Sunday, May 8, 2011

The Unintelligent Investor's Definition of the Week: Blue Chips

Blue chip

Oxford dictionary definition: denoting companies of their shares considered to be a reliable investment, though less secure than gilt-edged stock

Unintelligent Investor’s explanation

Did you know that the term blue chip actually came about because back in the days, blue coloured chips used to be the chips with the highest value in casinos. So in the stock markets, blue chip stocks refer to stocks that are of highest value.

I think in general, blue chip stocks are what people buy to take less risk. They are usually big companies, with expensive share prices and are unlikely to go bankrupt anytime soon. They don’t usually provide you with a high capital gain but has a price that is less volatile. These are of course stereotypes and might not be applicable to all cases. People who buy blue chip stocks tend to invest in them for a longer period of time, as oppose to traders who get in and out of penny stocks really quickly.

I found an article about a year and a half ago and it is about how to have a portfolio that is safe and consisting mainly blue chips. Luckily I still have it so I’ll copy and paste it down below.
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The complete moron's guide to top 10 stocks
MARCUS PADLEY
October 17, 2009

I was listening to a high-profile financial personality ''guesting'' on the radio the other day and he was asked by a caller what 10 stocks he would pick in a long-term portfolio and, amazingly, he had no answer.

Instead he fluffed out a couple of totally inappropriate mid-cap stocks that would have got you into a lot of trouble.

It turns out a lot of people we think are financial ''professionals'' have never given, are not licensed to give and do not know how to give, advice; they just crap on from the sidelines without actually having an opinion on the core, bottom line, ''nothing else matters'' skill of the finance game, answering the question "What do I buy?" It's amazing how much noise there is in this industry around that question without anyone actually getting down to answering it. I am more than guilty myself.

So let's make a start. What 10 stocks do you put into a long-term portfolio?

This is Stockbroking 101, chapter one - "The Moron Portfolio".

The moron portfolio is not called that because only a moron would pick it; on the contrary, it is so labelled because any moron could pick it. It is a portfolio designed to protect financial professionals (definition: people who have a licence to give advice) from legal action, and when it comes to legal action the main concern is that they have to have a reasonable basis for their recommendation.

On that basis the moron portfolio picks itself, and for the timid financial professional, here is the process. You print off the ASX 200 in market cap order and, starting at the top, pick the biggest stocks that you can't be sued for recommending. You do this not by picking the best stocks but by eliminating any stocks that you could be sued for recommending.

The 10-stock moron portfolio includes the four banks. Most safe advisers quite rightly recommend holding all four banks because there are more important games in town that finessing which bank. All will do. Then it's BHP, Rio Tinto, Woolworths, Westfield Group and Woodside. Anyone who likes gold would add Newcrest; finally, it's a toss-up between QBE, CSL or Macquarie Group.

QBE gets into most portfolios because it is well managed with a strong balance sheet; for a defensive stock it has steadily outperformed the market since it listed. CSL is a great stock but needs a bit of timing; it sometimes has long periods in the cold.

Macquarie Group is simple. If the market goes up, Macquarie goes up more. If it goes down, sell, and quick.

The only stocks that don't get an automatic pick in the top 10 include Telstra and Wesfarmers. Telstra because the only sex it offers is a yield, and by rights no one should invest in equities for that.

Equities are for growth in capital - ask any Yank - and if it wasn't for the performance of a protected monopoly called the Australian bank sector that has spoilt us into thinking we can have income and capital growth, the Australian retail investor would realise that.

High yield means low growth, which means a dull share price. Utilities, regulated gambling, property trusts, food, infrastructure, health care. I rest my case.

Wesfarmers doesn't get in because it's too complicated for most people. You'll find brokers very divided on Wesfarmers. Most are cautious about the big lash on Coles. That uncertainty, and the fact that it has about 10 different business units, puts it in the too-hard basket because no one really knows what it does. But the main bits are cyclical and I reckon that's enough at the moment.

There is a tail of stocks you might be recommended after that. Origin and Santos, AMP, IAG, Suncorp-Metway, Amcor, Qantas and Stockland, Foster's, Brambles, Orica, Lihir, Oil Search and AGL.

That's about it. You'll know when your adviser isn't a moron. He's the one recommending a stock I haven't already mentioned.

Marcus Padley is a stockbroker with Patersons Securities, the author of the Marcus Today daily stockmarket newsletter and the book Stock Market Secrets, available at marcustoday.com.au

Source: The Age
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