Title:
Blue chip stocks - not a poker game
Word Count:
431
Summary:
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.
Keywords:
blue chips, stocks
Article Body:
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.
Historically, 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? 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 a 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. 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.
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 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 imbedded in the price of a
stock.
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