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 stock advice and other tips 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: “The greater the expectations created for a stock by a wave of favourable publicity, the greater the fall will be when the stock disappoints.”

Our three-part approach to successful investing includes this very important advice: downplay stocks in the broker/media limelight.

Here’s why you should avoid the very real perils that can crop up with these overhyped stocks—and how you can benefit by recognizing good stocks that have been yet to enter the limelight.

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.

Obviously, there are many smart people working in the public relations and brokerage businesses. That’s why it’s a mistake to fill your portfolio with stocks these people have publicized. A high corporate profile may give investors a feeling of security, but it doesn’t pay them any dividends. Instead, in-the-limelight stocks trade at a premium that’s exaggerated just because they’re in the limelight.

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 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.

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Be ready for good stocks returning to the limelight

There are times when 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 are low on companies that still show signs of financial stability and long-term growth possibilities.

That happened 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 the same analysts and journalists 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 or popularity, 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 experience and opinions with fellow TSINetwork.ca members

In your experience, what is the single biggest failure by a stock that was highly hyped by brokers and the media? Is there a stock you recall that was able to succeed despite suffering a lot of negative publicity? Let us know what you think.