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.

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