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Topic: Wealth Management

Buying from a list of popular stocks is not the best investment strategy

buying from a list of popular stocks is not the best investment strategy

Choosing investments from a list of popular stocks can lead an investor into trouble because of the broker/media limelight—where stocks can appear to be better investments than they are.

When investor expectations are high, it pays to be skeptical and wary. That’s why the Successful Investor approach is to downplay any list of popular stocks that are in the broker/media limelight.

A list of popular stocks: Why smart investors will remain wary

Invest in your Financial Future for FREE

Learn everything you need to know in '9 Secrets of Successful Wealth Management' for FREE from The Successful Investor.

Secrets of Successful Wealth Management: 9 steps to the life you've always wanted, before and after retirement.

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Our Successful Investor philosophy has three key rules: 1. Invest mainly in well-established stocks with a history of sales and earnings, if not dividends; 2. Spread your money out across most if not all of the five main economic sectors—Manufacturing & Industry, Resources & Commodities, Consumer, Finance, and Utilities; 3. Downplay or avoid stocks in the broker/media limelight.

This third rule is perhaps less well-known than the first two, but every bit as crucial. That’s because it helps to protect you from the potentially costly side effects of investing in limelight stocks.

Many good stocks are well-known, well-managed and widely followed companies. They often are “household names,” as some investors refer to them. That’s a good description of most of the stocks we analyze and recommend. However, the broker/media limelight is far more exclusive.

List of popular stocks: Is it leading you to a dangerous limelight?

Often, this limelight is where you’ll find stocks that are doing a lot of underwriting business with the brokerage industry, for acquisitions, stock and bond issues, and so on. Underwriting generates a lot of fees, and a lot of newsworthy business developments. The limelight companies just naturally spend a lot of money and focus a lot of their high-priced help on taking advantage of this media attention in order to gain a more-favourable profile.

Naturally, brokerage analysts devote a lot of time to studying and reporting on these companies. They want their investor clients to see their underwriting clients in a favourable light, particularly when they are underwriting a new stock or bond issue.

There’s nothing wrong with any of this, of course. But it has predictable side effects. Companies, employees and consultants tend to see a lot of value in the work of their customers, employers and clients. The media generally like to produce stories about business ambition and success, because everybody loves a winner. This situation tends to give investors a highly favourable impression of stocks in the broker/media limelight.

Then too, all this favourable media attention can generate excessive pride in the managers of limelight companies. This leads some of them to make enormous, devastating errors.

We’d be overstating things if we said that stocks in the broker/media limelight can do no wrong in the eyes of brokers and the media. But it would be just as misleading to say that brokers and the media take an even-handed, impartial view of the limelight stocks that make their jobs so much easier and more profitable. Instead, the limelight casts a soft, forgiving light on these companies. This spurs investor expectations to unrealistically high levels. When stocks fail to live up to those high expectations, stock price downturns can be brutal and sometimes permanent.

List of popular stocks: “Tune out the noise” to discover the truly best stocks

“Tune out the noise” to truly find the (soon-to-be) most popular stocks

You’ll often hear successful investors explain that you need to “tune out the noise” to make profitable investment decisions. This, though, is different from narrowing your view to a handful of indicators. Instead, most investors who follow our Successful Investor philosophy use what you might call “reductive” reasoning.

This is different from the “inductive” and “deductive” reasoning that plays a big role in the study of logic, and in statistical analysis.

When you employ “reductive” reasoning, you keep your eyes open for all sorts of data. But you develop a knack for spotting the near-useless data that fills most daily news reports. You can safely ignore most of it.

You could think of this low-payoff data as “mental chewing gum.” It keeps your mind busy without providing any financial payoff, just as chewing gum keeps your jaw busy without any nutritional payoff.

List of popular stocks: Instead follow this advice for better investment picks

Instead of looking for lists of popular stocks, we focus on well-known, well-managed and widely followed “household names” that happen to be out of the limelight. These stocks tend to be priced more favourably than limelight stocks. They expose you to less risk when they fail to live up to our expectations. Best of all, they generally provide high—and reasonably reliable—long-term returns.

Have you picked any investments from a list of “limelight” stocks? What kind of return did you get?

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