In gut do you trust?

Find profitable companies. Buy them. Hold them. Eventually sell them at a significant profit.

Buy low, sell high, in short. And yet, the stock market is characterized by wild swings of collective investor emotion — notably greed and fear.

A new study by CIBC Investor’s Edge offers some insight as to why investors are emotional: many trust their gut.

It found 45 per cent of respondents ages 18 to 34 admit to investing based on gut feel. That number drops to about 20 per cent among those age 55 and older, who unsurprisingly are often more risk-averse.

Ontario-based financial educator Liz Enriquez, who helped CIBC develop the poll, has picked on up these characteristics when doing presentations at schools, community centres and libraries about personal finances.

“There’s a clear distinction between what older generations grew up understanding about investing and the younger generations in the social media environment and how they invest,” says the founder of Ambitious Adulting.

The survey didn’t find investors are driven by guts alone in their quest for financial glory; apprehension is palpable, with 85 per cent calling themselves cautious investors.

Fear is another factor. Among women, 77 per cent indicate investing makes them anxious. Among gen Zs — a group with the time to use risk to their advantage — 79 per cent state investing is anxiety-inducing.

“Investing is so emotional, but your portfolio should be relatively safe, right?” Enriquez says.

That’s why a lot of people work with advisers to build them diversified portfolios — spreading out the risk and gathering as much return as possible — to reach their goals.

Yet there is something positive to be said about “the gut” when it comes to risk-taking, because when it comes to investing if you venture nothing, you are likely gain very little either.

Although the survey didn’t distinguish between do-it-yourself investors, those working with an adviser or Canadians whose only risk is a guaranteed investment certificate (GIC) for a five-year term, the most gutsy investors are DIYers, Enrique says.

“I would say that’s the correlation versus someone getting their portfolio managed at a financial institution, who is more risk-averse.”

For DIYers, a bit of gut feeling is often required to overcome the initial inertia to dabble in the first place.

Enrique often discusses in workshops how a little bit of gumption is required, especially for individuals who “don’t feel smart enough or confident enough” (often women) and don’t invest as a result.

“I explain there are really easy ways (to invest) where you don’t have to sit in front of the multiple monitors, poring over charts constantly.”

Anyone seeking to DIY for the first time can look to relatively safe investments, such as all-in-one exchange-traded funds (ETFs), basically low-cost diversified portfolios of stocks and bonds that can capture investments from around the world.

They come in various allocations, such as 50 per cent stocks and 50 per cent bonds for balanced investors, and they rebalance regularly. It’s a invest-and-forget approach — and don’t underestimate the importance of forgetting, at least most of time.

Just like helicopter parenting, it isn’t making your investments safer; fretting daily about the decisions of U.S. President Donald Trump is likely to do your portfolio more harm than good.

Notably, Trump is prototype for male overconfidence and hunch decisions. So if it works for him …

Indeed, investors are rewarded for taking on more risk, Enrique says. Gut can be beneficial, but only when those instincts are backed by research.

“Compare stock picking or any investment decision to shopping,” she says. If you’re buying a sofa, you are probably going to do research. It’s the same with investing.

“Maybe your gut feeling says, ‘I want to buy a Tesla stock,’” she says. “Now stop and do some analysis.”

Verify if your gut is onto something with evidence. Otherwise, you will end up likely one of those amateur investors who help professional investors earn their keep.

Award-winning portfolio managers — like Mark Costa, director of the investments group at Brandes Investment Partners in San Diego — typically exploit gut-driven mistakes by other investors.

Yet even the pros must acknowledge the gut impact potential in their process.

“We try to control our instinct,” says Costa.

Brandes runs award-winning mutual funds available in Canada, using a value approach. That involves mispriced stocks of unloved companies that are really good enterprises.

When they find a bargain, it’s gut-check time. “We love a price that’s down a lot, which gets us excited,” Costa says.

The more the market hates a stock, the more value investors get amped up. The risk is becoming enamoured with the bargain.

“And then that’s when you get into value traps, because you’re basically driven by the emotional pursuit of something that pleases you,” Costa says, noting working in teams helps eliminate the impact of the erroneous gut instinct.

While greed — i.e. this stock will make me rich — is a big gut driver, love is a powerful investor drug, too, says Anil Tahiliani, senior portfolio manager in Calgary with Matco Financial’s award-winning Matco Opportunities Fund.

“I always say, it’s OK to fall in love with your puppy, but never fall in love with your stock.”

To that end, whenever love in the air for an investment, if Tahiliani owns it, he’s likely selling it.

“As a professional investor, I take advantage of that (exuberance) and either sell entirely or trim to take some money off the table.”

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com