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 advice on successful investing. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.

Tip of the week: &ldquoThe more brokers and the media praise a stock, the higher expectations are raised—and the farther it has to fall when it fails to meet all those expectations.”

One of our three keys to successful investing is to downplay or avoid stocks in the broker/media limelight. Today, I’d like to explain the pitfalls that can crop up with these overhyped stocks—and how you can benefit by recognizing good stocks that have been pushed outside the limelight.

Here’s why we believe it’s crucial to downplay stocks that seem to be near-universally recommended by brokers and are getting a lot of favourable 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 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 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 stocks. Our investment advice is that your in-the-limelight holdings 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.

Invest in your Financial Future for FREE Learn everything you need to know in '9 Secrets of Successful Wealth Management' for FREE from The Successful Investor. Secrets of Successful Wealth Management: 9 steps to the life you've always wanted, before and after retirement.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

The best stocks could be those moving back into the limelight

At other times, however, the broker/media limelight works in reverse. Low expectations can become common when a stock runs into internal or industry turmoil. Great buying opportunities can appear when investor expectations get low enough on companies that still show signs of financial stability and long-term growth possibilities.

That happened just over a decade ago to IBM (symbol IBM on New York) and Apple (symbol AAPL on Nasdaq), 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.

That was 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 solid as these two firms had been 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.

COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members

Have you bought stocks that were getting a lot of positive coverage in the media or in brokerage reports? How did those stocks do for you? Have you ever sold a stock in response to bad news about it in the media?

Note: This article was previously published on February 5, 2012.