How your gut is costing you money

Pay no attention to your gut instinct, says Bengt Saelensminde. All you need to be a successful investor is right there in front of you.

18 September, 2013 How your gut is costing you money Dear Buzzhairs Buzzhairs, The most successful investment I ever made was in an online gambling business. The shares flew from 7p to over four quid! During the stock's ascendency, I offered the tip to several friends and acquaintances. A few followed me in and did very well. But others talked themselves out of it: "I'm not sure... what about the ethics involved in gambling? A business involved in morally questionable activity can't be a good long term bet." And, "Isn't this area open to intense online competition?"... or "Look at the price! It's already tripled... I've clearly missed the boat!" My friends instinctively decided not to invest. Their gut told them not to do it, and then they invented sensible-sounding reasons for their decision. Gut reactions are all well and good when it comes to some things. But when it comes to investing, gut reactions can be totally counter-productive. The sub-conscious makes excuses as to why the gut instinct is right – it presents your biases as hard fact. And the point is, following your gut is usually a terrible way to invest. It can scare you away from big gains. But all you have to do is look at the cold-hard facts to quash these biases. Bank up to 42 extra income cheques a year… No matter what your age or income!   Spare a few minutes to set this up now, and you could have your first cheque in your hands within the next 30 days.   When you've seen how simple this is, you'll wonder why everyone isn't doing it.   Everything you need to get started is here.   The Dividend Letter is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares – you can lose you some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Forecasts are not a reliable indicator of future results. There is no guarantee that dividends will be paid. Customer services: 020 7633 3609. Today I want to show you a couple of examples of how this instinct has worked against many investors recently... and we'll see how you can very easily overcome these emotional barriers to successful stock picking. How to spot your biases As an investor you need to recognise that little emotional tug that 'likes' or 'hates' different assets. That's what a bias feels like! You might never be rid of these biases… but you can train yourself to spot them – and then, ignore them. In fact, all you really need to do is invest a little bit of time in analysing a few key numbers from the accounts and you'll quickly see what's really going on. Look at the turnover – is it growing? Look at margins – are they growing, or if not, are they at least stable? Look at cashflow – is the business actually bringing in the money it claims to be making in the profit and loss account? It doesn't matter if there's intense competition – not if the company is still growing and increasing margins. And as for buying a stock in the ascendancy – who cares! What we're interested in is whether the stock is trading at the right price relative to current earnings. Yesterday's price action is yesterday's story. Two unloved stocks Spreadbet operator IG index is a company that investors love to hate. Operating in what many consider to be a 'dodgy' sector, gut reactions tell them to steer well clear. But I'm a long term advocate of IG index. And figures out yesterday didn't disappoint. UK revenue was up 16% on the comparable quarter last year, with revenues per client up 28%. I predicted that volatile markets would drive revenue – and they did! In my last update on IG I also noted that that marketing spend in Europe had been running high, thereby depressing margins. So yesterday's news that European revenue was up a staggering 30% quarter-on-quarter is great news. The problem facing everyone in Britain There's something seriously wrong with the UK financial system.   The banks - and our very own British government - have colluded to stoke up the biggest credit bubble in British history.   If and when it bursts, it could blow a hole in every British investor's portfolio… including yours.   Will your wealth survive intact? Click here and judge for yourself.   The Fleet Street Letter is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600. Yesterday's release was an Interim Management Statement (IMS), so no figures on profits (hence no news on margins). But from what I can see, these increased revenue figures portend well. The shares have been performing great. But hold on for further upside. I've backed Supergroup (SGP) from the get go.  I talked about SGP from day one when it floated on the stock market. And from that day, the critics have said that this brand would be a flash in the pan. In fact, even three years ago, many were saying that the brand was already on the wane. And my response has always been the same. I don't know much about fashion. Maybe you do... and maybe you'll be proved right one day. But I do know about accounts; and to judge by the accounts, the business is going from strength to strength. The naysayers at one point made SGP the most heavily shorted share in London. That's when I suggested this was a fantastic opportunity for investors to top up. Anyone that picked up stock around £3 last year will be sitting pretty now that the stock is back up around the £12 level. Now, I'm not saying that I get every call right. I most certainly do not. I mean, just look at the Co-op bonds I mentioned... and that was supposed to be an ethical business! Hmm... maybe I should stick to vice stocks! But what I am saying is that gut reactions can be a very shoddy barometer of investment opportunity. And there's no need to trust gut instinct. Simply look at the cold hard accounting data in a dispassionate way, and you're much more likely to pick the winners and steer clear of the losers. Good investing, Bengt Saelensminde The Right Side PS: Got a comment on this article? Leave a comment on the MoneyWeek website, here. Don't miss out on other recent articles… Politicians won't let this market crash 16th September 2013 A red hot trust for the brave 13th September 2013 I need to clear the air about the Co-op 9th September 2013 A fun way into fine wine 6th September 2013 Important Information The Information in The Right Side is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. 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