Investing in the most popular stocks today will most likely hurt your long-run portfolio returns. Here’s why.
One key part of our Successful Investor approach is our “Limelight Rule”: Downplay or avoid stocks in the broker-media limelight.
This is a basic portfolio-construction principle. In pursuing their own interests, brokers and the media both tend to zero in on fast-rising stocks that have an appealing story and the potential for huge gains. But heightened attention from brokers and the media is a poor guide to investment profits from the most popular stocks today.
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Learn why the most popular stocks today in the limelight can make money….for others
The brokers want to attract short-term stock traders who spend a lot of money on brokerage commissions. They also want to build warm relationships with companies that attract short-term traders. These companies tend to have ambitious growth plans, which means they are likely to want to sell new stock offerings to investors, a source of even greater broker profit than trading.
The media want to attract readers and viewers, who can help sell advertising and subscriptions. However, this gets harder all the time, as growing online media competition drives down advertising rates and subscription sales.
This cooperative broker/media arrangement comes about naturally, as a product of human nature. There’s nothing disreputable or unscrupulous about it. Brokers and the media are business people, and both focus on what’s good for their businesses. Their interests tend to intersect in the limelight. You need to be aware, however, that their joint interests often conflict with yours.
Meanwhile, investors generally are interested in media and brokerage commentary, and some see the broker/media limelight as a great source of investment ideas.
Successful investors, individual and professional, also take note of “limelight stocks,” but they bring an extra tool to analyzing them: a healthy sense of skepticism. They continually think about how these stocks can fail to thrive, and what it will cost investors if that happens.
Brokers and the media touch on this subject as well, but more as a side issue than a focus of concern. Risk expands when the limelight exaggerates the investment potential of a company, or downplays the obstacles to its success.
You can of course make money on limelight stocks, if you get in early. But nobody can predict when “early” ends and “too late” begins. By the time a stock gains a place in the limelight, much of the easy money has already been made.
Realize that the most popular stocks today are rarely can’t-miss investments, and you can save yourself a lot of headaches—and money
You may get the feeling that these are can’t-miss investments, and that it’s safe to add them to your stock portfolio and forget them. That’s exactly the wrong thing to do with these stocks. Your “in-the-limelight” holdings are the ones you need to watch most closely.
Needless to say, lots of smart people work in the public relations and brokerage businesses. Many broker/public relations favourites 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 stock portfolio full of them. A high corporate profile may provide investors with a feeling of security, but it doesn’t typically pay off for them. Instead, in-the-limelight stocks usually trade at a premium.
Instead of familiarity, Successful Investors following our approach aim for investment quality and diversification in their stock portfolios. At any given time, lots of prosperous, well-established companies 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.
Buy stocks you can hold and watch closely, and you won’t have to worry about what are the most popular stocks today
Successful Investors over long periods of time buy and watch their stocks closely. They know not to buy and forget about them. I think you can buy and forget about good stocks for long periods of time and do quite well, but sometimes unpleasant surprises can then pop up all of a sudden.
Use our three-part Successful Investor approach to pick the best stocks on the market
Hold mostly high-quality, dividend-paying stocks.
Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
Downplay or stay out of stocks in the broker/media limelight.
The best stocks and the most popular stocks aren’t necessarily the same thing. Why do you think so few popular stocks go on to become valuable low-risk investments?
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