It’s a “Blue Chip”—Relationship Investing (37)

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I’m not sure what the term blue chip means anymore. To me it’s a remnant of markets past—not the present or the future. Years ago when I fell in love with this business, a “blue chip” stock was a major-name corporation, often with a world-renowned product, an admired corporate giant carrying a high financial rating and often paying an increasing dividend. It would usually boast an impressive streak of financial results and be a suggested core holding in many portfolios for individuals and institutions alike. I can still remember this term being thrown around the brokerage houses I frequented, with those owning shares in names so labeled a point of portfolio pride. But that’s all it is—a label.

Keep in mind that when I started visiting brokerage houses on a regular basis in the early 1970s, investors hadn’t witnessed a big bear market to speak of in decades. We all know what happened in that (early 1970s) period, as shares in the bedrock of American business took a serious southerly ride. Belief that sound financial corporate statistics would somehow better insulate the underlying shares from severe damage and that dividends would somehow help cushion the bear market blow was proved shallow. What an education I received during that period! It caused me to question conventionality at a young age; I’ve never stopped since.

Take no comfort in the fact that you own a well-known name that the Wall Street analytical “experts” may be recommending strongly. I’m not knocking them. Many have brilliant academic and industry credentials and IQs in the “Mensa” category. There’s just one problem with that—the stock market doesn’t know anything about credentials. Its verdict is final, as rendered by the price of the security in question. Just like a major storm ready to wreak damage on anything in its way cares little about the boat captain’s impressive seafaring credentials, you either need to get out of the primary bear market’s way or experience its brute force head-on!

Just because someone looks great on paper and their personal credentials look exciting and appear to mesh well with yours doesn’t mean that you’ll have chemistry when you meet face-to-face. Something analyzed on paper isn’t always an accurate reflection of how it will act in the real world, no matter how great it seems or how bright its future looks. Think of a person’s résumé as the underlying company, and themselves as the shares. Which is more important? On which basis will you be making your decision? Thinking that holding shares of a quality company are anything to take much comfort in when a primary bear market strikes is a big financial risk.

Moral: No matter how blue a “blue chip” may be, it can still put you in the red if the market moves against you. The stock market cares nothing about labels.

(To be continued...)

This excerpt is taken from “Relationship Investing: Stock Market Therapy for Your Money” by Jeffrey S. Weiss. To read other articles of this book, click here. To buy this book, click here.

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