Don’t trust those younger siblings

#IronyOn

I am an only child, which means I am responsible, persistent, and more emotionally stable than those rug rats born as the second or third in line. If you want proof that firstborn children are more responsible and better leaders, just look at King Charles vs. Prince Andrew or William vs. Harry. Or alternatively, read this study on the personality traits of siblings that shows that first-born siblings tend to be – how shall I put it – better.

What happens to younger siblings is that they have to actively compete with their older siblings for scarce resources. From parental attention to money and time, younger siblings are constantly at a disadvantage compared to their older brothers and sisters. To overcome this, many younger siblings develop strategies that can be described as “sensation-seeking”. They take on more risks in the form of more dangerous hobbies or socially risky behaviour like taking drugs. Similarly, they often try to outdo their older siblings in sports, music, etc.

This learned behaviour unfortunately also leads to riskier behaviour when they are managing money, which is fine as long as they manage their own money, but when they become fund managers and start to manage other people’s money, you better make a beeline around them.

Vikas Agarwal and his colleagues managed to identify the birth order of fund managers of US mutual funds and then linked that to the investment performance of these fund managers. It turns out that younger siblings made all the usual mistakes associated with sensation-seeking behaviour and excessive risk-taking. They traded more and had more extreme style biases in their portfolios. If these trades paid off, they would look like stars and gather the attention of their parents or – if that wasn’t available – their investors. Unfortunately, though, this trading and style drift doesn’t pay off in most cases, which is why on average, a fund manager that is a second-born child underperforms a fund manager who is a first-born child by some 60bps per year. And by the way, since you didn’t ask, let me tell you that the effect is the same size for men and women.

In other words, those youngsters think they know how the world works, yet they have no clue. Not only do they mess up the childhood of firstborn children they also lose money for their investors. And I for one will go and ask all the fund managers of the funds I invest in how many siblings they have and how old they are. It’s my new investment strategy and I am sure I can significantly improve my performance like that.

#IronyOff