The best investment ideas for your portfolio will rarely be found in the media limelight

As you may know, one of the three key points to our Successful Investor strategy is that you need to downplay or avoid stocks in the broker/media limelight. A similar warning applies to investment-related ideas.

If you’re looking for the best investment ideas, start by excluding investments in popular stocks that have gained ground in the broker/media limelight. It’s not a spotlight that most good stocks are in, because they’ve likely been high-quality investments for longer than the limelight alone could have maintained.

The best investment ideas stray from pessimism

When investment-related ideas find their way into the broker/media limelight, something similar, but upside-down can happen. With ideas, the limelight tends to shift focus. Rather than promote seemingly good reasons to buy a particular stock, brokers and the media instead tend to popularize seemingly good reasons not to buy any stocks.

Here’s a short random sample of “seemingly-good-reasons-not-to-buy-stocks” that have since made their way into the limelight over the years:

• 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 economy has entered a long period of “secular stagnation,” which will hold the stock market back for years to come;
• 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);
• The market has been going up for so long that it “has to” come down soon…

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.

Why over-hyped stocks are rarely the best investment ideas

We believe it’s crucial to downplay stocks that seem to be near-universally recommended by brokers and are showered with enthusiastic media coverage. In investing, familiarity can breed excessive feelings of comfort, security and performance.

After all, 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 creates high expectations, derails criticism, and leads companies (and their investors) to make devastating mistakes.

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 stocks. Our advice is that any holdings you have that are in the limelight are the ones you need to watch most closely.

When investor expectations are high, it pays to be skeptical and wary. It’s true that a number of broker/media favourites may go up more-or-less steadily for years at a time.

But when stocks fail to live up to investor expectations, as they inevitably do from time to time, their stock prices can plunge. And when they come down, they take a lot of people by surprise, and they can fall much further than you ever thought possible.

A tip for the best investment ideas: Buy and watch closely

People that do well in the market over long periods buy and watch closely. It’s not as if they buy and forget about them. I think you can buy and forget about good stocks for long periods of time and do quite well, but sometimes unpleasant surprises can then pop up all of a sudden. Also, the popular attitude toward what is often called buy-and-hold will tend to be against it at the time when it’s most favourable to your finances. Just like at the top of the market, everybody figures one way, and it turns out that conventional wisdom is wrong. Same thing at the bottom of the market; people make assumptions that are probably 90 degrees out of whack with what they should be doing.

What is one of the best investment ideas you’ve followed to find success? Which have you followed as advice from others that led to negative returns?

Some of the “best” investment ideas and “can’t-miss” opportunities lead to disaster. What would you tell young investors about hyped up stocks?