3 lessons for investing success from women investors
Here are 3 lessons from women investors that have resonated with me.
Investing is an endeavour that has a multitude of approaches. These approaches are coloured by past experience, backgrounds and differing goals. As investors, a healthy exercise is to step back and explore other perspectives to challenge our thinking and understand how implementing other approaches may make us better investors.
The theme for International Women’s Day this year is equity. In an industry where 12% of the people managing our investments are female, there isn’t an equitable distribution of perspectives and voices - especially those that are amplified.
Here are 3 lessons from women investors that have resonated with me.
Hetty Green, the ‘Witch of Wall Street’
Hetty Green had the unfortunate nickname of the Witch of Wall Street. She was prominent in the 19th century and was one of the most powerful investors in the world. At the time this was rare for woman. More than 150 years later little has changed.
She amassed a fortune of $100 million, which adjusted for inflation, is $2.3 billion today. She did this by herself – investing in railroad stocks and bonds, government bonds and mining stocks. She also earned a good deal from making personal loans and built a real estate empire on the side. She was notoriously frugal, and she was known for always wearing black. Her attire and unique position as a woman on Wall Street earned her the questionable nickname of the ‘Witch of Wall Street’.
Her whole career, Hetty went against the grain. She invested in the US dollar when they first came out when adoption and trust in the dollar was still low. Understanding why this is going against the grain requires a little bit of a history lesson.
The US Civil War lasted far longer and was more expensive than expected. In response the Union government issued the first currency that was not backed by gold. They were known by the moniker greenbacks which remains to this day. Many people thought this was a speculative investment as they moved based on how the Union forces were doing in the war. As it became more obvious that the Union would be victorious the dollar’s value fluctuated based on the perception of the long-term prospects for the US.
After Lee’s surrender and Lincoln’s assassination, a lot of people looked at the country and were sceptical about the prospects for the country in light of the immense challenges of reconstruction. The greenbacks plunged and hit of low of 50 cents to the gold backed dollar. Hetty Green didn’t stop buying greenbacks. A decade after the war ended the government folded all the greenbacks into regular US currency backed the by gold. This inflated their value and added significantly to Hetty’s wealth.
Hetty understood that all her other investments were already caught up in the long-term success of the US. A greenback whose value was based on the prospects for the nation was not any different. Her success was based her ability to go against the grain, sticking to her convictions, and understanding what she was investing in and why. As investors, this is key to achieving our long-term goals. One of the ways that we’re able to do this is by creating an Investment Policy Statement (IPS) that outlines what we are trying to achieve, and why. When opportunities arise that match our criteria, we are more likely to jump on it even if it is not favoured by the majority at that point in time.
Kat Cole, CEO and President of Focus Brands
Although not an investor, Kat is an experienced business leader who previously was the President of Cinnabon. If you’re unfamiliar with Cinnabon, they sell cinnamon buns that contain a dizzying amount of sugar in malls and airports in the US. If that sounds like your kind of snack you will be pleased to know they have recently opened stores in Australia as well.
One of the business lessons that Kat speaks about is goal setting. She believes this was a critical component to her ability to manage risk. To figure out the least risky approach to achieve your goal it is necessary to understand the destination you want to reach. Here management philosophy was especially useful when she took over Cinnabon. Cinnabon, despite ballooning obesity in the US had six years of net sales decline. Part of this was due to the GFC – people were staying out of all the places that there were Cinnabons – airports and malls and cutting their discretionary spending.
At the same time many Americans were focused on eating healthier. Many feared that these twin predicaments would be too much for a purveyor of unhealthy indulgences. Kat’s goal as the President was to increase sales for Cinnabon.
As Kat started speaking to people working at Cinnabon, she realised that they had lost focus of this goal. They had lost focus because they were focused on creating a healthy, low-calorie alternative to the extremely indulgent dessert.
Immediately, she was able to point to the underlying issue with the company’s approach. All of these low-calorie snack options were high volume snacks that you would eat every day - but Cinnabons were a treat. It was also obvious that creating a low-calorie option that doesn’t taste as good and doesn’t provide the same satisfaction isn’t going to increase sales because it won’t resonate with consumers.’
Kat’s solution for this was to make the buns smaller. If people wanted to order more, there was nothing stopping them. People could also just have a smaller portion with less calories, and the same decadent taste that they loved. There was uproar from the franchisees with this decision. They believed that consumers would be angry at the reduction in value. Kat’s focus on the goal paid off. Revenue for Cinnabon doubled within a few years and it became a billion-dollar brand.
As investors, having your goal at the centre of everything that you do will ensure that you are laser focused on your outcome instead of meandering through investing. To get started with defining your goals, listen to our Investing Compass episode on Constructing an Investment Portfolio.
Annika Bradley, Director of Manager Research, Australia
Annika runs our Manager Research team at Morningstar. The team is responsible for producing our Fund, ETF and LIC research here in Australia. She spoke at our Individual Investor conference back in October and discussed the pitfalls of mental accounting.
Her discussion was eye opening as this is something that I do and that I know a lot of my female friends do as well. Mental accounting is the tendency to separate money into accounts or buckets based on their purpose. For example, an education account, a house savings account, a travel account. There is a human bias to take this approach of allocating resources to each outcome.
Although this allows us to tie up our accounts with neat little bows, it means that we’re not looking at our risk capacity. That is the risk we need to take to achieve our goals. Mental accounting and segmenting our money to accumulate it against different goals can be a distraction from looking at time horizons or appropriate asset allocations.
Annika spoke about research from Richard Thaler, a Nobel Prize winning economist. He said that the reason that we do this mental accounting is to aid ourselves and to make sure that there’s not just some big unaccounted for pile of money. What this also does, however, is it aids another human bias which is for risk aversion. This means that we end up having more conservative portfolios than we need to achieve our goals.