Volume 3 Issue 43: Intelligent Investing

Investing In Blue Chips or Bull Shit?

Nowadays, I have noticed some "pundits" who keep calling for the market to drop further just to show that they are smart. While they think that "normal" people would not want the market to drop, they think that they are "smarter" by wanting the market to drop further so that "good opportunities" present themselves. This is because their underlying mentality is that they want to "Buy Low, Sell High".

However, the question that is rarely answered is, "What to buy?". Sometimes, the market is just so low that they will tell you, "Just buy anything la...". This is very scary. Let me just show you a bunch of examples. Before the 2008 financial crisis, companies like Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, Bear Stearns, Merill Lynch, etc are considered "the best" of their lot. I mean, in the financial industries, if you didn't know any of those names, you would be considered ignorant. So if you had purchased any one of those companies in 2007 in the midst of the "Buy anything la..." period, this is how much poorer you will look like today:

Investors in Goldman Sachs would have lost more than 50% of their money

Goldman Sachs

Investors in Morgan Stanley would have lost more than 75% of their money

Morgan Stanley

Investors in Bank of America would have lost 85% of their money

Bank of America

Investors in Citigroup would have lost 93% of their money!!!!

Citigroup

Investors in Bear Stearns, Lehman Brothers and Merill Lynch would have lost more than 90% of their money as well.

Now, many of these stocks are considered "blue chips" prior to the financial crisis. So, most people would not think twice about investing in them if I were to just bring up their names.  Sad to say, there is no such thing as "Just buy anything la...".

If you want to be in the stock market, you need to do your homework. There are no two ways about this. Just to illustrate how burnt you would be if you invested in Citigroup (once considered the largest bank in the world), if you invested USD100,000 in Citigroup in 2007, you would have lost 90% and be left with USD10,000. Not only that, to break even and get back what you lost, you would need to make 1,000%. That's right.

How hard is 1,000%? Well, assuming you can make 10% per year consistently, it would take you more than 24 years to break even. Yup, what you lost in one year can take you 24 years to make back. By that time, you would have sworn to stay away from the stock market forever.

HT: Brad DeLong