Chasing Blue Chips
Key takeaways
Blue-chip stocks are typically large companies with good reputations which often inspire the assumption that they will always be around and thriving.
But dominant players can also fall by the wayside eventually; AT&T, General Electric, and for a local example - SPH were at the top for a long time before disappearing and or getting overtaken.
Are you certain that your blue-chip stock will continue to give you the returns over the long-term? By investing in a broadly diversified, research-based and indexed investment, you don’t have to take that risk.
An investor without investment objectives is like a traveler without a destination
— Ralph Seger
As companies grow into some of the largest firms in the world, the returns that push them there can be impressive. These large companies also attract the attention of investors — who deem them to be “blue-chips”.
Blue-chip stocks are companies with good reputations, and assumed to be high quality, with the ability to fare well during recessions and pay consistent dividends. A common investor assumption is that to have a successful investment, one should buy and hold onto blue-chips for the long term. However this strategy does not always pan out; let us show you why.
Large & In Charge (For a Period Of Time)
For stock markets around the world, it is not unusual for the index to be concentrated in a handful of stocks. These large and well-known companies typically dominate the majority of financial news, both in print and television. A long-running example from the US shows that the largest 10 stocks typically make up around 20% to 30% of the market index.
Another thing to note is that sometimes, some large companies are able to stay on top for a long time (see diagram below). AT&T, General Motors and General Electric ranked in the top 5 for quite a number of decades before disappearing and being overtaken by other companies eventually. Others had a shorter claim to fame. The important lesson here is that a dominant player, in a seemingly dominant industry can also fall by the wayside eventually, so are you certain that your blue-chip stock will continue to give you the returns over the long-term?
Let’s Define That Period of Time
To this point, when we measure the long-term performance of stocks which are top of their markets, the results are quite lacklustre. On average, these stocks outperformed the market by an annualised 0.7% in the subsequent three-year period. Over 5 and 10-year periods, these stocks underperformed the market on average (see below).
Let’s take a look at local examples. The diagram below shows a 1998 listing of the component stocks in the Straits Times Index.
And in the diagram below, this is the Apr 2023 component stocks in the STI index.
Out of the original list, only 13 companies remain in the STI index today. The largest 5 companies back then were; SingTel, Singapore Press Holdings, OCBC, DBS and Singapore Airlines. If you had bought these 5 stocks in equal amounts back on 31 Aug 1998 then, their respective prices would be:
Singtel — $2.59
SPH — $12.50
OCBC — $4.04
DBS — $4.30
SIA — $5.25
Say you invested $100 in each stock for a total of $500 — the 5 largest SG based bluechip stocks at the time. And you held these stocks for around 25 years. The recent prices (20 Apr 2023) of these blue-chips are as follows:
Singtel — $2.53
SPH — delisted in Apr 2022 at $2.36 (SPH REIT delisted at $0.9372)
OCBC — $12.84
DBS — $32.78
SIA — $5.83
Your $500 would have grown to $1,315 — which seems decent at a glance, giving you a compounded annualised return of around 4% per year.
However, allocating to a globally diversified investment, with an emphasis on academically proven drivers of return similar to our VaR or Everest portfolios; $500 would have grown to over $2,000 — with a compounded annualised return of around 6% per year. Granted, this additional return would come at the expense of you going outside your comfort zone, investing globally and allocating to companies you may not have heard about. However, if generating a sustainable and long-term return is what you require in your investment plan, then this is the best way to do so.
It is hard to keep up with what is the best performing stock or even sticking to a blue-chip strategy over the years. After all, would you be certain that the stock you buy would still be around after 20 or 30 years down the road? Similar to what happened to SPH and many other local counters, constant evolution and new disrupters come along all the time to shake up the incumbents. You can be sure that the only constant is change.
So how do you always keep abreast of the latest investment developments? A systematic approach would be to invest in a broadly diversified and scientifically created indexed investment. This evidence based approach would ensure that when companies rise and fall, their influence in your investment portfolio changes and so does your allocation. In this manner, you can be sure that you are not left holding duds after decades, and you always invest in the up-and-coming company of the moment. This underscores the importance of having a broadly diversified equity portfolio that provides exposure to a vast array of companies and sectors.
If you want a second opinion on your investments and how this construction is done, come and have a chat with us.
