How to be a better investor

published 6 July 2018

903_MW_P16_Strategy — Investing: it shouldn't be too interesting

Are women really better investors than men? Another new study, this time from Warwick Business School, suggests they might be. The study put together data from nearly 3,000 investors who had stockbroking accounts with Barclays. It turns out that over a period of three years (from 2012 to 2015), women investors managed to beat the FTSE 100 by 1.94% a year, while men barely matched it (outperforming by 0.14% a year). You can spend time picking holes in methodologies or questioning the representativeness of the sample (in using data from stockbroker accounts, for example, you can really only draw conclusions about men and women who are explicitly engaged in investing, rather than the general population). But this finding isn't unusual similar bits of research come along regularly.

But rather than focus on the gender question, it's far more interesting to look at the traits that are associated with the more successful portfolios and to think about how you can put them to work yourself. There are two main factors driving the outperformance of the "female" portfolios, and neither is terribly surprising. Firstly, they trade less. Trading costs money so the more often you trade, the more your investments have to make simply to compensate you for those trading costs. So over-trading makes it harder to outperform. On top of that, the more often you trade, the more likely you are to make stupid, impulsive mistakes. No one can time the market perfectly, so when you trade frequently, you are as likely to miss out on gains as to avoid losses. In short, over-trading piles up the costs while damaging performance.

Secondly, women favour investing in what we might call "quality" stocks, as opposed to speculative ones. Investing in "lottery ticket" stocks (as Neil Stewart, professor of behavioural science at Warwick Business School, puts it) might be exciting. But it's also a much more volatile way to invest than buying sensible companies "that already have a good track record". Worse still, when some of these stocks inevitably lose money, it's psychologically very hard to let go. Rather than cut their losses, many investors are tempted instead to sell profitable stocks to "offset" the loss, rather than confront the problem and cut their losers and leave the winners to run.

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The lesson is pretty simple. Investing shouldn't be exciting. Ideally, it should be something of a chore, in the same way that changing your current-account provider, or your energy provider, is a chore. Take your time and do all of the research you need to before committing to any investment decisions. That way you'll make fewer of them, and you won't be tempted to reverse them on a whim.

I wish I knew what an auditor was, but I'm too embarrassed to ask

The law requires that an independent entity certify that a company's accounts represent a "true and fair" view of its financial condition, and that the accounts have been prepared using the relevant legislation (in the UK, that's the Companies Act). The firms that carry out this work are auditors. These are typically firms of qualified chartered accountants, who spend time at the company, talking to managers and checking records.

The auditor is looking for fraud, or large errors in either the numbers that make up the accounts, or the narrative that appears in, say, the accompanying director's report. Auditing in the UK is dominated by the "Big Four" accountants. Between them, PWC, KPMG, EY and Deloitte audit more than 95% of the UK's top 350 listed companies.

In theory, auditors are meant to be working on behalf of a firm's shareholders rather than its management after all, the shareholders are the ones who need to know that the accounts are trustworthy. However, in practice auditors are hired by executives rather than directly by shareholders, and the lack of competition in the sector has led to concerns that relationships between companies and their auditors can grow too cosy over time.

This is far from the only concern. Auditors make the majority of their money by selling unrelated services to the very companies that they audit, which suggests plenty of scope for conflicts of interest. The sector has come under even greater scrutiny in recent months after the high-profile failure of government outsourcer Carillion, which was given a clean bill of health by KPMG just before it issued a huge profit warning. This week the auditor's regulator, the Financial Reporting Council (which is under pressure to toughen up), has said it is now investigating KPMG's auditing of Conviviality, a drinks company that went bust in April, having failed to account for a hefty tax bill.

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.