Blue-chip stocks - not a poker game


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

Historically, investing in stocks has generated a return, over time, of between 11 and 15 percent annually, depending on 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 should pay all these stakeholders first, and if there is money left, 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 will receive for their investment.

What are the attractions of blue-chip stocks?

  1. Great long-term rates of return.
  2. Unlike mutual funds, another relatively safe, long-term investment category, there are no ongoing fees.
  3. You become an owner of a company.

So much for the benefits - what about the risks?

  1. 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.
  2. Don't invest directly if you don't have the time and skill to identify a good quality company at a fair price. 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. Theoretically, the value of a stock is the present value of all future cash flows discounted at the appropriate discount rate. However, like most theoretical answers, this doesn't fully explain reality. In reality, supply and demand for a stock set the stock's daily price, and demand for a stock will increase or decrease depending on 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, a 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. Here is a brief look at blue-chip versus growth stocks,

Investors should look at good companies with great expectations that are not yet embedded in the price of a stock. Here are some more ideas and thoughts on blue-chip stocks,

For assistance or more information, feel free to reach me directly or contact another Registered Financial Consultant. KG Meyer, PC is a fee-only fiduciary financial advisor located in Nashville, Tennessee serving those in need throughout the US.

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