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Investing Myth: Investing In Safe Blue Chip Stocks

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CSE.SAS

CSE.SAS
Global Moderator

Many times the average investor has come across the idea that investing in “blue chip” stocks are safer or more conservative. A blue chip stock is stock of a well established company with stable earnings and no extensive liabilities. Often, they pay dividends, and are recognized nationally or internationally. Many times they also have a large market capitalization (market value) and are included as part of a major stock index. Blue chip stocks are associated as being high quality stocks. However, this is a dangerous misconception. Lets explore why.


Stable earnings today or in the past, does not necessarily mean that earnings will continue to be stable into the future. Earnings largely depend on consumer and economic trends. No extensive liabilities, does not mean large business risks are not being taken. Business decisions that introduce large risk usually do not make it into the balance sheet until it is too late. A company that pays a dividend does not mean that they will continue to do so. We have seen many companies who eliminated their dividends, as they could not pay them out of their cash flow. National and international recognition is meaningless if it does not translate into profits.

Clearly, being considered a “blue chip” stock/company means very little. We should also remember that all great companies were once small start-ups. When investing, investors should stick to companies they know, and whose businesses they understand. The management of those companies should be honest & open, have a sizeable ownership stake in the company, focused on creating long term shareholder value, and should not display behavior consistent with the institutional imperative. The CEO’s leading the companies should also display taking personal responsibility for both positive and negative results. These qualities are much more important than being labeled a “blue chip”.

Regrads

CSE.SAS

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