Selling a blue chip investment too early will likely cost you money

blue chip investment

Instead of selling that blue chip investment for trivial or transitory reason, focus on its long term potential.

A blue chip investment is usually a well-established, dividend-paying stock with strong business prospects. These are companies that also have strong management that will make the right moves to compete in a changing marketplace. The best type of blue chip investment you can add to your portfolio will have a history of earnings and, in most cases, dividends. They have established their value. They can fluctuate widely and they will suffer in a long-term market downturn, but they offer a higher probability of long-term gains.

When it comes to adding value to your investing efforts, one of the least productive things you can do is to try to “time” the market. By that, we mean trying to sell your blue chip investment at what looks to you like a price peak—perhaps in the hope of buying them it at lower prices.

One of the hardest things about successful investing is that it’s easy to form a strong opinion on the market’s next price trend—and then find the market does something totally different from what you expected. That’s why you want to confine your buying mostly, if not entirely, to high-quality stocks, like blue chip stocks. They tend to hold on to their value over long periods.

Sometimes your strong opinions will turn out right. Other times, you’ll sell at what looks like a high price, only to find that some new information comes along that spurs the stock to much higher prices. Sometimes, you’ll sell a stock that looks “high,” then use the money to buy something else that looks cheap. But your cheap stocks get even cheaper while the rest of the market continues to rise.

You’ll often meet investors who are eager to tell you in great detail how they determined that a blue chip investment, or the market as a whole, was over-priced, and how they sold just in time to avoid a 10% or 20% downturn. Avoiding a downturn feels good and makes a good anecdote, but that’s not the same as making money.


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Practicing patience, not reactionary behavior

It’s all too easy to sell a blue chip investment that looks like it’s headed for a downturn, only to buy another that is headed for a collapse. For that matter, if you make a habit of selling whenever you feel the market’s risk has gone up, you will wind up selling your best stocks way too early.

You can always find a rationale for selling. Market commentators are continually thinking up new ones, based on recent market strength or weakness, historical market patterns, political or economic predictions, changes in tax policies—the list is endless. This is a good thing. After all, you can only buy a stock if somebody who owns it wants to sell.

Before you act on a selling rationale, take a broader look. Consider facts about the blue chip investment, and about your investment goals and temperament. If the selling rationale makes sense and you find additional good reasons to sell, then selling may be the right thing to do. But it’s always a bad idea to sell a good stock for trivial or transitory reasons.

Four ways to pick the right blue chip investment to hold

  1. Good blue chip investments have low debt. It doesn’t matter if you’re investing in blue chip stocks or penny stocks, the company under consideration should have manageable debt. When bad times hit, debt-heavy companies often go broke first.
  2. Blue chip investments should have industry prominence if not dominance. Major companies can influence legislation, industry trends and other business factors to suit themselves.
  3. Good blue chip investments often have hidden assets in the form of real estate. For instance, when a company buys real estate, the purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the purchase price remains unchanged on the balance sheet. You have to look closely to spot this hidden value. At times, the hidden value in a company’s real estate can come to exceed the market value of its stock. This hidden value may only become apparent to investors when the company upgrades the use of the real estate. For example, a merchandiser might repurpose a parking lot to build a shopping mall with a residential condo tower on higher floors, and a parking garage down below.
  4. Review the company’s finances going back 5 to 10 years. The types of blue chip investment we recommend will generally have a history of profits going back for at least that long. Companies that make money regularly are safer than chronic or even occasional money losers.

Have you been able to sell a blue chip investment when it was close to a peak price, and buy it back when it dropped? Have you ever sold a stock, only to see it go much higher? Let us know what you think in the comments section below.

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