The more brokers and the media praise popular stocks, the higher investor expectations are raised—and the farther they have to fall.

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 that limelight focuses on a stock, it tends to push up investor expectations.

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.

That happened a decade ago to IBM and Apple (two of our long-time U.S. recommendations). You may be surprised to learn that in 2002, both were commonly written off as has-beens.

Familiarity can breed excessive feelings of comfort, security and performance.

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.

Needless to say, lots of smart people work in the public relations and brokerage businesses. That’s why it’s a mistake to stuff your portfolio full of popular stocks these people have publicized. 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.

You may get the feeling that 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 these popular stocks. Our investment advice is that your in-the-limelight holdings are the ones you need to watch most closely.

It’s true that a number of broker/media favorites may 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.

Negative sentiment toward once-popular stocks can cause investors to ignore hidden value

Going back to IBM and Apple, a lack of interest in their stocks came after the bursting of the so-called dot-com bubble, when technology stocks were out of favour. Many technology stocks that were not nearly as sound as these two firms were praised excessively in the broker-media limelight. When the crash came, many of these same people were ready to throw out all technology stocks, the good with the bad.

This simply proves that when brokers and the media turn negative on an investment, they can ignore hidden value and stay negative far longer than they should.

You have to keep in mind that investor expectations routinely range more widely than investment outcomes. This applies to stocks as much as it does to the stock market. If you buy when investor expectations are low, it tends to cut your risk, especially if you stick with well-established investments.

Instead of familiarity, our advice is that you should aim for investment quality and diversification. 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.

If you invested in popular stocks because they were in the limelight for a period of time, which ones? And what was your experience?