Bluechip Stocks: Avoid the trap of buying long-term holdings in companies purely because they have performed favourably in the past. When it comes to shares, history certainly does not have any guarantee to repeat itself.
Bluechip shares – what are they?
Wha they teach you at uni vs. what actually works in the real-world are two very different things. By definition, a Bluechip share is a company that has a long-standing history of good financial and operational management. And a strong history of successful leadership. In Australia, these are the large mammoths like Telstra, AMP or Woolworths which you have most likely come into contact with at some point in your lifetime.
These sound like a good investments, right? The problem is, past performance is no reliable guarantee of future performance – a misconception that many investors get horribly wrong. Quite simply, as host Andrew Baxter describes it, Bluechip shares are not always the safe place to be.
Your investment strategy should be like music
The investment landscape is one that is continually evolving over time. The trick is to have an investment strategy that does the same. If you think of it like music – once upon a time we only had vinyl records.
Then cassette tapes through to CD’s, and finally now streaming on Apple Watches and iPhones. As such, investment markets have changed in much the same way, meaning that the old adage of ‘just buy Bluechip and hold on’ simply will not work in these conditions any longer.
General Electric – a dwindling bemouth conglomerate
Let’s take General Electric as an example (NYSE:GE), here is a company with year in year out growth in profits, growth in dividends and an even larger reputation to follow. Their CEO, Jack Walsh, essentially led GE to becoming one of the cornerstone ‘Bluechip’ stocks in America, meeting every entry requirement possible. At their peak, GE traded at around $160, now the stock trades at just $10 meaning that if you had of started with $10,00 at the peak, that investment would now be worth just $625. An expensive loss for a company to seemed to be a safe holding spot with major Bluechip status.
AMP AND TELSTRA – Darlings to devils
If we dial it back to our own backyard and look at some household favourites of the Australian stock market, the first that may come to mind are Telstra (ASX:TLS) and AMP (ASX:AMP). Most Australians would argue that these are great businesses that embody the Bluechip status, having a long-standing history with profitable financial performance – however for anyone who has held these stocks for a long-period of time would certainly disagree. After hitting a peak of around $9, Telstra now trades at just $3.80 despite somewhat running a monopoly. AMP similarly, has drifted down from around $16 now to just $1.90. Yes these stocks tend to pay hefty dividends to their investors every 6 months or so, but has it come at the expense of the stock value?
Carving your niche
When certain companies operate in a niche setting and come along with good management, their share price will respond. These businesses may not typically be called ‘Bluechip’, but they sure as hell are performing better than some who are. Take Afterpay as an example (ASX:APT) as a unique business who owned their first-mover advantage. This is a company who has managed to drive its share price from $2.50 to around $35. At its high in just a few years. A well driven and managed business that wouldn’t be classified as Bluechip. But one that certainly has carved its niche to cement it as an up-and-comer.
The outlook ahead
Just like music, investor sentiment has changed and so have their strategies. After seeing profoundly mammoth falls from companies like Telstra or General Electric, the idea of blindly buying Bluechip shares for the long-term is one that should be treated with caution.
As host Andrew Baxter sees it – we will begin to see some wholesale shifts in company activity to maintain the loyalty of their shareholders. Specifically, it’s about having a rock solid investment strategy to take advantage of these changes whilst adapting to new ones. For example, check out Andrews ‘Cash flow on demand’ strategy. With this, states Andrew, you are bound to stack the odds in your favour.