Blue chip investment is one of the favorite catch phrases for investors in their journey with money today. Ask anyone that just started investing and they might say they started to look at blue chip investment. You can also evaluate blue chip companies using value investing.
Why is it called Blue Chip?
Interestingly, Blue Chip came from the casino (who knew investing had a gambling root). There are many chips which people can use to exchange money for and blue chip is the most expensive one. It got adapted into the investing world and the most “valuable” company came to be known as blue chip.
What is a Blue Chip Company?
Surprisingly, there is no one definition of a blue chip company. However, it all points to same fact that blue chip are considered to be a “strong” company. Generally, they are high quality (with economic moat) and able to weather economic crisis and adverse economic conditions. They also know as reliable companies that people depend on no matter whether there is an market crash or not.
What is an example of a Blue Chip Company?
Back home in Singapore, there is a well known brand called Singtel. Previously, we wrote on whether it was a good time to buy Singtel. 2018 is a year of volatility which brings much opportunity in purchasing your first investment. Singtel is an example of a blue chip company as it has a moat of efficient scale. It is not easy for another company to come and steal business because of the big up front cost (imagine that you have to buy a satellite). Singtel is also in a position to be able to weather economic crisis and adverse economic condition. Whether there is a crisis or not, business or individuals will still need to use their communication device. There are also other businesses that Singtel is doing which we will not be covering here.
Another famous example of a blue chip company is called Facebook. Facebook have a strong economic moat called network effect. Facebook is in the business of advertisement. Whether crisis or not, people will still be using Facebook and companies will still use Facebook as their advertising arm.
What’s the downside of a Blue Chip Company?
Blue chip companies are generally accepted to be strong companies. However, some of them might have weak financials. If you only look at it on the surface without understanding the business, you might invest in a bad company. That’s why you have to pair it with value investing.
Another downside is that it tends to be expensive as people like to buy blue chip companies which drives the stock prices up. We have to wait for opportunities if we want to invest in a blue chip company.
Hope that you have learnt something.
Disclaimer: We do not hold any shares of Singtel or Facebook or intending to buy any in the next 72 hours. Please consult your financial adviser or broker if you wish purchase any stocks and shares.
Wishing you the best in your journey with money.