Random Finance Tip #2

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This post is sort of inspired by the Blue Chip stock entry by my friend Robin, of FortuneWatch.com.

I left a comment on it, and I thought I reproduce it here.

Without further ado, the second tip of this series is

“In times of sudden crisis, buy blue chip stocks”

Just in case you are wondering what the heck are blue chip stocks, let me first clarify. Nope they are not potato chips that are blue in color (Sounds yucky to me).

Blue chip companies are generally defined as big, safe, fundamentally strong companies with a market capitalization in excess of billions.

Blue chip stocks are good if you want to add some balance and diversification into your portfolio, but don’t expect any extraordinary gains. They are as safe (some people say boring which is a good thing actually) as can be. If you are looking for wild fluctuations, gyrations and excitement, you gotta look elsewhere.

So why buy in times of sudden crisis?

By sudden crisis, I mean a terrorist attack like 9/11, tsunami or hurricane devastation, death of a leading political figure or outbreak of disease like bird flu or SARS.

Such incidents usually spark off wild panic and indiscriminate selling. People are abandoning ship like nobody’s business.

You might be tempted to jump too, or stay off the market, but hold on a second!

Warren Buffett once said, “Be fearful when others are greedy and be greedy when others are fearful.”

How apt!

When everyone is panicking and selling like crazy, now it is time for you to pick up stocks like a crazed greedy mad man who seemed like he had never eaten in years! Not just any stock, but fundamentally strong blue chip companies with a solid balance sheet.

Now we are talking!

You can be assured that that the price of these companies will drop due to the mad sell off and this will represent a fantastic chance to scoop them all up at a bargain price. You probably won’t get such a good deal at the annual great sale by your nearest shopping mall.

If you think long term, and am willing to look past the short term downward spiral, the price will definitely correct itself in due time when the market has stabilized and regain it’s lost head.

Better still, look at government-linked companies like banks. The government won’t allow them to fall, so it’s a pretty sure bet in this scenario.

Blue chips have never tasted this tasty.

This strategy has worked in the past and will work in future. Just that, do you dare to go against the emotional mass crowd and walk the road less traveled? That is the question.

Hi Jag,

Good post mate and thanks for the comments, I would say that your comments were really an extension to make my post complete. Good on you. Thanks.

“They are not potato chips that are blue in color” well said, adds a touch of humor…lol. I agree Banks are a good avenue for investing also offers a touch of stability to one’s portfolio.

Keep it up.

Cheers.

Hey Robin,

Always a pleasure to comment on your posts. Your ideas and views almost always echo mine.

Anyway I believe that adding humor is always good in keeping the tone light. People love a laugh and smile at times. Positivity rules!

Cheers mate!

Following Buffet’s advice is a great way to go. Unfortunately, human emotions of fear and greed often get in the way of sound decisions.

You should be careful about following this blindly as it tends to work well in bull markets, but in bear markets, the jitters usually just feed the jitters. Yes the good companies will survive and prosper in the long term, but remember if you lose 50% of the value it has to make a 100% gain to get back to where you started. Also remember that a balance sheet is always looking back, until the next lot of results are published they will reflect the preior results. So if you are looking at a mortgage company, then their sheet may look pretty healthy until you discover they have to write off a huge chunk of their portfolio.
If you can get these stocks at a large discount to their intrinsic worth, then back the truck up. If you are buying because people are selling then you may be in for a bumpy ride.

It is totally true, though the stock market is wavering, it actually is the best time to buy, because what is low (in price) is bound to go up again in better days.

Always a pleasure to comment on your posts. Your ideas and views almost always echo mine.

Anyway I believe that adding humor is always good in keeping the tone light. People love a laugh and smile at times. Positivity rules!