One of the most common misconceptions about the stock market is that owning the so-called ‘blue-chip’ stocks for the long run is the only safe way of being ‘in the market’. Buy something that seems to have always done OK, and you’ll be fine – they say.
Well, I’m here to tell you that nothing is safe in the stock market. Nothing. Even buying the much touted blue-chip ‘safe’ stocks of the day has an inherent risk component, especially paired with the common lack of a conceptual understanding of risk management. In every generation, those traversing the markets need to re-learn this lesson over and over. Throughout cycles and centuries, many a highly popular stock that was en vogue for years and decades eventually stumbled down the staircase and broke its neck. Most wound up dead, some were paralyzed, and only the rare unicorn healed again. On top, for those stocks that did succeed, people cannot believe the emotional toll it takes to sit through devastating 70-90% losses for decades.
Stocks can come crashing down hard – but popular indices such as the S&P500 or the NASDAQ follow an ultra long-term upwards trajectory because they keep reshuffling their components according to the stocks of the day that trend up, camouflaging this dynamic and leading people to believe that stocks behave just the same. But they don’t. The advent of passive ETF investing has come to the rescue of a lot of people, as you avoid single stock risk. That does not mean however you’ll get rich, because the dilution of alpha with wide ETF diversification leads to strong bridling of returns, and you are still riding the regular down-trends in in the indices, assuming systemic market risk. Even when indices move up, they do so slowly, excruciatingly slowly. Thus, many people decide to play around a bit, trying to pick some stocks that in their opinion might make them money quicker.
Blue-chip only after the fact
The term “blue-chip” was first mentioned in the context of the stock market in the 1920’s – it comes from the card game Poker, where the blue chips resemble the high-value bets. The assumption goes that what’s perceived as a high-value company makes for a high-value stock. “Value” is an overrated concept, and such an equation is largely bogus as I’ve previously discussed. But one thing is for sure – whatever these stocks are good for, as I’ll lay out below, they are definitely not high-profit opportunities (anymore).
“If you had bought $10,000 in Microsoft in 1986 …”
I’m sure that over the years you’ve heard one or more of these stereotypical grand comparisons of past performance that are made in the need to appear smart and justify a certain strategy in the present. Stories like “if you had bought $10,000 worth of Microsoft in 1986, and held it for the total duration until today without so much as a flinch, you’d be a multi-millionaire right now”. 360,000% over almost 40 years. Well, do you know anyone who has done that? I mean, really done exactly that? There are only few people who buy at the right time, and are able to hold for half a century – if you know one, consider yourself an outlier. There’s a reason they’re so rare.
$10,000 is a lot of money for an average citizen – to put all of that into a single stock at the time when a still relatively unknown newcomer like Microsoft was making its debut on the market, with the idea of holding the stock through thick and thin, would have been akin to a blatant gamble. Sure, gambles can play out – but most of the time they don’t. People who would buy such a stock in such a scenario are of a specific psychological setup – one that is driven by enthusiasm, opinion, grand expectations, usually biased research, and the common dangerous emotions – hope, fear, greed, hubris, overconfidence, self-doubt. All that would have led that person to be very liable to impulsive decision-making, including to be very likely to panic sell at a rash decline, or buy more stock at market top euphoria, just to see large losses accumulate quickly.
For example on Black Monday in 1987, Microsoft suffered a 52% decline in a just 15 days – even the rapid COVID pandemic crash took longer, and already there a whole lot of people panic-dumped their beloved long-term holdings. It is hard to understand the panic that people can feel on such occasions – if you don’t think or are willing to admit it’s possible you’d fall for this, then you are the exact type of character who is most likely to have done so, because you are obviously not in touch with your own dark side and shortcomings. There’s a reason why, without fail, all the great market wizards of the centuries have cited our own psychology to be one of the top factors discerning success from failure.
But let’s continue the thought experiment. Even if you held through this decline, you’d have sat on virtually no returns for the next two years while the rest of the market was rallying on. Someone with the mindset that made that initial gamble would be inclined to jump horse right here, as the grass is always greener on the front lawn of other shiny company stocks.
