Buy Blue Chips and Go Broke

By Al Thomas

What is a Blue Chip? It is supposed to be a stock that is “good”.

Good by any definition means it is to the benefit of the owner or user. When it refers to a stock it mean it will make money for the stockholder. That could be short term, but usually refers to the long term, Buy and Holder. Most of the stocks in the Dow Jones Industrial Average are considered “blue chips”. Really?

The Dow has a requirement that any stock that falls below $10.00 per share is to be removed from the list. It is done at the end of the calendar year. This year they did not do it. Take a look.

These stocks should be removed from the DJIA Index: Alcoa was 45, now 6.50; Bank America was 45, now 5.00; Citicorp was 45, now 2.50; General Electric was 40, now 9.00 and General Motors was 35, now 2.50. Whatever the reason for not following through they are not saying.

Of the 30 stocks in the DJIA Index almost every one is much lower with some having lost more than 50% of their price. Caterpillar was 80, now 21; Microsoft was 36, now 16.00; and on an on. These are also the stocks that brokers recommend to their “conservative” clients because they always have value. OK, now define value. They seem to have forgotten that any stock or mutual fund that has lost 50% of its price needs to gain 100% to get back to “even”. Even is for losers.

Most brokers never mention that the investor should protect his capital with loss limit protection. It means placing an open stop loss order on any position when it is bought and moving that price protection up to lock in profits as they occur. Few, if any brokers or financial planners will do this for you. You, and only you, must watch your money. Nobody else cares if you eat dog food when you retire.

Every successful investor (that means one who makes a profit) knows when any position is taken how much he is willing to risk. Initially it will be how much he is willing to lose and as profits appear how to move up the stop loss protection. It only needs be done once a month or even better, once a week.

One other broker tip is,”This stock is so cheap it can’t go any lower”. Until it does. There is no such thing as a “cheap” stock or one that is “undervalued”. Today it is impossible to compute value.

As you can see Blue Chips are not immune from loss. Even at today’s lower levels stops should be placed immediately. Believe it or not the market can go lower.

Filet mignon or dog food. It is up to you.

Copyright 2009 Albert W. Thomas All rights reserved. Author of “IF IT DOESN’T GO UP, DON’T BUY IT!”