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Which of the following are you more likely to invest in:
- Tesla, whose stock is up nearly 800% over the past year?
- The airline industry, which has lost nearly 30% in the same span?
Your answer may depend on your gender.
A new academic study has found that male investors are more inclined to pursue momentum strategies, while female investors tend to be more contrarian. The study was conducted by Charles Jones of Columbia Business School, Donghui Shi of the Shanghai Stock Exchange, and Xiaoyan Zhang and Xinran Zhang of Tsinghua University.
The authors reached this conclusion upon being given access to a “comprehensive, account-level database from the Shanghai Stock Exchange with all trading and holdings over the period from 2016 to 2019.”
By “momentum,” the researchers have in mind strategies that buy winners and sell losers. In other words, momentum investors buy stocks that have performed well in the recent past — like Tesla TSLA, -7.82% — in hopes that their good fortune will continue.
A greater percentage of men than women pursue such strategies. One is John Murphy, managing director at Bank of America Merrill Lynch. Upon raising the bank’s price target for Tesla earlier this week to $900, Murphy and his team of analysts wrote: “The higher the upward spiral of [Tesla’s] stock goes, the cheaper capital becomes to fund growth, which is then rewarded by investors with a higher stock price.”
This is the classic momentum rationale. In effect, we’re being told that Tesla’s stock will continue to go up because it has gone up.
An even more blatant example of momentum-based thinking appeared in the lead story on MarketWatch on Monday: “He began buying Tesla at $7.50, and now he’s retiring at age 39 with $12 million. He refuses to sell a single share.”
Contrarian investors take just the opposite approach from momentum: They buy stocks that are out of favor, in hopes that their luck will soon turn for the better. A greater percentage of women than men pursue these strategies.
One is Helane Becker, managing director at Cowen Inc., who last week turned more bullish on the airline industry. She conceded, however, that to do so right now involves taking a “leap of faith.”
To be sure, my mentions are just anecdotes that happen to be consistent with what the researchers found upon analyzing the behavior millions of Chinese investors. I do find it interesting, however, that they all appeared on MarketWatch as I was writing this column.
Might cultural differences between China and the U.S. make this research less relevant to U.S. investors? While possible, Professor Jones in an email noted that his study’s findings were largely consistent with those reached by studies of U.S. investors.
One such study appeared in the Quarterly Journal of Economics over 20 years ago: “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment,” by Terrence Odean of the University of California, Berkeley, and Brad Barber of the University of California, Davis.
The primary finding of that study was that men are far more confident in their trading abilities than women and trade much more frequently — and lose more money as a result.
I reached out to Professor Odean to inquire what might account for this new study’s finding that men are more momentum-focused and women are more contrarian. In an interview he said he could only speculate, since he hasn’t analyzed the data, and he mentioned a number of possible explanations.
His hunch, however, is that the difference boils down to men being more aggressive than women in chasing performance. Also relevant are a number of psychological studies that have found that men have higher levels of “fear of missing out” than women.
This could explain their return-chasing behavior. As Jeremy Grantham, co-founder of the investment firm GMO, recently argued in a letter to clients: “When price rises are very rapid … impatience is followed by anxiety and envy … [T] here is nothing more supremely irritating than watching your neighbors get rich.”
Which are better — momentum or contrarian strategies?
Regardless of the correlations between gender and trading behavior, which is the better approach? My reading of the academic literature is that it’s a toss-up.
The historical data suggest that momentum has come out ahead over the long term, but that’s before transaction costs. That’s a crucial detail, since momentum strategies entail much more frequent trading than contrarian strategies.
For example, Odean and Barber, in their Quarterly Journal of Economics study, found that men on average trade 45% more than women, and earn annual risk-adjusted returns that are 1.4% less than those earned by women.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
