It is human nature to latch on to myths. We all do it. And investing, like much of life, has many myths.
Recently, the share price of Tesco (LSE: TSCO) seems to have gone into freefall: at 190p, the share price is now less than half its pre-credit crunch high. Many investors, from hobbyist investors like you and me, to investing gurus like Warren Buffett, will have got pretty badly burnt.
The fall of Tesco has left many stock market commentators, including myself, with red faces. After all, hadn’t we recommended buying into the retailer so many times? Hadn’t we always said that Tesco was the bee’s knees?
How did we get this so wrong?
How did we get this so wrong? Well, I think it was because of myths. In particular, the myth of the blue chip.
Like any myth, there are many strands of truth that run through it. Many blue chips are strong, stable companies, which churn out profits year after year. Much of the time, they tend to be less volatile than smaller companies. And there are many blue chips that have produced stellar returns in recent years. Think of Next, Diageo and Prudential. Blue chips make up the bulk of many pension manager and investor portfolios, and quite rightly so.
But perhaps one crucial lesson we can draw from Tesco’s share price crash is that blue chips are not as safe a bet as you might assume, and we should not blithely expect them to be. Further proof, if it were needed, is provided by the banking crisis triggered by the credit crunch. Pre-crisis, we all thought that the banks were safe, secure investments. Who would say that now?
Then there are the troubles of BP. A decade ago almost every fund manager had bought into BP — it was considered the cornerstone of most people’s portfolios.
Take every company on its own merits
In actual fact, blue-chip companies often tend to perform less well than small or mid-cap companies. But most investors are willing to trade the lower returns for greater security. Yet blue-chip companies have to face the same waves of technological and cultural change that every company has to face.
And to the myth of the blue chip, perhaps there is a second myth — the myth of Warren Buffett, or shall we say, the myth of the guru. Okay, Warren is the world’s most famous and successful investor. But I think you should never blindly follow anything or anyone, no matter how amazing they may be.
Always think for yourself. Always do your own research, and take each company on its own merits, whether you are talking about a small cap, a blue chip, an income play, or anything else.
This is why I try not to think of myths when I invest. After all, the most difficult thing about any myth, is letting go.