Are value investors the product of their environments, or are they genetically predisposed to go against the crowd? A new study says it’s a little of both.
The study, highlighted by The Wall Street Journal’s Jason Zweig in his Intelligent Investor column, was performed by economists Henrik Cronqvist and Frank Yu of China Europe International Business School in Shanghai and Stephan Siegel of the University of Washington, and examined the genetics and investment portfolios of 35,000 twins in Sweden (where until recently tax law required individual investors to disclose their holdings).
“Identical twins share 100% of their DNA, while fraternal twins share about the same amount as brothers and sisters,” writes Zweig. “The researchers compared the similarity of the portfolios held by identical twins and by fraternal twins. That enabled the economists to estimate the extent to which the same combinations of genes were associated with similar portfolios.”
The results: The study indicated that “up to 24% of the differences in the degree to which investors favor value or growth stocks can be explained by variations in their genetic code,” Zweig says. But “environmental influences also help explain the ’tilt’ toward value or growth investing, the researchers found. For example, if the economy was in a severe recession when an investor was between the ages of 18 and 25, or the investor’s parents were relatively poor, he is more likely to prefer investing in cheap stocks.”
Zweig says the backgrounds of some legendary value investors, like John Templeton and Benjamin Graham, appear to have had big influences on their value tilt. He also says investors should ask advisers and investment managers about their own backgrounds, and what sorts of adversity they’ve lived through. “After all, a financial adviser or investment manager who has never overcome a serious obstacle might not have what it takes to hold on to cheap stocks when they get a lot cheaper in a hurry,” he says. “A value investor who can’t withstand pain isn’t a value investor at all.”
Validea’s Benjamin Graham-inspired portfolio is up 365% since its mid-2003 inception vs. 84% for the S&P 500. Check out its holdings here.