, On Monday June 13, 2011, 11:50 am EDT
Warren Buffett is one of those legendary people that provide inspiration for the rest of us. Though he is an icon among Wall Street types, and he lives and works in the relative obscurity of Omaha, Nebraska.
Buffett began investing in 1956, opening a partnership that would eventually grow into the company he runs today, Berkshire Hathaway. He started with $100 of his own money and $100,000 invested by his partners. Over the years, he turned that into a $60 billion company, on the basis of his now famously careful, thoughtful and methodical investing strategy.
A new book called Warren Buffett Invests Like a Girl explores how the tycoon made (and grows) his fortune by practicing many of the same habits and quirks observed in women investors. Author LouAnn Lofton studied the habits of male and female investors to better understand the behaviours that make us do what we do with our money.
Golden Girl Finance recently interviewed LouAnn about some of the ideas in her book.
Golden Girl Finance: Love the title! What does it mean to 'invest like a girl'?
LouAnn Lofton: When it comes to throwing a ball or running, the phrase "like a girl" is used negatively. But when it comes to investing, acting "like a girl" is a very good thing! Studies show that when making investment decisions, women tend to be more patient than impulsive; more realistic than over-confident; and, prudent rather than reckless. The reason for this is that women think they know less than they actually do and have a fear of doing the wrong thing — it sounds bad, but it works to their advantage!
GGF: But women are always stereotyped as being so emotional!
LL: Because they are willing to admit they don't know or understand certain things, women will do more research, spend more time before making a decision, hold onto shares longer, only invest in companies they understand and, generally, take fewer risks. A study by Vanguard demonstrated that following the financial meltdown of 2008/2009, men were more likely to panic and sell at the bottom, whereas women held onto their investments through thick and thin.
GGF: When did you spot a pattern between women's investing style and Warren Buffett's?
LL: I started studying Warren Buffett a few years after high school. My father passed away when I was 15, so I knew that at the age of 21, I was going to inherit a small sum of money. I thought, 'no one is going to do this for me; I have to do it myself.' I wanted to learn, so I bought a book about Buffett and was drawn to his story. I started following his investments. In 2007, I was working at The Motley Fool as editor-in-chief and I came across many studies about how women invest. The research they do, their risk-averse nature, their patience…and I thought, 'this sounds pretty familiar.' I realized there was a connection: this is how Warren Buffett invests.
GGF: What traits in particular did you find are common to women and Warren Buffett?
LL: There are eight principles which I explore in the book. I hope that seeing these traits in light of Mr. Buffett will give women more confidence to trust their own style. For example, women trade less often than men, viewing their investments as long-term purchases of real companies, not just ticker symbols in a game. They are less likely to act on a 'hot tip.' Similarly, Warren Buffett says you should never invest in things you don't understand. Coca-Cola, the Washington Post - these are classic Buffett investments: companies he got to know, understood and stuck with. He has traditionally shied away from technology companies as he has said he doesn't understand how to evaluate the future of these companies. Like women who do a ton of research, Warren Buffett pores through annual reports and reads five newspapers a day; he basically just reads and researches all day.
GGF: What quality have you found to be most advantageous when it comes to investing?
Controlling your emotions and having the right temperament are more important than following trends, knowing formulas or even being especially intelligent.
GGF: How did Warren Buffett respond to being told he invests like a girl?
LL: I sent him a preview of the book and hoped he'd get a kick out of the title! I hoped he would see it as a compliment. When I saw him at a Berkshire Hathaway shareholders' meeting, I asked him, 'do you think you invest like a girl?' He said, 'I probably plead guilty.' Mr. Buffett has always been very supportive of women in the workplace and in positions of leadership.
GGF: What investing behaviours are common among men?
LL: Men are generally more comfortable with risk; they often think they understand more than they do and are more likely than women to invest in companies they don't know. When you compare investment accounts, men have 45 per cent more trading activity then women. Studying men's investing behaviours, again and again, you see patterns of over-confidence.
GGF: Do you see these gender differences only among individual investors or among professional money managers too?
LL: In the last nine years, hedge funds managed by women have outperformed those managed by men by 55 per cent. Yet only three per cent of hedge funds are run by women!
GGF: What contributes to the difference in how men and women invest?
LL: Men are more competitive by nature. Testosterone, "the male hormone," is a big factor. Generally, men have 15 times more testosterone than women. The level of testosterone in a man's body is influenced by his environment. On a trading room floor full of men, testosterone levels are higher, men act more competitively and more aggressively. More women on trading floors and working within the industry can help balance a testosterone-driven environment.
GGF: What can women learn from men's investment traits?
LL: Men take action and women can learn that from men. Men are more likely to get out there and invest their money. Even though women are involved in the household budgeting and expenses among 73 per cent of households, the investment decisions are still primarily handled by men. Women need to step up and ask questions, get involved in those decisions and insert their opinions.
GGF: Yes, men love to have their decisions questioned…!
LL: But there is so much that men can learn from their wives! Peter Lynch, famous manager of the Fidelity Magellan Fund, has said his wife and teenage daughters are responsible for inspiring many of his greatest investment ideas.
GGF: Of course, not all women invest the same way, nor all men.
LL: Of course not. Some women are incredibly aggressive investors and risk-takers. There are always exceptions. Warren Buffett is a clearly an exception among men, in his style. It's a fun discussion for us to have though. A lot of successful male investors perhaps didn't realize that the reason they've had such success is because they're investing like a girl!
GGF: Is there one main message you want to get across in your book?
LL: Let's all learn from each other and use that knowledge to make more money!
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