Microsoft’s history is full of such scenarios – for the span of ten years from the market top in 2000 to the absolute bottom in 2009, Microsoft declined by a total of 74% over a downtrend lasting a decade. You’re telling me that such a person could have sat on such a loss for so long, while there were hundreds of new similar tech stocks IPO’ing? Stocks of great companies that you could easily muster the same enthusiasm or “fundamental” conviction for? Don’t fool yourself. In fact, Microsoft went 16 years sideways until it eventually re-gained its old price level. Add to that many people’s need to raise money during times of economic hardship, by whatever means necessary (e.g. that old Microsoft stock that hasn’t moved an inch for 10 years), and the chances of most people holding such a stock dwindle drastically the longer the time-frame.
Where the rubber hits the road
People misunderstand how emotionally difficult it is to hold stocks for such a long time-frame, especially the newest generation of “investors” that have known nothing but central bank quantitative easing-supported & liquidity-driven markets for the last 1.5 decades. Even today’s average money manager has only been in his job for an average 8 years – they’ve never experienced a deep bear market! How can they know to look beyond the event horizon, how to deal with the singularity that they face when one happens?
The idea of holding a stock for the ultra long-term implies that you are very young when you have to put up the money. Nobody starts at 50 and hopes to hold a stock for another 50 years. It’s expected to start this endeavor at 15-30 years of age, or younger – a stage in life when few people have an easy $10,000 lying around, at least one they wouldn’t be better off or have to be spending on education, housing or life right then. Remember that we can more easily speak about $10,000 today, but $10,000 ‘1986’-dollars were worth the equivalent of approx. $28,000 of today’s money when correcting for inflation.
There was almost no 20-year old that put the equivalent of such an amount of money into the stock market into a young tech company, especially not after the stock market gained a rather questionable reputation after going side-ways from the mid-60s to the early-80s. Only few people in 1986 would have put that much money on Microsoft on a hunch. It wasn’t the powerhouse it is today.
Microsoft’s perceived risk at the time was high – an assessment I completely disagree with, but consensus is what drives popular opinion in the world of stocks. Thus people rather buy something that is well-established, has a slow but steady track record, or something that has had a recent strong run and is now considered established & ‘safe’ by the community. Microsoft was quite the contrary of what most hold-forever “investors” would recommend you to buy for your portfolio in the 1980s. For most people, if they bought it at all, it would have been part of a widely-diversified portfolio, with very few money put in such a non-established non-blue-chip stock.
Survivorship bias
Microsoft’s ascent over 4 decades is impressive, but it is only so now – in hindsight. There are countless examples of young tech startup stocks with similar business models and market niches in the 80s and 90s which stock could have been bought on the same expectations for the long-term hold, which however just served to erode people’s capital into the ground.
But here comes the twist – the stocks that are being used by buy & hold blue-chip advocates to make their case are always the stocks that survived. What people again ignore is that many of the stocks that exist around a given time and are highfliers, simply crash and disappear completely a few years later, or take decades to recover.
The long-term “investors” of today cherry-pick the best stocks from 40-50 years ago, and then declare that their strategy would have worked on them. Well, hindsight is always 20/20. A ton of stocks that people bought in the 80s and 90s never made any net profits for holders, had their profits dwindle into oblivion, or crashed and were delisted – and people’s money with them. But these are gracefully ignored, and we boast our strategy with the performance of the survivors – something called survivorship bias.
Recommendations come when the real opportunity is gone
What the long-term buy’n’hold crowd does not do is to recommend you to pile into stocks like Microsoft when they’re young – the long-term buy recommendations come always when the move is obvious, the company has all the attention, the stock rally mature, and the real opportunities long gone. When stocks have blue-chip status, they just don’t move much anymore percentage-wise. Stock floats are too big, and shares are distributed into too many hands for the price to be marked up quickly.
The problem is that most people do not put their money into stocks or into mutual funds until the trend is obvious and late (and close to a top), due to fear and greed. This has happened over and over at every single market top since there are records.
