market; to prefigure part of the answers I will discuss below, the women seem to understand this.) The female investors would turn £10,000 into £72,000 over the same 30 year period. That is a huge improvement over £45,000 and bear in mind that the female investors have taken the same risk, making it even more impressive. (One caveat is in order here: no one performs this consistently over the long-term–if they say they do, it is a huge red flag. Remember Madoff? But the point stands.)
How are female investors outperforming?
WUBS and Barclays set out a few reasons which could explain the outperformance. One of them is the one we already know about. Women are less over-confident than men. I explain how that works here: Women Are Better Traders Than Men. In summary, women tend less often to think that their new idea is brilliant and then abandon their previous idea before it has had time to work. Men on the other hand just get extremely convinced about their new sure-fire idea and go with it. Interestingly, women’s lack of over-confidence is not manifested in what they say about their beliefs. They just don’t act on them as often. We could discuss philosophically what that means about our account of belief — but the key point is that women are less likely to trade in deleterious ways!
But there are new reasons suggested. There are three that I think are especially interesting.
- Women stay away from terrible ideas like #Bitcoin (this explanation is proposed by a Guardian commentary from Patrick Collinson; see links below)
- I have explained in various places exactly why Bitcoin is a catastrophic investment The #Bitcoin Bubble Is Caused By The Halo Effect; The Forthcoming #Bitcoin Crash Will Kill The #Trump Demographic; The #Anecdotal Fallacy And The #Bitcoin Bubble; Bad Arguments for the Permanence of Bitcoin. In the first of those posts, I was (admittedly slightly fortunately) able to call the peak of the Bitcoin bubble three days before it occurred at $20,000; the current price is under $4,500 and it will be consistent with $0 soon enough.
- I have not seen any data on how many women bought into Bitcoin, but is is certainly consistent with my claim in the second post above that female investors have stayed away — we know that women did not vote for Trump very often and much less so if they had college degrees. In addition all of the online hysteria (!) from Bitcoin boosters appeared to be from deluded male market participants.
- Women avoid “lottery style” trading
- It has always struck me as insanity to own a lot of penny stocks which are supposed to return ten times the amount you invest in a year because this almost never happens. As I discuss in my book, The Psychology of Successful Trading, traders can get seduced by vivid stories, incorrectly over-estimating massively their likelihood of coming about. A far better approach is just to sit still in major stocks for a long time, with maybe some spicy options for fun in a minor section of the portfolio. The problem with picking the next Amazon (or Bitcoin, for that matter) is that you can’t. You would have to own a million penny stocks for each Amazon or Apple. So this strategy is exciting but completely unsuccessful.
- Men hold on to their losers
- It seems that women are better at getting out of something which hasn’t worked. This came very close to home for me. Infamously, I am still holding Deutsche Bank stock, partly because I recommended it in my book as a contrarian trade. Banks are supposed to trade at at least book value (in fact, 2.0x before the crisis). So if you buy a bank at 0.25x book value, you can’t lose right? Because it is buying something for a quarter of its value. That hasn’t worked for me yet — maybe a female trader would have got out of this position a long time ago.
In conclusion, we have seen some deep-seated psychological advantages which female traders will have over male ones. This should encourage women in their investing.
I would like to thank Dr M R Hampson for suggesting I look at this.