One of the more interesting periodic reports I received when I worked for a large retail brokerage firm was the retail investor holdings report. Every month, the company's computer systems would generate this report which indicated the most popular stocks held by the firm's retail clients. Obviously, the report did not reveal the individual account information, just the totals, so at a glance we could see the most widely held stocks.
In the tech bubble of the late 1990s, many tech names muscled their way into the top 50 positions. During the depressing years following this bubble's bursting, more conservative names rose in the ranks of most popular stocks. One feature of this report (unsurprising if one thinks about it for a minute) is that the largest market cap stocks tended to be the most widely held. So names such as ExxonMobil, General Electric, Microsoft, AIG and Pfizer would usually be among the top holdings.
It was at this firm that the concept of "Core Holdings" was drilled into me. The thinking there was that certain stocks, due to their excellent long-term fundamentals and a history of consistent above-market performance, should be held for the long run, no matter what. This type of stock is often referred to as a "blue chip."
But what makes a stock a "core holding" or a "blue chip?" Well, like much of what happens on Wall Street, we can only really measure a stock's "core holding-ness" after the fact -- that is, after it has outperformed the market over a long period.
One irony of all this is that this designation has proved sometimes to be a great disservice to individual investors. Because a stock is labeled a core holding, investors may ignore important fundamental changes that might call into question its status as a core holding (like I did with Amgen). I remember well a list of "core holding" stocks that my firm put together (I don't think they asked my opinion for this list) and published in the late 1990s. It included such "winners" as Enron and Global Crossing. Needless to say, investors who bought these names thinking they could "buy and forget" them were sorely disappointed.
As I speak with investors I sense that some of them would never consider selling a stock because they truly believe that is a "core holding." Sometimes their attachment to a stock is sentimental (my Grandfather gave me that stock...) and sometime there are tax implications. But too often, the attachment is not founded in fundamentals but in some vague notion that the stock is a "winner" regardless of cold hard facts. Take a look at Microsoft for example. When you look at the stock's chart from 1990 to 2000, there is no doubt that this was a great investment. But when you change the time frame from 1999 to the present a different story emerges.
This chart suggests that all investors who bought MSFT over the last EIGHT years (excluding those clever ones who bottom ticked the shares in 2001, 2002 or 2006) have not made any money. How can we call this stock, despite whatever operational excellent we may attribute to the company, a core holding? We can see similar charts for HD, GM, WMT, C, MRK and many others.
I am not advising investors to sell these names. I actually own PFE, which we might also place in this group, but that's a story for a different post. I think it is a good idea -- I do this for my portfolio constantly --to look at one's holding and see if there are names there that have not performed well for a long time, especially those stocks attached to what we may view as excellent companies. Then reassess the fundamentals of that company and review the reasons for owning it. You may find that what you thought was gold is really lead. And as they say "Get the lead out!"
Source: Yahoo Finance