July 17, 2009, 5:36 am

6 Investing Rules Revisited Part 2: Blue Chips Are Safe Investments

by: The Financial Blogger    Category: Investment, Market and Risk
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On this lovely Friday, I’m writing about the 2nd investing rule that must be revisited: Blue Chips are safe investments… really?

Why are we calling them Blue Chips?

The expression comes from the world of poker back in 1904. Blue chips were the highest denomination in poker games. The term was then used for the most stable and solid companies of all.

Several DIY investors found themselves caught in the middle of the market turmoil with their “safe portfolio”. Looking for stable income and high paying dividend stocks, investors turned to blue chips such as financials and insurance companies.

While doing their due diligence and analysis, the middle DIY investor bought American Insurance Group (AIG), Lehman Brothers and… Merrill Lynch? If he was Canadian, he would have bought Canadian Banks, Manulife or GM? Hence, he saw his investment portfolio melting as fast as a cat in a microwave (however, the investor was the one screaming!).

I once heard “the bigger they are, the harder they fall”. I was 15 and we were talking about a big guy… well I guess that it works for businesses as well 😉

Being big and having a great share of the market don’t seem to be enough to perform well in today’s financial landscape. Even the biggest and well managed companies can fall under overconfident, bad decisions or simply fraud. GM taught they were too big to fail and they paid the big price.

Blue Chips Are Safe Investments: revisited

While some Blue Chips remain great investment over long term (Canadian Banks for example), they do not represent a “safe investment” anymore.

The average stock picker cannot keep taking the leader in each industry and select his stocks looking at dividend yield, income stability and share of market. The past is not granting the future and 2008 showed us the real face of capitalism; a world of opportunity… that can blow if not properly controlled (greed and humans… they really get along pretty well!).

It’s not because a company is big that it will not disappear tomorrow morning. And it is not because it gives a good dividend that you are assured to receive it for the next 10 years. There are no safe investments when we talk about the stock market, period.

For more information on stocks, you can look at free video at INO TV. They offer great videos answering all kind of questions about trading.

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