When Microsoft had finally established it’s status of reliable growth, became a blue-chip, and was recommended as a portfolio cornerstone by the long-term buy & hold crowd, the true opportunities were long over. You would have only profited from about 2% of the stock run since it’s IPO – waiting for blue-chip status would have lost you 98% of opportunity.
So much for such grand historical admonitions of “If you had bought xxx in 19xx” – they all are based on the same faulty premises.
1960s to 1980s
Let’s skip back a few decades and have a look at the stocks that were in vogue. From the ’60s to the early ’70s, these were the “Nifty Fifty” – a set of highfliers that were the hot s*** of the day.
A prominent Nifty Fifty stock was Digital Equipment Corp. This had been a strong performer early on where no one would have touched the stock, quadrupling in just about a year of time (read about it here), but by the time it became blue-chip all opportunity was gone – it later lost most of its value up to a buyout by Compaq, and the long-term holder certainly did not make a killing for his decade of holding.
Most Nifty Fifty stocks collapsed in the 1973/74 recession, and only few went on to make profits for their holders. But there are exceptions – for example, Walmart is one of the few stocks that did make long-term holders money. But, as for Microsoft above, as good as no one held that stock for 51 years – through wars, recessions, financial crises … and a -77% loss over 2 years.
The late 80s and early 90s were prominent for Nasdaq-100 stocks, including Xerox, Polaroid, Kodak, or Avon – all blue-chips at the time. As often for tech stocks, companies stop innovating when they grow, and their stocks lose speculative demand. Such happened for most of these at the time, e.g. Xerox:
The 1990s – Cisco Systems, Inc.
The late 80s and 90s markets were dominated by American Tech stocks. Cisco Systems, Inc. serves as a great example of a company that was once considered a blue-chip stock with seemingly limitless potential, but which stock failed to deliver thereafter.
During its late heyday in ’98-2000, Cisco was viewed as one of the most exciting and promising companies in the market. Stockbrokers, individual stockholders and institutional managers were convinced that Cisco would dominate the world and become the only worthwhile stock to own for decades to come. The community was promising the heavens for Cisco’s trajectory – “a powerhouse with no ceiling in sight“. Its stock price seemed to have unstoppable upward momentum, reinforcing the belief that owning this stock was a surefire path to success.
True enough, early on Cisco was a staggering winner, staging about a 95,000% run from its IPO to the 2000 top. Problem is, most people wouldn’t touch it until it was well aged, bathing in attention and blue-chip in the years of ’98 to 2000. Buying there yielded virtually no results until this day, as you can see in the chart below.
As almost always in the market, what everybody believes and chases is seldom worthwhile. Despite the company’s continued operational success to date, the stock itself has dropped painfully and stagnated for the past 23 years. Individuals and funds who bought into Cisco as a long-term bet after it achieved blue-chip & mega-cap status were in for a disappointing surprise.
See Cisco, first as a logarithmic chart to show the dwindling opportunity of buying Cisco late as a blue-chip:
Now, compare to a linear chart to see the 90% drop past earning its blue-chip medal that long-term “safe bet” buy & holders would have to sit through:
Cisco was part of an elite group of mega-cap stocks known as the “four horsemen,” which included Microsoft, Dell, and Intel. All four stocks serve as a cautionary tale for those believing blue-chip stocks are devoid of risk. While Microsoft stockholders ‘only’ experienced a 16-year hiatus of sitting on dead money after reaching the 2000 Highs, the other three blue-chip horsemen— Cisco, Intel, and Dell — to date never managed to reclaim their former glory, more than two decades later.
Again, even if investors didn’t buy exactly during the late 1990’s market frenzy, the real opportunities for substantial gains, as seen during the early days of these stocks, were long gone.
More tales from the nineties
In the late 1990s, “investors” were attracted by the allure of many of such seemingly unstoppable blue-chip stocks. However, reality turned harsh quickly, leaving many with shattered dreams and lost fortunes. One prominent example was AOL (America Online), a once-dominant internet service provider that epitomized the internet craze as much as Nvidia today epitomizes graphic processing units, or Apple epitomizes upmarket consumer handheld electronics. As the market topped, AOL’s stock plummeted. Eventually, it merged with Time Warner in 2001, but the blue-chip stock continued to spiral down, and with it stockholders’ dreams.
