• October 2011

A Must-Read: Warren Buffett Invests Like a Girl—And Why You Should, Too

By Hope Katz Gibbs,
Publisher
Be Inkandescent Magazine

Warren Buffett Invests Like a Girl author LouAnn Lofton knows the value of investing wisely.

Her portfolio started to grow at age 15, shortly after the death of her father, a pharmacist, who set aside funds for LouAnn and her two siblings.

“Because my father died, it meant that I would inherit some money upon my 21st birthday,” the Mississippi native told Be Inkandescent Magazine from her home in New Orleans. “And because of that, I decided, about a year out of high school, to learn about investing, so I didn’t squander the opportunity presented to me by that money.

“It wasn’t an overwhelming amount of money—nothing that was going to set me up for the high life anytime soon—but it was enough that I knew I didn’t want to blow it. I also knew no one would do it for me, and had I not armed myself with knowledge, I was liable to spend it instead of saving it and investing it. That would have been a disappointing outcome. And I hated the thought of disappointing my father even after his death.”

Her quest led her to study the investment strategy of Warren Buffett.

That was 1994, the year she read Andrew Kilpatrick’s classic investment guide: Of Permanent Value: The Story of Warren Buffett.

“I read his book and was mesmerized,” says Lofton, who came to meet the author years later. In fact, he offered advance praise for the back cover of her 2011 tome and called it, “A well-written, sound investment book that is a real practical guide to investors.”

“It was a real thrill to talk to Kilpatrick, and what a perfect full-circle thing to have him comment on my book,” Lofton notes, adding that another huge thrill came the day she met Buffett himself.

“Get out of the car. Just get out of the car,” she recalls saying to herself to calm her nerves on the brisk morning when she sat outside a brunch in Omaha, waiting to go in and meet the Oracle of Omaha himself. “Thinking back to my childhood in Mississippi, growing up in a tiny three-stoplight town (literally—three!), I’d have never imagined I’d one day be face-to-face with the third richest man in the world.

“But life is funny that way, and the threads that connect events often aren’t visible to us until well after the fact,” Lofton shares.

On Becoming a Motley Fool

In fact, Lofton’s path to Buffett began while she was living in Washington, DC, and interning at a think tank, when she met Tom and David Gardner, the founders of The Motley Fool.

Despite the fact that she hadn’t yet finished college, they saw her potential and hired her to work as a writer and editor at their financial advisory company. Lofton quickly rose to the position of managing editor.

Through the years, she invested her money wisely—à la Buffett’s philosophy—by keeping it simple.

“Know the companies you invest in, and like their products,” she shares. “Don’t be scared or panic and sell when things get rocky—like they are today. Don’t get greedy when things are good. Just stay the course. So long as you aren’t retiring next year, or sending your kids to college in the fall, it’ll be okay. America is a great country. Things will work out.”

The Science Behind the Girl Thing

Of course, that approach is not typical for most men, other than Buffett, realizes Lofton, who in 2001 began studying the investment patterns of women versus men.

“Brad M. Barber and Terrance Odean of the University of California published what is likely the most famous and groundbreaking study on gender differences in investing with their Feb. 2001 Quarterly Journal of Economics paper, “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment,” Lofton writes in Chapter 2, noting that the social scientists surveyed 35,000 discount brokerage accounts over six months.

“They found several distinct differences both in temperament and performance for men versus women,” Lofton explains. “Simply put, men think they know more than they do. Women are more willing to own up to the fact that they don’t know everything.”

So how does the issue of overconfidence play into investing behavior and results?

“Because of their overconfidence, it was assumed—correctly, as it turned out—that men would trade more than women do,” Lofton says. “That drags them down, running up transaction costs, which act like the proverbial albatross on what might otherwise be smart investment decisions.”

In fact, Barber and Odean found that men traded stocks (aka: securities) 45 percent more than women did.

“This flip-flopping of securities reduced their net returns by 2.65 percentage points, compared to the 1.72 percentage points women dinged their accounts by trading,” she adds, noting that single men were the worst offenders, trading 67 percent more than single women. Married men also fared worse than married women—but were not as bad off as the single guys.

Lofton believes the most interesting finding in the study was this: “Women’s out-performance [over men] wasn’t related to better stock picking or to market timing. The key is that women’s trading tendencies hurt their performance less than men’s, thanks to men’s greater overconfidence. The difference, then, is more related to temperament than it is to skill.”

How can more men, and women, invest wisely?

As Lofton explains in Chapter 16 of her book, it’s not that complicated. Simply chill out, manage your ego and temper, tame aggressive tendencies, and keep your overconfidence in check.

Here are seven tips from Lofton to keep in mind:

1. Trade less often than men do. Remember, you are buying a piece of an actual business when you buy their stock. Take a long view, and be patient.

2. Exhibit less overconfidence. Know what you don’t know, and think about and learn what is your circle of competence. Then stick to it, no matter what.

3. Shun risk. Men, on the whole, don’t tend to insist on an appropriate margin of safety. To avoid debt as much as possible, do your homework—especially when investing in overseas stocks and markets.

4. Be realistic. It’s critical to be levelheaded about your investments, and the market at large. Learn not to be excited by market swings to the upside, or devastated by market drops.

5. Put in more time and effort researching possible investments. Consider every angle and detail, as well as alternate points of view. To avoid confirmation bias, seek out information that contradicts your conclusions, not just information that reinforces what you think you know.

6. Be immune to peer pressure. Be willing to be a contrarian, as uncomfortable as it may be. And take Buffett’s advice, “Be greedy when others are fearful, and fearful when others are greedy.”

7. Learn from mistakes. We all make them. Don’t beat yourself up when you slip up. Rather, think about what you can reasonably do differently in the future.

Add to those tips these three Buffett-centric principles:

  • Value and cultivate your relationships. A business is only as strong as the people running it. Read up on the management of companies you are considering investing in, and look for smart, open, loyal, fair executives you admire. Don’t be afraid to put people before profit; Buffett isn’t.
  • Learn from the masters, but be willing to question them.
  • Be fair and operate in an ethical manner. You can be good and be rich; one doesn’t preclude the other.

Now that you are thinking like Buffett, go forth and invest. But keep these key ideas in mind:

  • When you buy a stock, you are buying a business. Don’t forget that.
  • Buy what you know.
  • Long-term buy-to-hold is the way to go.
  • Compound interest is a miraculous thing.
  • Save to grow.
  • Get your assets allocated.
  • Diversify.

What is Lofton buying these days?

“I have to admit that I have been so busy promoting the book that I haven’t had the time to do my homework,” she shares. “But I was particularly intrigued in late September when I saw that Warren Buffett was bullish on Berkshire Hathaway.

In fact, The Motley Fool’s writer Morgan Housel wrote about the Buffett’s big buy in the Sept. 26 edition of Fool.com, explaining: “It’s a common irony that most share repurchases come at the worst possible time. Buybacks peak when shares are expensive and dry up when they’re cheap. What’s meant as a way to create shareholder wealth habitually destroys it. Berkshire Hathaway is a different story. Warren Buffett’s company hasn’t repurchased a dollar of stock over the years until now, when shares are effectively the cheapest they’ve ever been.”

That’s why, he says, Berkshire’s board of directors authorized a share-repurchase program of an unspecified amount, so long as the buybacks don’t bring the company’s cash hoard below $20 billion.

“Why is simple,” adds Housel, who quotes a statement from the company: “In the opinion of our board and management, the underlying businesses of Berkshire are worth considerably more than” the current price.” [Read more here: www.fool.com.]

Want to learn more from Lofton? You bet you do! Click here to buy her book.

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