We're celebrating the winning ways of female investors with a series of articles about what makes the fairer sex better at picking stocks.
It was mid-October 2008. The market was spiraling out of control. Every day brought new tales of financial ruin and fresh predictions of pending disasters. The end was near. Or the end wasn't even on the radar. Either way, it was bad.
On Oct. 16, Warren Buffett attempted to calm nerves and put the chaos in perspective. In an op-ed column he wrote for The New York Times, he reiterated one of his famous investing aphorisms: "Be fearful when others are greedy, and be greedy when others are fearful."
Easier said than done.
Women who manned up when it mattered most
Money manager Candace King Weir -- a 37-year veteran investor -- recalls the mood at the time: "I don't think any of us quite knew where things were going to shake out at that point." As she told LouAnn Lofton in an interview for The Motley Fool's new book, Warren Buffett Invests Like a Girl, everyone was selling off or frozen on the sidelines in fear.
But not Candace and her daughter Amelia Weir, who run Paradigm Capital Management. "Head down, steady wins the race" became the mantra they repeated over and over again -- to their analysts and to themselves. And that's what they did.
They held on tight to companies the market was tossing against the rocks. They kept in constant touch with management teams. They asked, "Your stock is off 70%. Is there any change in your business?" If the answer was no and the underlying business was the same as it ever was, the Weirs did the prudent thing: They bought more shares of stock.
The Weirs played through the pain. And it paid off handsomely.
Show of hands: Who had the nerve to not just hold onto their investments, but to keep buying more in late 2008 through early 2009? Not me.
I sat on my cash like a mother hen. Sure, I kept my already-invested money completely invested in the market: I kept contributing to my 401(k), the bulk of which followed the S&P 500 up and down and down some more and who knows what in those two or three account statements I never quite got the nerve to open. But when it was time to get greedy -- to snap up stocks at bargain-bin prices -- I remained fearful. You?
When the market's tide began to shift in mid-2009, investors scrambled to get back in the water. Sure, there was still time to make a bit of a splash. But by the time we adjusted our swimming goggles and waded in, Paradigm was already taking a victory lap: 2009 turned out to be a very, very good year for Candace, Amelia, and their investors.
The biggest loser: boys
"It takes a certain amount of a steady hand to be successful as an investor," Candace says in Warren Buffett Invests Like a Girl.
As for surviving extreme market turbulence, experience certainly helps. Candace formed Paradigm Capital Management, which serves high-net-worth and institutional investors, in 1972. All along, the focus was on finding companies at depressed prices compared with their future earning potential.
What also helped the Weirs weather '08 and '09 were their patience, persistence, skepticism, and contrarianism -- uniquely "female" traits that serve women, and Warren Buffett, well in good times and bad, as Lofton explains in her book. (Download the first chapter for free!)
Don't discount girl power: Consider, for example, 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% -- walloping the 5.82% average weighted index of other funds.
But that's not all. During the financial panic of 2008, everyone lost money -- men and women (and probably children and pets, too). But even in bad times, the female money managers outperformed the pack, with women-managed hedge funds losing less on the downside (9.61%) versus all the other funds (19.03%).
3 ways to be greedy when others are fearful
Another way to explain the female outperformance is with two very important words: timeline and temperament.
We've devoted an entire chapter of our Motley Fool Investing Canon to keeping calm and carrying on, or, more specifically, how to have a long-term time horizon and the wherewithal to ignore the impulses (like frequent trading and following the pack) that lead to subpar investment returns. Below, the Weirs reveal three very concrete ways they were able to overcome their fears and invest when the market was at its ugliest.
1. Don't excuse yourself from the table too early.
Even after more than three decades of investing, Candace admits that it still takes great discipline to stay focused and not be swayed by fears and factors around you: "You have to be able to take a longer view at times," she says. "And you have to keep showing up every day, so to speak ... because if you don't show up, you don't get to play the game and eventually you are just out of the game."
"You have to have a certain set courage of your own convictions, because often you can be wrong for weeks or months. It's not that you really were wrong, but you appear to be wrong," Candace says.
Amelia knows the feeling of being "wrong." She got into the business as a textile/apparel researcher at Bear Stearns when tech stocks were all the rage. "Everyone was really fired up about Internet this and Internet that and everything was selling at crazy valuations," she says. She remembers the firm's salesmen blowing right by her desk to find out if any of the analysts had the next great dot-com stock they could pitch. "The fact that you had these really interesting companies with real businesses and real balance sheets and solid cash flows didn't matter."
Of course, we all know how most of those "hot" stocks fared.
2. Stick to your knitting.
Long-term success not only requires staying in the game, it also requires sticking to your game plan. Lofton writes in Warren Buffett Invests Like a Girl that men think they know more than they do, while women are more likely to know what they don't know.
Like Buffett, Candace stays within her circle of competence. Before she formed Paradigm, Candace worked at an investment firm that did a lot of what she calls "esoteric investing" -- "things that would be 'the next great fix' for something, but would always be selling at 30 times revenues and a zillion times earnings, or no earnings."
Being on her own freed her to focus on companies that better lent themselves to her evaluation methodology (she calls herself a fundamentalist). "I always kind of believed that EBITDA multiples of free cash flow meant something, and as long as you thought you had a management team that made sense, and had a product growth story that you could understand ... those were the kind of fundamentals that allowed you to be pretty successful over time," she says, and those continue to be the fundamentals to which she adheres.
3. Stand by your man/woman.
Like Warren Buffett, the Weirs don't simply invest in companies -- when they buy shares in a business it is the same as putting their money behind the company's management team.
With more than 70 companies in their portfolio, Candace says it's simply not practical to be an expert on every product and every company. "You have to do a little bit of delegation," she says. "You have to think that you have a management team that can understand where they should be in the marketplace and what products are going to drive their business."
After they identify a promising investment idea, a purchase isn't greenlighted until the Weirs put management through the paces. They ask a detailed set of questions ("I feel like I am a trial lawyer," Candace says) and listen for well-articulated answers, no hemming and hawing. "There are enough smart managements out there -- enough good businesses -- that I would not invest in a company that says, 'You can read it when we release our 10-Q.'"
Assessing management is just as important for individual investors. While we don't have the same access to company top brass as investors managing millions, we can listen to the conference calls.
Amelia recommends listening to the audio replay over simply reading the transcript. The nuances of speech are very telling, she says. For example, are their explanations vague or suitably detailed? Is their tone during the question/answer period with analysts defensive or helpful? It's not an exact science, Amelia says, "but it lends additional information if you are willing to go through that effort."
More ways women rule -- and what you can learn from them
- Value investing all-star Lisa Rapuano -- former analyst with Bill Miller at Legg Mason and now manager of her own firm, Lane Five Capital Management -- explains the four Cs of market-beating investing in "You, Sir, Are No Buffett."
- As the great-niece of global investing legend Sir John Templeton, stock picking is in Lauren Templeton's genes. She reveals four ways that gurus think before they invest in "Lessons From an Investing Guru's Niece."
- For even more about what's behind women's winning ways, download the first chapter of Warren Buffett Invests Like a Girl for free!