Blue Chip Stocks – Are they safe investments ?

It is not uncommon in India to hear this wisdom –

Blue chip stocks are safe to invest and one should pick good blue chip stocks , put all their retirement corpus in them and relax.

Investment advisers that recommend individual stocks in a portfolio, preach this wisdom without any limits. I don’t think that  they give such advice with any ill intention. They honestly believe that such strategy would work in their clients’ interest.

However, I usually recommend diversified mutual funds for ease of adding new money in accumulation stage, and ease of holding, managing and tax management.

Recently I came across a blog written by PV Subramanyam. It was interesting and thought provoking. That is the subject of this article.

So taking a 5 year view on portfolios is possible, beyond that, having a view is madness. If suppose one kid had told me in 2007 he has invested in Tata Steel, Hindalco, Bharti airtel, Reliance, – I would have said ‘wow, surely your money will double in 6 years…’. Today I would look stupid.

I took 3 blue chip stocks from unconnected industries.

  1. Reliance Industries (Oil refinery)
  2. Tata Steel (Metal)
  3. BHEL (public sector making heavy electrical /power equipments)

Let us go back in time to Jan 1, 2008. Let us see the performance graphs of these companies for the period 2003 to 2008. A reasonable period of 5 years to measure the performance.

 

Reliance Industries (2003-2008)

reliance_2003_2008

Tata Steel (2003-2008)

tata_steel_2003_2008

 

BHEL (2003-2008)

bhel_2003_2008

 

Performance between 2003-2008
01-01-2003 01-01-2008 % Ret CAGR %
Reliance 150 1452 868% 57%
Tata Steel 89 940 956% 60%
BHEL 54 518 859% 57%

At year 2008 :

Looking at these graphs, it is not difficult for the investor and financial advisor to come to the conclusion, these are safe stocks for next 5-10 years. Not only that each of these companies are Number 1 in their sectors in India, competitions had lot to catch up. Reliance was the largest weighted stock in Sensex and Nifty.

Fast forward to Jan 2013 :

Let us check the graphs for the same stocks for the period of 2008 to 2013.

 

Reliance Industries (2008-2013)

reliance_2008_2013

 

Tata Steel (2008-2013)

 tata_steel_2008_2013

BHEL (2008-2013)

bhel_2008_2013

Let us check the returns received in absolute terms and in CAGR %.

Performance between 2008-2013
01-01-2008 01-01-2013 % Ret CAGR %
Reliance 1452 840 -42% -10%
Tata Steel 940 438 -53% -14%
BHEL 518 232 -55% -15%

 

Yes, PVS is correct; The financial planner would look stupid having recommended these lousy stocks in 2008.

So, what are the lessons for the stock investors ?

=> Buy & Hold strategy of individual stocks with blind faith does not work !

=> Stock investors should periodically check their holdings and add more money to winners and fire the losers.

=> By investing in a diversified mutual fund run by a good fund manager with a strong track record avoids such hassles for the individual investors who don’t have the time and energy to take look after a periodical review of the performance of their individual stocks.

 I would like to end this article on a positive note. I found another Blue Chip stock in the Pharma Industry- Sun Pharma.

Let us see its performance for the same period.

 

Sun Pharma (2003-2008)

sunpharma_2003_2008

Sun Pharma (2008-2013)

sunpharma_2008_2013

01-01-2003 01-01-2008 % Ret CAGR %
Sun Pharma 60 240 300% 32%
01-01-2008 01-01-2013 % Ret CAGR %
Sun Pharma 240 735 206% 25%

 

After the 10 years long run from Rs.60 to Rs.735, you might think, the stock might be very tired.

From Jan 1 2013, till date, (in 5 months) it has made another 46%. Currently it is trading at 1075 (May 30, 2013).

This Blue Chip has returned 17 times of original investment in the span of 10-11 years, with a phenomenal CAGR of 78%.

Do you think only real estate make money in India ?

Note if the financial planner picked the Sun Pharma along with those Reliance, Tata Steel and BHEL, the portfolio would have still made money. One Sun Pharma cures all the illness of the portfolio. There is a lesson here: It is important to have good diversification in stock portfolio.

Before you leave this page, try to answer this question yourself:
Is it time to sell Sun Pharma or buy more ?
Please comment on whether you agree or disagree with me.

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