Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investment strategy, and shows you how you can put it into practice right away.

Tip of the week: “Smart investing limits the danger of lawsuits.”

Lawsuits are an everyday risk in business. For example, U.S. lawnmower engine maker Briggs & Stratton (symbol BGG on New York) recently paid $18.7 million U.S. to settle a lawsuit that accused the company of using misleading labels on its lawnmower engines.

Last fall, an Ontario court ordered Great-West Lifeco (symbol GWO on Toronto) to pay $456 million in a class-action lawsuit related to its 1997 takeover of London Life. The lawsuit accused Great-West of improperly using the money in London Life’s client accounts to fund the takeover. The company is now appealing the ruling.

A recent high-profile Canadian example was Maple Leaf Foods Inc. (symbol MFI on Toronto), which had to pay $25 million to settle class-action lawsuits after 21 people died of listeriosis (a form of food poisoning) after eating contaminated meat in 2008.

Shares of Briggs and Great-West were largely unaffected by their legal troubles. Maple Leaf fell sharply during the listeriosis outbreak, but it has since rebounded.

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Investment advice: How to protect yourself against lawsuits and other investment threats

1. Invest mainly in well-established, dividend-paying companies. These firms are likely to survive any legal troubles that come along — and go on to thrive. Well-established companies often have strong brands that consumers have come to trust. That’s a plus, because customers are more likely to stick with these companies when they run into trouble. Moreover, well-established firms have strong management that will act quickly when problems arise. That limits any long-term damage to their brands.
2. Diversify. Spread your money out across most, if not all, of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities). Even if a company you own gets sued and loses half its value, more fortunate investments should leave you with a profit.
3. Set ethical standards. If you have qualms about a company’s business practices, stay out of it, no matter how inviting it seems. Good companies do lose lawsuits from time to time. But lawsuit or no, bad companies always wind up costing their investors money.

Our investment advice: Keep in mind that it’s much easier to file a lawsuit than to win an award, much less an award that stands up under appeal. Lawsuits are just one of many risks you face as an investor. In the course of an investing career, you’ll lose far more to bad investment judgment than to adverse court decisions.

Next Wednesday, February 16, 2011, Investor Toolkit will give you our investment advice on the role economic predictions should play in your investment strategy.

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