Time to Start Buying Blue Chip Stocks?

Barring some phenomenal rally in the last weeks of the year, 2008 will go down in history as one of the worst year’s ever in the stock market. To date, the Dow Jones Industrial average has fallen 37%. That would mark the 3rd worst performance in the Dow’s history. The worst year being the 53% drop in 1931.

Conventional wisdom has always said that if you invest in solid, blue-chip companies for the long-term, you will be rewarded with higher returns. However, we at eChristianInvesting have recently performed some detailed analysis on the Dow’s performance over the last 10 years and have found that conventional wisdom doesn’t always hold true. Over the last 10 years, investing in the Dow as a whole would have yielded an average return of -3% per year and your investment would currently be worth 1/3 less than what you had originally invested.

So maybe the shotgun approach to investing isn’t the way to go?

Now let’s take a look at the individual Dow component performances over the last ten years. Investing in Exxon Mobil (XOM), United Technologies (UTX), 3M (MMM), Chevron (CVX) or Caterpillar (CAT) ten years ago would have more than doubled your investment. However, only half the Dow components (15) have increased in value over the last ten years, while 14 would have lost you money. So is picking blue-chip stocks just a 50-50 guessing game with equal chances of winning and losing?

Maybe a better strategy would be to invest in the top performing stocks each year? We took a look at the top 5 performing stocks in the Dow each of the last ten years. If you would have bought the top performing stock each year, you would have watched that stock lose money in 6 out of the 9 subsequent years. On average, the top performing Dow stock has lost 15.7% the following year. Surprisingly, the 2nd best performing stock has behaved much differently, averaging a 9.6% return the following year.

Now let’s take a look at the top 5 worst performing stocks in the Dow each of the last ten years. If on December 31st of each year, you would have bought shares in the worst performing Dow stock of that year, you would have earned a positive return in 7 out of the 9 subsequent years. The worst Dow performer as averaged a 19.4% gain the subsequent year. Excluding this year’s horrible performance, that average jumps to 31%. Few investors would complain about those types of returns.

If you would have invested in the 2nd worst performing stock each year, the return isn’t quite as impressive, but is still very good. Those companies have posted positive gains in 6 out of the subsequent 9 years and have averaged a 13.8% annual return. Again if you exclude this year’s abnormally bad performance, that average return goes to 17%.

Without a doubt, 2008 has been an incredibly bad year for almost all stocks. However, stock market crashes always present unique opportunities for investors willing to invest when things don’t look great. Buying stocks that have been this year’s worst performers may not be conventional wisdom, but don’t be surprised to see General Motors (GM) and Alcoa (AA) be next year’s biggest Dow winners.

Disclosure: no positions

Comments

[john s. gordon:]

confirms the 'buy dogs of dow' thesis, to some degree. tread cautiously however. some dogs are deservedly so.
> jack

2008 Dec 07 09:19 AM

[secmaven:]

Buy stocks for long term growth of capital. Conventional wisdom goes south. Which stocks? GM because it is worst performing when the company's sales are collapsing and the management has an empty begging bowl out before congress with the word "bankruptcy" written in the bottom?

2008 Dec 07 10:01 PM

[capital pains:]

All this is nonsense..The old rules are dead and gone forever,,,
" Buy and Hold" is now "Bye and Fold"
Thank you hedge funds, investment banks and brokers, Hank Paulson,
Labor, Management, all greed driven miscreants.
If you must invest, or shall we say, bet a stock, as the market is nothing more than a short term gamble, with the odds stacked way against the average investor. Follow the Money, Hedge funds still rule, unwind and reposition constantly and very quickly. If a stock happens to be in a sector that the funds are buying, take your profits and leave. Good luck smiled on you ..The market is gambling and a longer and longer shot at that !

2008 Dec 13 07:25 PM