Thursday, 16 December, 2010

Power of Blue Chips

Power of Blue Chips

Most of us who "invest" in shares genuinely believe that we're investing to "build wealth". Nevertheless, when we look at our own portfolio, we realise that we have a mixture of a wide variety of stocks, which I would like to classify into:

  • Blue Chips (Based on any yardstick of your own) - Most entries on this list would not be debated by anyone
  • IPO / FPO Stocks which got converted into "Long-term Holdings" for historical reasons (Usually the stocks were not sold on listing either due to greed or lethargy, and ended up in our "Long-term Holdings")
  • Momentum stocks - Flavour of the season stocks which got converted into "Long-term Holdings", again, for historical reasons
  • Stocks bought on "Tips" which got converted into "Long-term Holdings"
  • Loyalty-driven stocks - These are stocks of companies which were ex-employers of
    • The "investor"
    • His / Her "close" family members (Spouse, Parent, Child, Uncle, Aunt, etc.)
    • His / Her ex-boss held in high esteem
  • Stocks bought on "Research-recommendations" from Brokers, Investment Analysts, TV Anchors, News Magazines, etc.

Believe me, I have stocks in each of the above categories.

For ease of analysis, I put "Blue Chips" in one group and all others in another group.

I was curious to know how the two groups performed.

Here, I must mention two quick points before proceeding further:

  1. I've been consistently outperforming the Sensex, Nifty & my mutual fund holdings
  2. My vanity has made me to believe that I am reasonably careful with my investments

Due to the above factors I was startled by what I found:

  1. The Purchase Value of "Blue Chips" was just 42% (which, intuitively, ought to have formed at least 75-80% of the total purchase value of my overall Portfolio)
  2. The Current Value of "Blue Chips" was a much higher 54% of the current worth my overall portfolio.
  3. Over 90% of my holdings (after excluding those stocks purchased within the last 6 months) were all sitting on paper profits, which perhaps corroborates the fact that I have been consistently outperforming the Sensex & Nifty.

Very obviously, the "Blue Chips" are indeed "Blue Chips"! They have vastly outperformed ALL other shares. Despite the fact that I've been outperforming the Sensed & Nifty consistently, I would have done even better if only I had focussed more (some would say exclusively) on "Blue Chips"!

But very sadly, my ego and vanity took a mighty hit. I've been falling prey to all the behavioural biases that I am theoretically aware of.

Immediately, I contacted a few of my friends and acquaintances and asked them to do the same exercise. The results were broadly similar. Irrespective of their investment acumen. Without regard to their age or gender.

Obviously, some conclusions are in order:

  1. "Blue Chips" are "Blue Chips" - Don't ignore them
  2. Don't forget # 1 above
  3. Be aware of the significant out-performance of "Blue Chips" vis-a-vis other stocks
  4. Analyse your own portfolio on this basis during the next week-end
  5. Arrive at the percentage of "Blue Chips" that you wish to have in your own portfolio.
  6. Do this review at least once a year and re-align your portfolio accordingly to bring it back to your own target level of "Blue Chips".
  7. Don't forget # 1 above

Personally, I've decided that I will REFUSE TO BUY any scrip other than "Blue Chips" till the figure reaches at least 75%. Let's see where it takes my portfolio in the months ahead.



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