The most popular stocks, which are often in the media or broker limelight, are often overpriced and may plunge.
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 that the most popular stocks are can’t-miss investments, and that it’s safe to buy and forget them. That’s exactly the wrong thing to do with these popular stocks. Our investment advice is that your in-the-limelight holdings are the ones you need to watch most closely.
Why Friends and Family Recommend Us
Many of our wealth management clients are referred to us by our existing clients. In 2016 alone, 45% of our new clients were recommended by someone who already has their investments with us. One very good reason: The portfolios we have managed for our clients over the past 15 years have returned an uncommonly high average of 9.01% net per annum, compounded—after fees are deducted.
The most popular stocks in the limelight should be downplayed
When investor expectations are high, it pays to be skeptical and wary. That’s why we advise downplaying popular stocks that are in the broker/media limelight.
When popular stocks fail to live up to investor expectations, as they inevitably do from time to time, their stock prices can plunge.
Sometimes, however, the best stocks you can find are those that are just entering the limelight, and that are likely to spend a long time there due to great performance. So it pays to look on investor expectations as a valuable tool. But they are just one tool of many that you need to consider when you make investment decisions.
The same idea works in reverse. Sometimes, low expectations become common when a stock runs into internal or industry turmoil. Great buying opportunities can appear when investor expectations get low enough for companies that still show signs of financial stability and long-term growth possibilities.
“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 successful investors 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.
For example, one time the news media reported that a well-known hedge fund operator had favourable things to say about the outlook for gold, a subject on which he had previously said little. This set off a flurry of reporting: on the price of gold, past gold production, gold’s monetary history, the hedge fund operator’s trading history, his past triumphs and failures, and so on. Some journalists felt his newfound enthusiasm could mark a turning point for the metal.
In contrast, most successful investors ignored all this. They know that nobody gets it right every time when making investment predictions, least of all with a fungible commodity such as gold.
Finding the most popular stocks with our three-part Successful Investor approach
We recommend sticking to our three-part Successful Investor approach. In addition to its bottom-up focus, it calls for diversification by economic sector, and advises downplaying or avoiding stocks in the broker/media limelight.
If you diversify as we advise, you improve your chances of making money over long periods, no matter what happens in the market.
As part of their portfolio diversification strategy, most investors should have investments in most, if not all, of the five sectors. The proper proportions for you depend on your temperament and circumstances.
More aggressive investors might want to increase their portfolio weightings in Resources or Manufacturing stocks. For example, more aggressive investors could consider holding as much as, say, 25% to 30% of their portfolios in Resources.
Has investing in the most popular stocks of the time been beneficial or harmful to your portfolio? Share your experience with us in the comments.
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The Successful Investor Inc. and its affiliate Successful Investor Wealth Management (referred to hereafter as TSI Network) know that you care how information about you is used and shared, and we appreciate your trust that we will do so carefully and sensibly. This notice describes our privacy policy. By visiting websites owned by or associated with TSI Network, you are accepting the practices described in this Privacy Policy.
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What personal information do we collect?
The information we receive from customers helps us personalize and continually improve your online experience at TSI Network. TSI Network may collect personal information online for all legal purposes, which include, but are not limited to:
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Does TSI Network Use the Information It Receives?
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Changes to this Policy
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TSI Network may revise this Policy from time to time.
Legal Notices and Disclaimers
The contents of this web site and our publications are based upon sources of information believed to be reliable, but no warranty or representation, expressed or implied, is given as to their accuracy or completeness. Any opinion reflects the Successful Investor’s judgment at the date of publication and neither the Successful Investor, nor any of its affiliated companies, nor any of their officers, directors or employees, accepts any responsibility in respect of the information or recommendations contained in the publications or on this web site. Moreover, the information or recommendations are subject to change without notice.
Information presented on this web site or contained in our publications is not an offer, nor a solicitation, to buy or sell any securities referred to on the web site or in the publications. The material is general information intended for recipients who understand the risks associated with an investment in any securities referred to in the publications or on this web site. The Successful Investor has made no determination regarding whether an investment, course of action, or associated risks are suitable for the recipient.
