A sham battle of the sexes when it comes to investing

published 9 February 2018

882_MW_P10_Strategy — Mrs Watanabe had other ideas about gender roles

If women make better investors, it's only down to adopting twosimple rules that everyone could benefit from.

"Women are better investors than men." It's a headline you see trotted out every so often and the latest research to back it up comes from broker Hargreaves Lansdown (HL). According to The Sunday Times, HL's female clients saw their portfolios beat those of men by 0.48% a year in the three years from 2015. It may not seem like much, but if they did it consistently it would deliver an extra 14% over 30 years.

What's the secret? Women, it seems, prefer to play it safe, and don't tend to do rash things with their money. They "don't want to take on too much risk", notes Sarah Coles of HL. They prefer "buy and hold", adds Maike Currie of Fidelity, and, reports Boring Money, they lack confidence about investing.

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That's all very well. The problem is that, while advocates of these sorts of studies are usually trying to make a case for women becoming more engaged in investing, it all smacks of discredited, patronising, "Men are from Mars, Women are from Venus" popular psychobabble on a par with claiming that women can't read maps and men are permanently emotionally constipated.

To disprove the notion that women are inherently risk averse, you need only glance at the rise of "Mrs Watanabe" in Japan in the 2000s. This was the nickname given to the phenomenon of Japanese women turning to online currency trading and overseas investing in their efforts to earn a return in a zero-interest-rate world. The example shows that women are more than capable of becoming rather too fond of the dopamine hits to be gained from making leveraged spread bets on the FX markets when they get the chance. Several female traders ("clickety clickers") became famous and wealthy, notes Satyajit Das in Extreme Money, and in 2007 one telecoms chief executive even argued that it damaged Japan's moral fibre. "The sight of housewives trading stocks on personal computers undermines the education of children. Making money without sweating for it undermines the work ethic."

Rather than make generalisations about gender, a more useful question might be: what traits do the female investors in this sample display that help them to beat the men? It's two main things: they trade half as often (so their costs are lower) and they don't take ill-researched punts on individual stocks they are more likely than men to own funds rather than individual shares, and they are also a lot less likely to own Aim stocks.

In other words, don't mess around with your portfolio compulsively, and don't gamble. Stick to those two rules, and you may become a better investor even if you are a man.

I wish I knew what operational leverage was, but I'm too embarrassed to ask

Operational leverage (or gearing) describes the relationship between a firm's fixed costs (costs it has to pay regardless of how much business it does) and variable costs (those that rise and fall with the level of turnover). The higher a company's fixed costs are as a proportion of total costs, the higher its operational leverage. High leverage makes a firm's profits more sensitive to a change in sales. Banks, airlines and hotels all have high operating leverage, because they have high fixed costs (in the form of property and staff, mainly). An aeroplane still requires a full complement of staff to get from A to B, regardless of how many seats are filled.

Here's an example of how operating leverage can affect a company's earnings. Say a firm makes sales of £1,000 in a given period. It has fixed costs of £800 and variable costs of 10% of sales (£100). So the profit is £100 (£1,000-£800-£100). If sales rise by 10% to £1,100, the profit rises to £190 (£1,100-£800-£110). That's a 90% jump for a 10% rise in sales.

Not bad. However, the effect slams into reverse should sales drop. That's why firms with high operational gearing have to take drastic cost-cutting action when and if sales start falling.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.