Wednesday, April 20, 2011

Redefining 'Blue Chip'

The sales slogan most widely used by the financial planning industry in the 1990s was simple. We could all become wealthy if we simply bought a portfolio of blue chip stocks and held them indefinitely. And, in the period from 1991 to 2000, it worked. But it hasn’t been working lately, has it? Why not? What has gone wrong? Blue chip used to mean “big.” Somehow the safety of owning a big widely recognized company seemed a reasonable thing to do. “Small” was held out as risky or speculative, not so reasonable. Big was good in the old days.

But the twenty first century has seen that idea deteriorate badly. The biggest manufacturing company in the world went bankrupt in 2010. The biggest bank, brokerage firm, insurance company and mortgage company all needed bail outs in 2008/09. Between 2001 and 2008, the currency of the biggest country in the world dropped over 40% against the basket of smaller world currencies. We can no longer consider General Motors, Citibank, Merrill Lynch, AIG, Federal National Mortgage Assn, and the US dollar to be blue chip investments.

And now the credit rating company, Standard and Poor, has issued a warning that it could consider downgrading its AAA credit rating for the biggest and bluest of all: the sovereign debt of the USA herself! In the 1960s, folk singer Bob Dylan crooned: “You mothers and fathers throughout the whole land, don’t criticise what you can’t understand… The times, they are a-changin’”

My mother and father were teenagers in the 1930s. Imagine what they thought about the stock market and the economy. When the times changed in the 1950s, they were reluctant to participate in the investment world at all. For them, the stock market was speculating. It was more important to have a good job, spend only what you earn, and salt away your savings for a rainy day. They knew all about rainy days.

Those who were teenagers in the 1990s learned a whole different set of values. Buying and holding blue chip investments was one of their truest lessons.

I wonder what the teenagers of 2000 to 2010 learned about the stock market. They saw the market drop in half twice – the 2001/02 bear market and the 2008/09 decline.

I hope they learned that Bob Dylan was right. And when the times change, we had better change with them.

Now we see that the concept of “blue chip” has changed. Bigger no longer means better. How should the typical investor change in reaction to this new fact?

Big blue chip Microsoft stock is approximately the same price it was 10 years ago. The smaller Apple has gone up by 30X! Yes, there’s money to be made in the stock market. But blue chip is not the ticket.

In my investing book, Beyond the Bull, I suggest investors take stock of themselves. Know yourself. What was the stock market doing when you learned about it? Did you learn in the roaring 1990s bull? Or the swing-up-swing-down market of the 2000s? How was the market’s performance when you first began your investment adventure. If your first investments were made in the 1990’s you might believe in buying blue chip stocks and holding them for the long term: that’s what was working in the 1990s. If you learned to invest in the 2000s, you learned that buying low and selling high was a proper way to invest.

I learned to invest in the 1970s. It was one of those buy low, sell high eras. But, I worked for Merrill Lynch: their main focus was on blue chip American stocks. So, that’s what I learned. But, because I have had to earn a living in the financial markets these past 36 years, I have had to change my style as the times changed. Bob Dylan was right.

My advice? Leave yesterday’s blue chip dinosaurs to their financial fate. Stay light on your investment feet: we are in a buy-low-sell-high market.

Sometimes the hardest thing to change is your mind.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Tuesday, April 5, 2011

Voting Chevy

With a federal election campaign in full swing, we keep hearing that the electorate have short memories. Let’s test those memories.

Remember the General Motors bail out of 2009? Most of us recall the irony of the super-supportive NDP, with six sitting Members of Parliament elected by the people of Oshawa, Windsor and Hamilton backing the Conservative government’s multi-billion dollar tax-payer loans to GM in order to preserve manufacturing and steel making jobs in those three cities.

But do you know the hidden story?

My father tried to bail out GM single-handedly: at the age of 85 he bought a brand new Chevy. He believed in the North American auto industry: those cars were made of Canadian steel and he had worked as a machinist for the Steel Company of Canada for 30 years. In my father’s day, GM was the pride of American manufacturing and Stelco was the pride of Hamilton. For him, buying a Chevy was an act of patriotism. His purchase was helping his neighbours keep their jobs. But, in spite of his heroic octogenarian effort, both GM and Stelco declared bankruptcy. His sincere effort had been wasted.

Just before GM declared bankruptcy, the governments of Canada, Ontario and the USA had promised them bail-out loans totaling thirty-three billion dollars. Buying a Chevy had not been enough. Now my father, along with all the rest of us tax-payers, had loaned GM a very large sum. We all hoped the Conservative government, with the support of the NDP, working on behalf of my father, would somehow spin this straw into gold.

But even the big bail out loan didn’t prevent the inevitable. On June 1, 2009 General Motors declared bankruptcy. The common stock went to zero and was de-listed. I wonder how many pension plans owned GM stock. It seems logical that the pension plan of a company who sells steel would own shares of its biggest customer. If it did, then GM had declared yet another “gotcha!” on my father by stinging his pension plan.

The following year, the new streamlined stripped down General Motors issued new stock: over $20 billion in new stock! The various governments had recouped part of their loans!

Why is it important for readers to remember this ironic corporate fiasco? In my investment book, Beyond the Bull, I encourage investors to be objective: try to see economic situations for what they really are. Try to learn from the way other people behave in the economic world. That’s how you can become a better investor. But it’s not easy.

Now that Canadians are in an election campaign, political parties are aggressively trying to persuade us to see the situation the way they see it – and to vote for them. The Beatles once sang: “Try to see it my way…” There’s no objective thinking in an election campaign!

And what about my father? He passed away last summer, leaving me to drive his new Chevy. With gasoline prices flying through the roof, I’ll probably trade it for a small car with better fuel efficiency.

And what about you? Are you objective in your economic thinking? When your RRSP dropped 30% in the 2008/9 stock market crash, were you able to stay objective? Are you able to objectively look at the various candidates in this election? Or is it easier to slip back into your old familiar patterns of seeing the world the way you’ve always seen it?

Most investors are like my father, still thinking in the old ways. Most investors think that big blue chip companies are safe investments. But GM was once the biggest. Stelco was once the biggest. Buying and holding big blue chip companies no longer works. It’s time to be objective; it’s time to re-think the old ways.

The first step in becoming objective is to remember. Remember what happened in the past and learn from your mistakes.

Can we be objective about this election? When all the votes are tallied, will the NDP be re-elected to those six union-town seats in the House of Commons?

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

This article and others by Ken are available at http://kennorquay.blogspot.com.

Contact Ken directly at ken@castlemoore.com.