Investors may find it hard to believe that the best blue stocks can be the ones that are not yet popular.
Even the best blue chip stocks (or shares of larger-capitalization companies) can stumble. That’s especially true when they’re in what we call the broker/media limelight. Investors can build up unrealistic expectations when stocks spend time in that limelight. When broker/media favourites fail to live up to those expectations, they drop much further than they would have if they had been less widely followed.
When building your portfolio, it’s crucial to downplay stocks—even blue chip stocks—that seem to be near-universally recommended by brokers and are often the subject of favourable media coverage. That’s because, in investing, familiarity can breed excessive feelings of comfort, security and performance.
After all, brokers get information from the media, investment journalists spend a lot of time talking to brokers, and company managers listen to both. A feedback loop can develop that spurs high expectations, derails criticism, and leads companies (and their investors) to make devastating mistakes. You may get the feeling these are can’t-miss investments and that it’s safe to buy and forget them. That’s exactly the wrong thing to do with them. In fact, your in-the-limelight stocks are the ones you most need to watch closely.
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Needless to say, lots of smart people work in the media and the brokerage business. Many broker/media favorites go up more-or-less steadily for years at a time. But when they come down, they take a lot of people by surprise, and they can fall much further than you ever thought possible. That’s why it’s a mistake to stuff your portfolio full of them. A high corporate profile may provide investors with a feeling of security, but it doesn’t pay them any dividends. Instead, in-the-limelight stocks trade at a premium.
Instead of familiarity, aim for investment quality and diversification in your investment decisions. At any given time, lots of prosperous, well-established companies—the best blue chip stocks included— are out of investor fashion. Some of the biggest profits you ever make will come from buying these stocks before they find their way into the limelight.
Note that the broker/media limelight works two ways when you are looking for the best blue chip stocks. When brokers and the media turn negative on an investment, they can ignore hidden value and stay negative far longer than they should. Some great bargains can materialize as a result.
A hard rule to accept—and an easy one to disregard
Many investors find our rule about staying out of stocks in the broker/media limelight hard to accept—or easy to disregard. In fact, doing the reverse seems to come natural to a lot of investors. These investors seem to scour the broker media limelight for tips on the best blue chip stocks to buy. They feel that stocks in the limelight come with a special pedigree, almost a guarantee of top performance.
Sooner or later, however, stocks in the broker/media limelight generally go through a period of drastic underperformance, if not outright collapse.
Some broker/media favourites do turn out okay. But they rarely do much better than average over long periods. More important, they usually provide a poor reward in light of the risk involved.
The problem is that investors are generally narrow-minded; they just want to make money and avoid risk. The media and brokers single out the best blue chip stocks for other reasons.
Brokers like stocks that have big plans, are actively traded and highly volatile. Volatile, actively traded stocks are attractive to traders, and heavy trading generates healthy brokerage commissions. Companies with big plans will eventually seek financing, often by selling new stock issues to the public. For brokers, new stock issues are even more profitable than heavy trading.
The media are generally more objective in their analysis of stock market news, but they do like a good story. Many journalists rely on contacts in the brokerage business for information, and that information may be tainted with broker self-interest.
The effect of the broker/media limelight is that it bloats investor expectations beyond realistic boundaries. This means the best blue chip stocks in the limelight need to report great results just to satisfy investors’ expectations. Unfortunately, a bad quarter or two can disappoint a lot of broker/media-following investors, and spur them to dump the stock. Their selling can spark a brutal plunge in the price of the stock.
To top it off, some stocks get into the broker/media limelight with nothing more than a good story. They can stay in the limelight for a lengthy period by spinning a series of plausible sounding reasons for the “delays” in their progress. But eventually their lack of substance becomes apparent.
Zeroing in on stocks in the broker/media limelight can alert you to potential opportunities. Some broker/media favourites will prosper. But you need to remember that stocks in the limelight have already been discovered—and rarely hold a lot of hidden value. To make significant profits for you, these stocks need to do better than most investors expect. That’s why we rarely recommend stocks in the limelight, and why we advise you to downplay or avoid them altogether.
Have you invested in some of the best blue chip stocks as they became more popular? How long were they profitable for you? Share your experience with us in the comments.
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