How to benefit from the 'theory of popularity'

Research by Morningstar

'Investors prefer to allocate to companies which have the most attractive characteristics, but over time these stocks tend to underperform unloved investments.'

This phenomenon is being investigated by Thomas Idzorek, head of investment methodology and economic research at Morningstar, in his theory of popularity. He suggests stocks that are the most loved by investors, such as those with the strongest brands and balance sheets, are likely to underperform the more "unpopular" investments over time. This is because investors pile too much money into the most popular stocks, overinflating their prices, while the less popular investments tend to trade at cheaper valuations. Over time, the popular holdings get "bid up" by investors, and this over...