Blue Chip Investing

by Wes Bridel on September 22, 2010

in Stewardship

Blue Chip investing is something that everyone should understand.  We’ve been discussing asset management in a crazy economy.  Blue chip investing should be a component you carefully consider in addition to the international equities we discussed on Monday.

When you invest in a company that dominates its industry and provides goods or services that are essential to people’s lives, this is blue chip investing. Your investment should always retain inherent value over the long term.

Even if the world undergoes significant economic change, these companies should make it through the hard times because no one else can deliver the same goods and services that many find essential at nearly the same low price.

That being said, market valuations do fluctuate greatly depending upon the mood of the market.  When Mr. Market is all smiles, the valuation levels will be high and the price that you must pay for a dollar of profits will be high.  When Mr. Market is running scared, you can pick these companies up at tremendous values and hold forever as their earnings, dividends, and eventually share price grow tremendously.

This is how many of the greatest and most famous investors got that way.  Warren Buffett is probably the most famous investor today and this is exactly what he does.  He looks for great companies which dominate their industries selling for incredibly cheap prices.  When everyone else is fearful, he swoops in and buys.  When markets return to normal, he is sitting on a nice profit.  Recently, Buffett seems to have added to his search criteria by buying stocks which should especially do well in inflationary environments.

If you don’t want to be an active investor and watch the market for the best time to buy, you could buy these companies knowing that over time, their prices will rise.  In a deflationary environment, they should still be able to sell their products because people need these products.  If hyper-inflation hits, they should be able to raise prices to whatever the new standard is and thus be a hedge against this inflation for your portfolio.  However, in either of these situations, you should expect the share price to drop significantly before it rises.  So be prepared for a rollercoaster and know that you are in it for the very long haul.

There is a better way however.  In the type of economic environment that we are in, the opportunities to buy high quality, world dominating stocks at once in a lifetime low valuations should abound.  If you identify the companies that you want to purchase and watch as the market falls apart, dragging down good companies with bad, you will be able to find unbelievable bargains.  Many of these companies are today at fantastic long term values even if you don’t want to wait.

How to Invest

You have some choices to make in this category.  This is one of the easiest categories to specifically choose companies that you want to be invested in.  You might look at companies like (this is just an example, I believe most of these will go down before they go up)…Exxon Mobil (XOM), Coca Cola (KO), Johnson & Johnson (JNJ), Proctor & Gamble (PG), Microsoft (MSFT), Intel (INTC), Walmart (WMT), McDonald’s (MCD), Berkshire Hathaway (BRK-A or B), etc. and decide that they are priced right (which means they seem to be selling today at a good value price compared to earnings) and individually pick these companies.

You might also choose an ETF to diversify across a pool of giant, world leading companies.  If you do this, you need to decide if you want to focus only on US based companies (perhaps because you feel you already have significant international exposure), or if that is not important to you (or perhaps you’d prefer as much non-US Dollar exposure as possible) and you just want to have the Bluest of Blue Chips no matter what country they are domiciled in.

In the next post in this series, we’ll look at ways to speculate on Treasuries and why this could be one of the greatest trends of the coming decade.  If you have any thoughts or questions on this or other topics, please let us know.

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