In fact, according to TrimTabs Investment Research yesterday, the latest round of turmoil has sent $41 billion in equity mutual funds to the sidelines for the month through last Friday. At the same time, even bond funds have been hit hard as another $24 billion was sucked out of those retail markets.
Together, that put September’s withdraws at the top of the all time list tripling the previous record set in 2001. Now if that’s not a stampede to cash I don’t know what one is.
But as all of that money headed for the mattresses, folks like Warren Buffett have been going in through the out door, believing that certain stocks have suddenly become cheap. And not surprisingly, it has been largely blue chip stocks that have benefited the most.
That’s because as the herd hits the panic button, even good companies get taken down with bad. As a result, savvy investors suddenly now find themselves in the midst of a market sale if they are patient.
So while the exits are getting clogged, it’s now actually time to nibble and blue chips stocks are the best place to start.
Blue Chip Stocks Explained
The reasons for this are pretty simple. Blue chip stocks are the best of the best and financials stocks aside they are going to be with us for a long, long time.
In fact, the name itself comes from the world of poker where the color blue signifies the highest valued chips. And if you’re able to build up a stack of these during a downturn, you will likely wake up at some point in the future well ahead of the rest of the players.
So what are bargain hunters like Warren Buffett looking for these days as they troll for the winners amid the fire sale?
It’s simple really. In general investors like Buffett are looking for companies that all have at a minimum the following six characteristics. That’s what makes them blue chip stocks in the first place.
They are:
- A nationally recognized, well-established company.
- Companies that sell high-quality, widely accepted products and services.
- Companies that are known to weather economic downturns.
- Companies that can operate profitably under adverse economic conditions.
- Companies with a long record of stable and reliable growth.
- Companies with a solid and consistent dividend history.
Where to find Blue Chip Stocks
Perhaps the most famous list of these types of companies is the the Dow Jones Industrial Average, more commonly known as the DOW.
First published in 1826, the Dow is a carefully selected list of the 30 companies that in essence serve as the national bellwethers. That would be a good place to start.
Another place to start, however, would be with what’s known as the Nifty Fifty. That was the name given to the 50 large cap stocks on the New York Stock Exchange in the 1960s and 1970s that were widely regarded as rock solid buy and hold growth stocks.
These were the fail safe stocks of the time that would weather any downturn and are credited with propelling the bull market of the early 70’s -even as their P/E’s reached unsustainable heights.
They included names like Coca-Cola, Procter & Gamble, McDonalds, Gillette and Anheuser-Busch — companies that are still with us today and that will still be with us tomorrow.
Overtime though, the list—like the Dow — has evolved to better reflect the new economy. It is expressed by the Morgan Stanley U.S. Multinational 50 Index (^NFT). In short, it’s a new nifty fifty that includes names not found on the Dow such as Cisco Systems (CSCO), Oracle Corporation (ORCL) and Apple Inc (AAPL).
Among the list you will find many of companies that have now worked their way onto the bargain rack as the herd forced them to sell off.
Buying Blue Chips Amid the Sell Off
However, along with the massive sell off, the new nifty fifty index has taken its share of lumps. Like the Dow, it’s down as much as 30% this year with more pain likely to come.
But that’s exactly where savvy investors will find their most profitable long term entry points.
Here’s why.
Excluding this one, there have been eight bear markets since 1960. On average they have lasted 12 months with declines in the S&P index averaging 29.3 percent.
Now if that sounds familiar at all, that’s because that is exactly where we find ourselves right now. That means that even if our current situation were to get worse, we are likely getting very close to the bottom. Because the simple fact is the markets bottom long before the economy does.
So don’t waste your time waiting for the recession to actually get here before you make your move. By then the market will have left you behind once again.
That’s why nibbling on blue chips stocks at this point is the investment strategy that makes the most sense these days as everyone heads for the exits. Beating the crowd is the key.
Keep in mind, of course, that these are investments — not trades. After all, there is big difference between the two and now is the time to decide which style really fits your needs.
Just be careful not to be trampled by the herd as you head in the other direction.
Your bargain-hunting analyst,
Steve Christ, Investment Director
The Wealth Advisory
PS. After last week’s wild ride on Wall Street, most investors are ready to get off the roller coaster for good. And I can’t say I blame them. Last week was a white knuckle ride for the ages.
But as giant-sized as Wall Streets troubles have been lately, there is one investment strategy that will perform in any market – even with its twist and turns.
It’s an investment strategy that can double your money with little risk called the "Dividend Money Machine." To learn more about it click here.