Not only general market sentiment may change, but individual companies may start facing problems prompting stockholder herd panic. Enron was an energy company that was considered a blue-chip in the ’90s, which later emerged to be engaged in accounting fraud, hiding debt and inflating profits through complex financial schemes. As the truth unraveled, Enron’s stock price nosedived, and the company filed for bankruptcy in 2001. Stockholders that did not cut losses, hoping to hold forever, were left with worthless shares.
Other notable blue-chip stocks from the late 1990s met a similar fate. Companies like WorldCom, Global Crossing, and Lucent Technologies succumbed to severely falling stock prices, and holders who had put their money into these once-promising stocks watched their capital evaporate in slow (or fast!) motion.
Many more stocks found their top in this environment when they became blue-chips, only for history to repeat again – Qualcomm, EMC, Amgen, Micron Tech, and many others were bought en masse by people and funds late in the nineties, only to watch these stocks linger mostly below their buy price, or make minimal returns (e.g. AMGN 250% over a span of two decades, a profit you should be able to see in 6-12 months in the best stocks).
Rinse and repeat – 2008/09
Equally during the 2008/2009 financial crisis, several blue-chip stocks suffered significant blows, leaving shattered long-term holder portfolios in their wake. American International Group (AIG), once a revered blue-chip insurance giant, faced a severe liquidity crunch, requiring a massive government bailout to survive. Shareholders saw the value of their AIG stock plummet like the Hindenburg. Other “safe bets” of the time, such as Lehmann Brothers, went belly up and their stock was delisted, not much to the delight of shareholders.
General Motors (GM), the Mack Daddy of blue-chips and long-standing symbol of American industry, also succumbed to the crisis in 2007-09, ultimately filing for bankruptcy and erasing shareholders’ capital. GM went public again in 2010, only to go sideways with zero net profit for stockholders over the next 12 years to this day.
Never marry your darling stocks
These are just a small number of the high-profile examples that exist in history, and they highlight the vulnerability of seemingly invincible blue-chip stocks, serving as stark reminders of the undeniable danger in owning such stocks (or putting “$10,000” into them and letting them ride) without managing risk.
What CSCO was in 2000, is what the “American Mega-Cap” stocks appear to be today – Apple, Nvidia, AMD, Salesforce, Meta, Google, Amazon, and so on. Hyped in every finance journal, recommended by every investment adviser, these stocks are seen as safe long-term bets. Blue-chips.
The problem is that their relative time of opportunity is long gone. You might make 100% or 200% over a few years or a decade, if at all, but they won’t make you rich – and that is if they survive the current tectonic shifts in the market at all, which is by no means certain. Remember that I’m not talking about the companies themselves here, I’m talking about the stock – two different things. The example of Cisco juxtaposes a stellar behemoth of a company with a stock that went stale and devoid of meaningful profit potential.
All the market’s current favorite tech darling stocks might roll on for years, or they might, like old elephants, walk over the hills to die. What’s for sure is that their prime is long gone. You might lose a lot of money in them, but you sure won’t make a killing.
The strategy of buying and holding something for 4-5 decades may work on paper, but research and observations after the fact ignore stockholders’ impulsive decision-making, succumb to the survivorship bias, and tout betting on stocks whose prime is long over.
The crux is – you should never get married to your darling stocks. Don’t buy and hold individual stocks come what may, just because they’re blue-chip. What is a heartbreaking idea and bad tip in real life, is a simple tactic of not getting drawn into of the non-trivial possibility of sitting on stock losses for decades to come in the market. Leave your opinion at the debate club – rather, speculate in stocks with a strategy of how the market really works.
Don’t get married to your darling stocks, and hold them through losses – because all we truly do is speculate on pieces of paper. Stick with “short-term” relationships, don’t get emotionally involved with your stocks, and drop them the moment serious problems appear.
