We're celebrating the winning ways of female investors with a series of articles about what makes the fairer sex better at picking stocks. Find out why everyone needs more Girl Power in their portfolio.
A lot of investors try to imitate their idols in the hopes of becoming just like them. Not Lisa Rapuano. She made her stance on hero-worship clear when she stepped up to the podium at a Value Investing Congress conference and told a room full of Warren Buffett devotees, "I'm not Warren Buffett, and neither are you."
No, Rapuano doesn't try to be her heroes; she learns from them.
It's out of respect for their accomplishments -- their well-earned track records -- that she has no interest in becoming "the next so-and-so." As she explained to LouAnn Lofton in Warren Buffett Invests Like a Girl, "I don't try to be these guys. I don't take everything they say as gospel, because it's what suits them and that's why they're good -- they found what they're good at."
Rapuano, the founder of Lane Five Capital Management in Towson, Maryland, knows herself well enough -- her strengths and her flaws -- to not try to be anyone but herself. That said, she certainly has the pedigree to be an investing All Star in her own right. She spent more than a decade working with value investing titan Bill Miller at Legg Mason Capital Management before founding her own firm.
There's another thing that gives Rapuano a leg up on the competition in the investing world: Being born a Lisa and not a Lenny.
It's good to be born a girl -- or at least act like one
To say that Rapuano was born with an innate ability to be a great investor is an over-statement. However, as Lofton learned while researching gender differences in investing, certain "feminine" traits are linked to the ability to achieve higher-than-average investing returns.
For example, compared to male investors, female investors tend to take fewer risks, trade less frequently, do more homework, and are less influenced by peer pressure, soaring stock prices, crashing markets, and whether or not their alma mater won their bracket. (I made up that last one, but the rest of it has been researched and reported in Lou's book. Check out the first chapter for free!)
No one's calling anyone a girly man here, but it turns out that the Oracle of Omaha happens to exhibit strong feminine leanings in all of these areas. I don't see a lot of Buffett shareholders questioning his manliness. In fact, they might want to urge him to femme-it-up even more based on the results of a study by Hedge Fund Research that tracked the annualized performance of female-managed hedge funds from 2000 to 2009. During that time, the funds managed by the ladies returned, since inception, an average 9.06% annually, walloping the 5.82% annual average weighted index of other funds. High five, ladies!
Why women's intuition rules
What is it about the female mindset that leads to such superior investment returns? Rapuano makes a good case study for why women investors kick butt. When asked what traits helped her build Lane Five's record, she mentions three.
- She's good at ignoring the "noise." Rapuano has a knack for keeping focused on the long term and also staying aware of the wider story and how it can affect her investing thesis. "There are a lot of successful investors of all stripes, but my particular strength and my particular adoption of long-term value is because there are kinds of things where I can see a different future than other people see," she says. Investors have to be adaptive and open-minded, but strong enough to not change their stripes or chase the latest trend, she says. "It's a really fine line, a really difficult line to walk."
- Another strength that works in her favor is her ability to do nothing. "I just don't feel the need to 'do something,'" she says. In fact, she will sometimes go months without making a single trade.
Men, it turns out, are biologically wired to act -- to do something. We learned in high school that higher levels of testosterone fuel riskier behavior. More recent research on testosterone and cortisol levels in London traders from John M. Coates of the University of Cambridge found that higher levels of testosterone lead to more high-frequency trading. And, sorry gents, all that trading is bad for your bottom line. A six-year survey of 35,000 discount brokerage accounts found that men made 45% more stock trades than women, which reduced their net returns by 2.65 percentage points per year, as opposed to 1.72 percentage points for women.
- Lastly, Rapuano doesn't care what others think. "Once I figure something out and I put something together and I have a lot of confidence, I can ignore what everyone else has to say," she says. "I don't ignore evidence -- but I can ignore the noise and the opinions of people and continue to build my confidence," she says.
Having confidence doesn't mean she's immune to over-confidence. She cites an investment in the Renault stub right before car company stocks got crushed in 2008. It wasn't that she failed to foresee the economic collapse that riles her; it's that when people started showering her with positive feedback about the investment, she listened and let the praise cloud her thinking. "Biggest lesson is that external reinforcement of the idea doesn't make it better."
Keeping a cool head and a calm trading finger are not the only traits Rapuano shares with Warren Buffett. Both have an insatiable curiosity about the world and the way things work, and an unflagging appetite to learn.
The 4 Cs on every gal's mind: Cool, calm, curious, and contrarian
One of Lane Five Capital Management's core values is "Learn and read widely." She says: "... a curious person is more likely to uncover the piece of information that will be the evidence you need to have higher confidence than the next guy that is not curious enough to be resourceful."
It turns out that this penchant for research -- to seek and study gobs of information about potential investments -- is yet another common habit of female investors. It is this pursuit of knowledge that helps women (and Warren) steer clear of two return-wrecking activities: Acting on hot stock tips and trading on a whim.
Dissecting a company, event, theory, or other aspect of a topic is only half of Rapuano's exercise in learning. Even after she has figured out how something is put together, she asks, "How else can I think about that?" "What else could I research to figure out if this is right or not?"
Although Rapuano spends time poring over the work of the industry's usual suspects (Buffett, Graham, Klarman, et al.), the most valuable lessons she says come from studying out-of-favor-investors. What she learns from them -- how they react in times of adversity -- has made her a better investor, she says.
She looks for what she has in common with them and what she does not, and then asks herself: Why not do it that way?
That's a line of questioning all investors -- regardless of gender -- should pursue: "What else should I research to gain insight into this?" "Am I taking the right approach to this challenge?" "Have I looked for enough evidence to refute my hypothesis?" In other words, be woman enough to challenge the way you invest.
Get in touch with your feminine investor side
What is it that makes Warren Buffett such a consistently phenomenal investor? He's patient. He's thorough. He shuns risk. He shies away from things he doesn't understand. In other words, Warren Buffett invests like a girl. If you want to improve your portfolio's returns, you should, too. Learn how in our new book, Warren Buffett Invests Like a Girl. We'll send you the first chapter, gratis!