Investing in the most popular investments found in the broker/media limelight can lead to big losses—so it is best to stay clear of them

One essential part of our Successful Investor investing system is that in your stock-picking, you should downplay or avoid the most popular investments in the broker/media limelight. That’s because this limelight naturally tends to zero in on stocks that are of interest to brokers and/or the media. This heightened attention tends to spur buying of these stocks, particularly by active traders. It can balloon their prices up to risky and unjustifiable heights.

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You may still make money buying these stocks. But you face worse odds than you otherwise would—simply because the broker/media limelight has pushed up public expectations, and stock prices, beyond a reasonable level.

Be aware that the limelight on the most popular investments can spur interest in bad stock ideas

You might say the broker/media limelight lends credence to bad stock tips. It spurs investors to become too optimistic about stocks that have a good story to tell but are unable to live up to investor growth expectations. When the hype dies down, losses can be brutal.

The limelight also has an impact on the acceptance of investment ideas, but in an upside-down fashion. It legitimizes bad stock-market ideas and theories—the kind that tell a negative, fear-inspiring story. These ideas may make plausible sense, but they spur investors to become too pessimistic, rather than too optimistic. They can scare investors into dumping all their stocks just when a downturn is coming to an end. They can also spur you to sell when the market has been stalled for a lengthy period, just when it’s about to head upward.

A scare story can scare you out of the market, and it may be years before you get back in. This puts a huge dent in your lifetime investment earnings potential.

Learn how to spot a market scare so you can make smarter investment decisions

Scare stories come along every few years. Once they gain a foothold in the limelight, many investors and observers come to see them as unquestionable.

Some limelight-hyped ideas that spurred unwise investment negativity after Y2K include the “Cyclically adjusted price-to-earnings ratio” (fear that the market rise since 2009 has gone on too long and that stocks are bound to come crashing down); “Secular stagnation” (fear that the economy would never grow again after the financial crisis); “Peak Oil” (fear that the world is about to run out of oil—disregarding the oil surplus that fracking delivered to the world); plus the fear of a 1930s-style depression, due to all the drivers of trucks, taxis, buses and so on who will lose their jobs due to the coming of self-driving vehicles.

Additional “seemingly-good-reasons-not-to-buy-stocks” ideas that have since made their way into the limelight over the years include:

• The sudden expansion of deficits following the recession was sure to spark a huge revival of inflation;
• The stock market is headed for the proverbial “seven bad years”;
• The Social Security system in the U.S. is running out of money and will require huge tax increases to stay afloat;
• The stock market is much more expensive than it looks, judging by the Shiller P/E ratio (this ratio uses an average of earnings for the past 10 years, rather than the customary P/E based on the latest year’s earnings, or estimates of earnings for the coming year);

You may have heard of all these scare stories, and many others besides, without realizing the harm they can do to investors who take them too seriously.

All these ideas made (or continue to make) some kind of sense, as do the repeated buy recommendations that you get about stocks that are in the limelight. But it takes more than a veneer of logic for an assumption to qualify as good advice. That’s true whether it exaggerates the appeal of a single stock, or exaggerates the risk of a broad market downturn.

The important thing is to understand the concept, because you’ll see it at work again and again.

Use our three-part Successful Investor approach to pick stocks that look beyond the most popular investments and will lead to superior portfolio gains

1. Hold mostly high-quality, dividend-paying stocks.
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 stay out of stocks in the broker/media limelight.

What kind of long-term success have you had from investing in a stock in the media limelight?

What do you do to remind yourself that the most popular investments aren’t always the best investments?