Warren Buffett and Carl Icahn might have spent years honing their skills, but new research argues that your genes play a significant part in determining the type of investor you become.
Up to 25 percent of investment decisions are down to genetics, according to economists Henrik Cronqvist and Frank Yuy from China Europe International Business School (CEIBS), and Stephan Siegel from the University of Washington.
They conducted a study of 35,000 identical and non-identical twins in Sweden to look at what determines an individual’s “investment style” – whether they are value or growth investors. Identical twins, which are genetically identical, were used to find out if any difference in investment style would be due to environmental factors, while the non-identical twins were used as a control.
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“What we found is that it is nature and nurture – it’s both your genes and your environment that affect how you invest,” Cronqvist told CNBC on Friday.
With regards to nature, the economists argue that investing style has a biological basis, with a preference for value versus growth stocks partially ingrained from birth.
‘Warren Buffett gene’
“There is such a thing as the ‘value gene’ – or the Warren Buffett gene – but this a bit of an oversimplification,” Cronqvist said. “It’s probably not one gene, it’s probably a complex set of different genes that are involved.”
The economists looked at the differences in the investment portfolios of the twins – both identical and non-identical – in an attempt to devise what percentage of investment decisions are affected by an individual’s genetic makeup.
Some 18 percent of variations in investment styles were down to genetics if price-earnings ratios were used as a measure, according to the economists. This rises to 25 percent if Morningstar’s Value-Growth Score (which enables investors to choose a fund with their preferred style) is used as an investment style measure.
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Adrian Lowcock, senior investment manager at Hargreaves Lansdown, said he was not surprised by the findings.
“Everyone’s DNA forms the framework from which they can develop, and investors certainly have different categories of risk – some people are naturally risk-takers and others are much more cautious,” he told CNBC.
“Compared to the average person I think I am more willing to take certain risks – although I couldn’t say how much of that is down to my DNA.”
Next generation of cautious investors?
When it comes to nurture, the study found that an investor’s style is also affected by their experiences, both earlier and later in life.
“Those investors that have had tougher upbringings, that were poorer – for example, Great Depression babies – are more likely to develop a value-orientated investment style later on in life,” Cronqvist added.
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As such, today’s budding investors in Europe, for example – whose “impressionable years” have been spent in the midst of an economic downturn – were most likely to have stronger preferences for value investing.
“If you get your first job in that period of time, when there’s tough economic times, then later on we find that you’re more likely to be a value-orientated investor, rather than a more glamorous, growth-orientated investor,” he said.
Investor Lowcock said this also made sense. “If you came from a background where there wasn’t money to splash around, you’re not going to be an extreme risk-taker,” he said.
“My Dad was an accountant – he was very sensible with money and he’s certainly passed that on to me.”