Partner with your wife

Road to long term investment success We all know that a happy and successful family is where husband and wife come together and work as a team in sharing various areas of responsibilities, especially in a manner that leverages each others strengths - be it bringing up a child or planning for a holiday. Interestingly, the same holds true for investment decisions. Traditionally in India investment in stock markets is associated more with men than women. There are far fewer female fund managers in India than male fund managers. In an average Indian household, women are not as involved as men in taking decisions on stock market investing. However, there is a growing body of research which suggests that women may be better long term investors than men. Women, on average, tend to display behavioural traits more aligned to successful long term investing. Closely involving your wife in stock market investment decisions can lead to better investment decisions and help you avoid common investment mistakes. Terrance Odean and Brad Barber, professors of finance at the University of California, in a study in 2001 called "Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment " concluded that men, in general, tend to be over confident when it comes to investing. "We found that men traded more actively than women, and so attributed that, at least in part, to overconfidence, being too sure of themselves in terms of stock picking and too willing to trade on perhaps too little information," explained Odean. A Vanguard study in 2009 found that men were more likely to panic and sell their stocks at the bottom during the 2008-2009 bear market than women were. If the market is in freefall men panic and sell out at any price. In a normal market, mens overconfidence makes them stubborn a nd they refuse to admit they were wrong about an investment and will hold on. Another study in 2008 by University of British Columbia found that women CEOs are much less willing to pay a high price when acquiring another company. The takeover premium paid by women CEOs is over 70% less than that paid by men CEOs. From a stock market perspective, one could view it as an example of women being more risk-averse than men. For a value investor, the price paid for a stock is critical. It must be sufficiently below the estimated intrinsic value of the stock that he purchases so that the chances of making a profit are high. The study concludes that women have a more realistic sense of corporate value. They tend to keep a higher margin of safety when deciding on what to pay for a particular stock. In contrast, men may be more willing to overpay for an acquisition because of desire to win or build a corporate empire. Globally research has also shown that women don't trade as much as men. They are more patient. They tend to buy and hold for the long term. They also are naturally more risk-adverse, a characteristic of women not only when it comes to investing, but also in other aspects of life. They are also better at managing their emotions than men are. Women also tend to spend more time researching the investment ideas, seeking out more information, and take less risk. This prevents them from investing based on hot tips. Men are greater risk takers. This may be manifested in having more concentrated portfolios, less diversification, more investment in small-cap and higher volatility stocks than women. The result is that womens greater risk-averseness make them less likely to suffer big losses. The best long term investors are risk-averse because they realize that avoiding big losses is the key to building substantial wealth in the long term. Avoiding losses is probably the single most important rule in stock market investing. Think about this example: if your portfolio loses 50%, you need to earn 100% just to break even. Losses put huge catch-up pressure on your portfolio. Warren Buffet puts it as a simple rule of making money, Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.

In his letter to shareholders of Berkshire Hathaway in 1986 Warren Buffet wrote, We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful . This is a trait found more often in women than men. They tend to succumb less to peer pressure than men, which allows them to take a more level headed approach towards investments with a long term approach. Men in the company of other men tend to take more risks due to competitive drive. To sum up, it is temperament and not intellect that makes one a successful long term investor. In the words of Warren Buffet, Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing. Women seem to have more of that temperament, including patience and healthy scepticism. They also tend to take a very deliberate approach to their finances. So why does the average man suffer all of these emotional problems that get in the way of making long term investing decisions? A Colorado State University study suggests that mens overconfidence problem could have originated from their unique status in society with regards to job advancement, earnings, and power. The paper also offers biological explanation: women are wired for child-rearing and elderly care and consequently are more risk-averse to ensure that those under their care are protected. In contrast, men are wired to be aggressive and take risks in order to hunt prey and attract mates. Whereas child-rearing requires a long-term perspective, hunting and mating is more here and now and requires reflexive thinking and immediate action. Whatever may be the reason for female outperformance, it is important for men to note is that nothing is cast in stone. Good investment behaviour can be learnt and practiced. Men can consciously fight against their biases in order to become better investors (i.e. invest more like women). This would be easier for the men if they partner with their spouse in investment decision making. For this investment partnership between a husband and wife to be successful in the Indian context, more women need to educate themselves about investing, especially in the stock market and mutual funds. In your role as a spouse, you can help that process. Once you have got her interested, she can be a great support to your familys investment decisions. A number of my friends have come to me and said, 'When my wife got involved in helping me make investment decisions for our family, the performance of our investment portfolio was better. And I was a happier person. So what is the action plan for the man of the house? I would propose the following: Get your spouse interested in financial planning and investing in stock markets. Go along with her to quality investment seminars in your town, and hand hold her initially if need be. Hire a professional advisor for the family. This would help build familiarity with nuances of investment decisions. Seek her inputs in key investment decisions. In making investment decisions work together like a team. Jointly review your investment portfolio periodically. Finally, both genders should understand that the key to our investing success is our ability to control our urge to act irrationally and consistently execute simple steps. If you get your asset allocation right, build a diversified portfolio, periodically review your portfolio to check if you are on track, and then set up automatic contributions (systematic investment plans) each month, you'll come out as a successful investor.