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Is Risky Investing in your Genes?

Volume 2, 2014

When picking stocks are you more like Warren Buffet or Donald Trump? Research by CEIBS Professor of Finance Henrik Cronqvist, CEIBS Assistant Professor of Finance Frank Yu Fang, and Stephan Siegel of University of Washington Michael G Foster School of Business provides some answers.

Read on for excerpts from a video interview with Prof Cronqvist.

What does your research tell us about how we invest our money?

For our research we basically looked at investment style. Some investors are more value-oriented, some are more growth-oriented in terms of their style. We looked at why this is the case and we found two different determinants. Number one: genes, your genetic makeup – what you are born with – will determine, to some extent, if you prefer value versus growth.  Secondly, the life experiences that you’ve had. So, if you had tougher times that you’ve gone through throughout your life, you are much more likely to become a value investor.

Does the environment also play a role in determining investment style?

Genes are an important determinant of value versus growth investment style but they’re not the only factor. So we decided to look at a couple of other factors as well. Here we were inspired by famous value investor Benjamin Graham. Some would refer him as the “father of value investing”. Benjamin Graham grew up quite poor. His father passed away when he was very young and his mother lost the family savings in the panic of 1907.

CEIBS Knowledge, Volume 2, 2014

Benjamin Graham was tasked, among his siblings, to go to different grocery stores in New York City and look for bargains. So he was a bargain hunter when he was a little kid. This strikes me as very interesting because when I think about famous value investors, I think about them as bargain hunters. Think about Warren Buffett in the financial crisis buying Goldman Sachs at a bargain price. This was sort of one source of inspiration for the factors that we analysed. We looked at different life experiences that people have and then we link that to their investment style. What we found were a couple of different things. Those that grew up during the great depression had a stronger tendency to become value investors, sort of bargain hunters. We found that those that entered the job market for the very first time, who got their very first job in sort of an economic downturn, those were also more likely to become value investors. And then the last thing that we looked at is if you grow up poor, like Benjamin Graham did. We found that those in our dataset who grew up poor, they were also much more likely to become value investors. It’s not only about the genes but there are also these different life experiences that you have, they also explain, ultimately, what style you would pursue.

What are the practical implications of your findings?

There are many different implications from our research, so let me focus on just one. There are many, many value funds out there. We counted these and found about 2,050 different value funds with the word “value” in their names. And there are even more growth funds; we found about 3,200. If you are running one of these funds, what can you learn from our research? What we know from our research is that some people are more attracted to value versus growth. So, who are the people who are more attracted to value? It would be those that had tougher times when they grew up, they entered the job market at a difficult time, and they were sort of shaped by these defining years in their lives. If you can identify those people, then you can find some of your potential clients that can be more attracted to value funds.

For the complete video see the Faculty Research section on CEIBS iTunes U or YouTube sites