Blue Chips or Potato Chips?

Often, when we invest in equities, people told to invest in Blue Chips for the sake of stability. The Blue Chips normally stand for the companies who are the market leader in their industry. For example, General Motor (GM) in car industry, Dell in computer, Microsoft in software industry, Wal-Mart in retailing and so forth. Are the Blue Chips really a good investment? Why not we examine some to get some ideas?

Google, the world top leading search engine as per 23rd March 2006 has market capitalization of $101.04 billion ($341.89/share). Its Price Earnings (PE) stands at 68.09 with Earnings Per Share (EPS) at $5.02. No dividend paid out so far.

What does it mean? With PE of 68.09, it means when you invest in Google at the current price, you need to wait for 68.09 years to get back all the dollars you invested. The inflationary factor not calculated on this matter. Say, you invest a share of Google with $341.89 in 2006, you need to wait until 2074 to get back $341.89. Please note the value of $341.89 in 2074 is TOTALLY DIFFERENCE with the value in 2006. Of course your invest return period could be shorten if there are some positive progress. For example, for the coming years, Google earns spectacular earnings years after years which mean its EPS more than $5.02. It might be $10, $30, $75 or even $300! Who knows? One things for sure is high growth normally will not long last. It could grew at the rate of 20%, 40%, 80% or even 200% per year. But, to continue such high growth rate for 10 years, 20 years or 50 years, there is only one route: OUT OF THE PLANET EARTH.

Baidu, Chinese top search engine saw its price drop since its 1st day closing price at $122.54. As per 23rd March 2006, its price stands at $50.60. Is it a bargain since its price drops more than half of its peak? To answer the question, let’s look at its fundamentals. Its PE is 273.51 with EPS $0.19. No Dividend paid out before. Even tough its price drops more than half from its peak, its PE seems at the sky rocket end with only tiny earnings. Is it a good investment choice? Ask to the RIGHT candidate – RATIONALITY.

VA Linux, once a darling star of the dot com mania who is tagged as “Next Microsoft” peaked at $320. The price quoted in 23rd March 2006? $3.65. The lost of almost 99% of its value. Enhancing shareholders value? Yes, it is but with reverse direction. At 3.65, its PE stands at 32.88 and EPS of $0.11. No dividend ever paid out.

Wal-Mart Stores listed in New York Stock Exchange (NYSE) since 1970 is the world top retailer. It outpaces its rival such as French Carrefour, UK based Tesco and German Metro. Its price on 23rd March 2006 was $48.54. Its PE stands at 18.10 and EPS at $2.68. Its dividend paid out translates to 1.40% yield.

How about a legendary “Oracle of Omaha”, Warren Buffett’s holding company, Berkshire Hathaway Inc.? Its price as in 23rd March 2006 was $90,000. Yes, $90,000 per share! Its fundamental? PE at 16.25 and EPS of $5,538.47! There is no dividend paid out since its listing. (Note: the price quoted here is Class A share. There are 2 classes of Berkshire’s share: Class A and Class B where the price of latter is 1/30 of the former.)
Though the examples, I believe RATIONAL investment judgment could be made. After all, what we need for our investment portfolio is the REAL blue chips which are always there but not the potato chips which its destiny to be eaten up.

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Choose the correct information

In the era where we are bombarded with ton of information, carefully choose the correct information is crucial. After all, bits and bytes of information can be more dangerous than ignorance.

Once upon a time, when the information is hardly obtained by an ordinary people like us, we treat the information we obtained like precious metal. We absorbed what ever we could in the hope that we become more knowledgeable. While this is a correct attitude for the improvement of humanity, this only applied to the society where the information is scarce. When the situation changes, where we could easily obtain whatever information that we wish as long as we connected through the internet, choosing the correct information becomes crucial. This phenomenon is similar to the society who lacked of food, and making them no choice to choose what the food they wish to put inside their stomach.

Very often, by absorbing the misleading information, either consciously or unconsciously would only bring the devastating result to us. Take the example, whenever a company announces its profit soaring in a particular quarter, do not be so excited and thrush your money into it. The reported earnings lie to its word “reported” and whether it is “real” earnings, only god knows. Simply by Creative Accounting, the management and its related interested parties could manipulate the company account and show the public a “soaring reported earnings”. There are too many ways for the manipulation, by cooking the book, by selling off the assets to boost one-time earning, by dealing business among related companies are among few examples of the manipulation. The only way to be a successful investor lies to your passion and your home work – no short cut.

Over the years, I found out that the asian investors are the lambs that become the prey of the fox of financial industry. The information that is out of date and no longer applied in the western world could be sold in asian countries. Take an example, after 97/98 Asian Financial Crisis, many asian investors isolate themselves from the stock market. Because of the cash piling up, they need to find a way to invest their cash pile. Where the market would always supply what demand needed, the financial industry came out with the “Capital Guarantee Fund”. These hungered investors pouring their hard-earned money into the funds. Other examples like “Buy and hold”, “The price of real estate is always appreciate in the long term” and “Blue Chips counters is a safe haven for the investor”. There are too many examples that show that people without a proper knowledge tend to become the prey. While ignorance people have no choice but become a sacrifice, the most pitiful people are the one who obtain misleading information and yet they feel they got the correct information.