Why Invest in Blue Chip Stocks?

Investing in conservative blue chip stocks may not have the allure of a hot high-tech investment, but it can be highly rewarding nonetheless, as good quality stocks have outperformed other investment classes over the long term.

200612300042_72024.jpgHistorically, investing in stocks has generated a return, over time, of between 11 and 15 percent annually depending how aggressive you are. Stocks outperform other investments since they incur more risk. Stock investors are at the bottom of the corporate “food chain.” First, companies have to pay their employees and suppliers. Then they pay their bondholders. After this come the preferred shareholders. Companies have an obligation to pay all these stakeholders first, and if there is money leftover it is paid to the stockholders through dividends or retained earnings. Sometimes there is a lot of money left over for stockholders, and in other cases there isn’t. Thus, investing in stocks is risky because investors never know exactly what they are going to receive for their investment.

What are the attractions of blue chip stocks? Great long-term rates of return. Unlike mutual funds, another relatively safe, long term investment category, there are no ongoing fees.You become a part owner of a company.

So much for the benefits – what about the risks? Some investors can’t tolerate both the risk associated with investing in the stock market and the risk associated with investing in one company. Not all blue chips are created equal.

If you don’t have the time and skill to identify a good quality company at a fair price don’t invest directly. Rather, you should consider a good mutual fund.

Selecting a blue chip company is only part of the battle – determining the appropriate price is the other. In reality supply and demand for a stock sets the stock’s daily price, and demand for a stock will increase or decrease depending of the outlook for a company. Thus, stock prices are driven by investor expectations for a company, the more favorable the expectations the better the stock price. In short, the stock market is a voting machine and much of the time it is voting based on investors’ fear or greed, not on their rational assessments of value. Stock prices can swing widely in the short-term but they eventually converge to their intrinsic value over the long-term.

Investors should look at good companies with great expectations that are not yet embedded in the price of a stock.

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4 Responses

  1. Shane says:

    There are some great blue chips out there … Berkshire Hathaway has long done very well. Yahoo has also done quite well this year.

  2. Robin Bal says:

    Hi Shane,

    You are right there are many real good blue chip stocks out there.Blue chips have a good dividend paying history, thats also the reason that generally investors stay loyal, paying dividends generates investor confidence. Investing in blue chip companies can yield income as well as capital appreciation.

    Blue chips also add stability to your portfolio.

    Take care and Cheers.

  3. Jag says:

    Hi Buddy,

    Always feel good to come back to your blog to read some great content. As you can see my frequency of updating of my blog has been doing down, as I’m building up a formal consultancy biz.

    Still, I try to make time to come down to your blog, and I must say you never disappoint me with your quality of your post. In fact, yours and Jonathan’s SWR are the only blogs I visit if I’m really tight for time and can only make time for certain blogs.

    Ok I’ve talked so much but I’ve not commented on this post yet.

    My thoughts: It’s always good to have some blue chip in our portfolio. Adds some stability and certainty. And yes, this also reminds of the trick which I mentioned when I commented on one of your post – buy blue chip in time of crisis.

    Cheers,
    Jag

  4. Spencer Ramrirez says:

    I have read several excellent stuff here. Definitely worth bookmarking for revisiting. I surprise how much effort you set to create such a fantastic informative site.

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