Wednesday, June 06, 2007

blue chips not equal to diamonds

"Blue chip" stocks -- the stocks of large, established companies -- were long touted as great investments for "widows and orphans," who weren't expected to manage their money actively. And historically speaking, some blue chips have been great investments. Companies like General Electric (NYSE: GE) and Johnson & Johnson (NYSE: JNJ) have been rewarding shareholders with solid growth and strong dividends for decades. But as hedge fund manager Mohnish Pabrai points out in his recent book Mosaic: Perspectives on Investing, even blue chips don't last forever.

The average Fortune 500 company has a life expectancy of 40-50 years, and given that it can take 25 years or more for a new company to grow to Fortune 500 size, many so-called blue chips cease to exist less than 20 years after they make the list! Size is no guarantee of longevity -- just ask all those Enron shareholders. And even among more established firms, times and businesses change. I'm sure that most of the investors who bought Ford (NYSE: F) 15 or 20 years ago didn't foresee a time when the stock would be trading in single digits and the company desperately clinging to life.

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