Blue chips are the highest valued piece, which is well-known, well-established, well-capitalized. For a blue chip to arise the business should have placed itself well in its own niche where the market cover is prominent. These businesses are well managed would have lived more than 100 years now. The time is no means a measure of a blue chip, but this tells us the track record, how did they handle business cycles, liquidity crunches, recessions and crisis. The business swan against enormous wave fronts to achieve the state of float by getting the foundation right building the empire with the high waves as moats.
Where to search for:
As every retail investor thinks blue chips are found with the high market capitalized stocks, in market jargon its Large cap. Nowhere in the previous lines its specified that the company should have a humongous capitalization ( The real meaning of blue chip is to have large market cap). Among the so called sub standard stocks of Mid and small cap can also be found. Beholder’s view, market cap holds no influence over blue chip stocks, it’s the business that should have the characteristics of an empire.
Asian paints was once a small cap stock, no region is uncharted and the entry on every explored area is a bang. New entrants are struggling to compete with this huge paint bucket. To know more about Asian paints. Most of the risk averse investors buy large cap funds or directly buy large cap stocks. Nifty 50 index comprises this kind of stocks which determine the market’s overall picture.
Bajaj finserv has entered the large cap territory a year back, which can also be said as a bluechip. Investors can find blue chips in the lower categories they are called as emerging markets which has immense value and can asure you a wealth builder.
Wider, long lasting and deeper moats, piranhas would be nice to spice it up. Every company has it’s own kind of moat like pricing power, brand, well organized management, cost cutting, complex engineering, futuristic products, etc., all contribute to the moat which sometimes be breakable unless widened year on year. Simplistically, moats are ideas implemented again again.
Risk and stability:
After an extensive debate on Beta, people are off track, contemplating volatility as the risk of the security. Even after proving that risk cannot be boiled down to a reasonable number, from both the perspective bluest chips are safer and they contribute more to the index, which limits the beta movement since the business is widely known and the insignificant information is.
The meager return:
The business has already been established and a significant market has been captured. There is no room to grow, no stones left unflipped, every idea is in execution How will the growth rate be? Past times its intrinsic value huge liquidity is needed to rise against the friction. The capital appreciation is almost equal to bonds. One way to maximize returns is, dividend reinvesting. If the money is of no need in the forthcoming future, invest it back to buy more of the units.
The dividend reinvested return on nifty 50 from 2013 to 2020 is a CAGR of 12.03%. The difference is lower because the compounding period is only about 7 years and the gap widens as the invested period increases.
The risk is incurred, returns are attributed to that of a bond. How will the dividends be? It’s all the same as fixed investments do. The price of the chips cannot be justified because the business cannot perform to the stock’s performance. The yields are quite low, but consistent. Dividend portfolio constructed with blue chips are stable and yields consistent returns. The price return of the nifty index is 8.65% and 11.45% dividends included.
As already said, dividends are the ruling part of the return and reinvesting them is the golden egg.
Most of the top order players tend to diversify or deviate from the core business by acquiring, it’s a problem of capital allocation. Managements cannot adhere to the new business which they think they are cognitive and the weighing scale is heavier on the failing side. Large business channel immense cash from various products and businesses which contribute to the revenues from all the sides.
- For Banks- Financial services, Loan repayments, Insurance, Gold loans, Mutual Funds, etc.
- For FMCG- Candies, Beverages, Cosmetics, dry goods, Canned foods, etc.
- For Energy- Solar energy, Distribution segment, Charging stations, Natural gas, etc.
- For Publications- Bookmarks, books, magazines, billboards, etc.
When to buy:
Buy in recessions, depressions, bad news which every investor will be keen. Some news can be laughed at but imprudent investors panic to sell their part in loss where your mind is set in ambush to trash the price with the war chest.
The appetite to sure shot wealth building floods your mind seeing the market’s optimism. People with minimal discipline may go for Systematic Investment- Putting money periodically for a long time even market hates you.
The blue chips return isn’t market beating ergo, they can easily be substituted by alternative investment vehicles.
- If the investor has tasted market’s morsel, mutual funds can be a way to proceed with.
- If the layman wants to invest in the market, can’t spare the time, Knows no bit, Index fund is the way to go.
- Real estate is one which provides a return of 6-8% from a commercial building and lesser than that for housing. The only difference between both the market is liquidity is hard. Since market for established businesses are poised to be efficient and real estate is extremely correctly priced, no uncertainties prevail.
- Government bonds, which yield 5-6% and are risk free.
- NCDs, Corporate bonds, NBFC bonds, Tier-2 bank bonds, which yield much more than G-sec, but aren’t risk free.
Blue chip disaster:
In 1997, Arie de Geus wrote a fascinating book called The Living Company. Geus studied the life expectancy of companies of all sizes and was very surprised to find that the average Fortune 500 company had a life expectancy of just 40 to 50 years. It takes about 25 to 30 years from formation for a highly successful company to earn a spot on the Fortune 500. Geus found that it typically takes many blue chips less than 20 years after they get on the list to cease to exist. The average Fortune 500 businesses have already past its prime by the time it gets on the list. Even businesses with durable moats don’t last forever. Dhando investor