- March Madness Isn't Just Limited to the NCAA Tournament.
- Trying to pick Cinderella for your tournament bracket, or investment portfolio, is not the safe bet.
- Blue chip companies aren't always perfect, but they have a long record of stable and reliable growth that typically overrides occasional disappointments.
This is a wonderful time of year for anyone who follows college basketball. That's because the NCAA Division I Men's and Women's Basketball Tournaments are underway in a run of games spanning a two-and-a-half week period that is euphemistically referred to as March Madness.
That moniker is among the best in sport because crazy things do indeed happen when these tournaments begin. There are buzzer beaters; there are upsets (otherwise known as bracket busters); there is total domination; and there is almost always at least one team that carries the Cinderella banner past the first two rounds into the Sweet 16.
Something else that stands out about the tournaments is that many of the same programs are regarded as national championship contenders year after year. These are blue chip basketball programs. Think schools like Duke, Kansas, and Kentucky on the men's side and Connecticut, Tennessee, and Stanford on the women's side.
We aren't aiming to play favorites by naming the schools we did. There are other schools in that blue chip mix. The point is that the blue chip label has been earned from a longstanding history of competitive success that has earned the programs national recognition, a large fan base, and the respect of their opponents.
It is said that success breeds success. That rings true in college basketball as blue chip programs are able to attract the best talent that helps these programs remain strong. However, a group of talented individuals doesn't gel as a talented team without quality coaching, discipline, a continued desire to get better in practice, and an appreciation for the model that has turned them into blue chip programs.
With that, we'll transition into how a blue chip company is defined on Investopedia:
"A nationally recognized, well established and financially sound company. Blue chips generally sell high-quality, widely accepted products and services. Blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which help to contribute to their long record of stable and reliable growth."
March Madness isn't just limited to the NCAA tournaments. There has been a little March madness this year as well in the stock market, the global economy, the geopolitical arena, and the weather.
That madness has created some volatility, some speculative excess in certain situations, some misgivings about growth prospects, and a whole lot of calls for the head of Punxsutawney Phil.
It is precisely at maddening times like that when investors should have a renewed appreciation for holding blue chip companies in their portfolio. To be sure, many will still get knocked down when madness takes over, yet they typically handle such blows better than most companies and are often the first to bounce back.
Blue chip companies, though, aren't perfect. They experience operating disappointments every now and then and their stock price suffers as a result.
Even Duke, which has one of the most respected programs in men's college basketball, hasn't made the NCAA Tournament every year. It missed the NCAA Tournament in 1995, but it has been back every year since. Only Duke fans (and probably North Carolina fans) can recall that 1995 blemish. What the rest of the college basketball world knows and respects is that Duke has made 37 tournament appearances, 15 Final Four appearances, and has won four national championships.
Reputation Precedes Itself
It's no mystery why Duke most years is picked in NCAA brackets as a team expected to go a long way in the tournament. Duke, of course, has been a bracket bust before, which is akin to a blue chip company having a one-time earnings disappointment. The overriding point is that Duke's longstanding history of success makes it a safe selection more often than not to produce some nice bracket returns.
It isn't really all that different for blue chip companies. They are expected to do well year after year and most do. They stumble occasionally, but quality management, discipline, a continued desire to get better in their business practices, and an adherence to a business model that has served them reliably for decades usually helps them get things turned around relatively quickly and producing nice returns for investors.
Think companies like 3M (NYSE:MMM), Emerson Electric (NYSE:EMR), and Procter & Gamble (NYSE:PG) on the goods side of the economy and Automatic Data Processing (NASDAQ:ADP), Consolidated Edison (NYSE:ED), and T. Rowe Price Group (NASDAQ:TROW) on the services side.
Incidentally, the aforementioned companies have all increased their dividend for at least 25 consecutive years. That makes them "Dividend Aristocrats."
There are no NCAA aristocrats on the men's side at the moment. Kansas is one year shy of aristocracy, making its 24th straight tournament appearance this year. The University of Tennessee women's team, on the other hand, is making its 33rd straight appearance and is the only team to have made every tournament. That's NCAA basketball tournament aristocracy at its finest (and I say that as a loyal graduate of Vanderbilt).
What It All Means
When filling out a tournament bracket, it is easy to overthink things because there is so much noise in the echo chamber. There is no shortage of opinions about which teams will do well and which won't. Expert cheat sheets are published on sports sites and they get parsed in an attempt to predict the first round upsets and to identify Cinderella. This happens because crazy things happen in the early rounds; and calling those early upsets can be the difference in winning an office pool.
When it comes to winning the whole thing, though, Cinderella is not the safe bet. The blue chip programs are the safe bet and there is plenty of tournament history to back that up.
The same process of overthinking things happens just as readily in the stock market. Innumerable opinions are put forth about which stocks will do well and which won't.
There are plenty of selections from which to choose in the stock market, but if you don't want to overthink it, a basket approach is the way to go. An S&P 500 Index fund, an ETF like the SPDR Dow Jones Industrial Average (NYSEARCA:DIA), and/or mutual funds like the T. Rowe Price Blue Chip Growth Fund (MUTF:TRBCX) and Vanguard Dividend Growth Fund (MUTF:VDIGX) are some layup options in this respect, but there are many others.
In bull markets, though, the focus isn't so much on picking the next Procter & Gamble as it is on picking the next Tesla (NASDAQ:TSLA). The payoff can be huge if the stock slipper ends up fitting, but the payback can be, too, if it doesn't. This leads us to an added explanation of a blue chip company provided by Investopedia:
"Blue chip stocks are seen as a less volatile investment than owning shares in companies without blue chip status because the blue chips have an institutional status in the economy. Investors may buy blue chip companies to provide steady growth in their portfolios. The stock price of a blue chip usually closely follows the S&P 500."
With a long-term time horizon, blue chip companies are generally a safe bet. They might bust your stock portfolio at times just like Duke occasionally busts tournament brackets when it bows out early.
There are no guarantees with stock investing and there are no guarantees in picking an NCAA tournament winner. Crazy things happen to generate some madness, but over time, history has shown that blue chip selections have produced some nice returns in both NCAA tournament brackets and investment portfolios.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.