The prevailing wisdom in investing is that investors should own large and reputable companies which have a long and stellar track record to buffer any risk of capital loss. Such companies are commonly called “blue-chip” companies. The term blue chip came from the game of poker where the blue-coloured chips within the game held the highest value. In the case of investing, blue-chip companies are considered the “best” there is and can reliably weather downturns to emerge either unscathed or even stronger.
This does beg the question though — does this mean that such companies are guaranteed sure-win investments? Should investors, therefore, pile all their money in them?
Large, Reputable Companies May Also Experience Business Problems
Even though blue-chip companies have had a long track record of success, they are not immune to competitive forces and changing industry and business cycles. The globalised business environment means that all companies will be exposed to competitive threats coming from a variety of sources, and these may impair the ability of the company to continue to enjoy their once-dominant position.
There may also be unexpected negative incidences which may crop up even for large companies, such as (for example) a fire breaking out at a production facility, massive fraud uncovered or a major lawsuit announced. Such events have the potential to cause significant profit and/or revenue declines.
The Age Of Disruption
In this day and age, the buzzword is “disruption”, and this is occurring in many industries at an unprecedented rate. Many industries from transportation to medicine and travel are being disrupted by new, emerging technologies which threaten to upend traditional business models.
Blue-chip companies are not immune to such disruptions, and their old-school business models may be too well-established and ingrained for them to be able to move nimbly to a newer business model to tackle these disruptive forces. This may cause them to lose market share and business opportunities to smaller but more innovative companies which are able to tap on technology to unleash better ways of conducting business.
Valuations May Be Elevated
Blue-chip companies, being who they are, also tend to have high valuations as they are well-recognised by the investment community and also well-covered by sell-side analysts. As mentioned in a previous article of mine, investors tend to have high expectations for such companies due to their size and status. Therefore, one needs to be cautious when considering them as investments as too much optimism may be priced in.
The Foolish Bottom Line
As can be observed from the points above, blue-chip companies are not sure-win investments and investors should not automatically assume that they can make money by investing in such companies. It’s important to do due diligence and proper research before committing money to any investment, be it a small company or a blue-chip company.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.