Blue Chip versus High Growth Stocks

Which Group of Stocks Yeilds Largest Return?

Oct 31, 2009

Investors everywhere want to know which stocks are the most profitable. Are the best returns found in high growth volatile stocks or in slow moving blue chip companies?

The Argument for Blue Chip Stocks

The argument for blue chip stocks is that someone can invest and forget about it. A higher-quality stock should be able to produce a decent rate of return over the long term. At least that is what an advocate for the 'buy and hold' ideology would say. But is this actually the case?

If an investor bought company stock in 1975 for 10 dollars per share, the price would need to be worth 40 dollars and 14 cents by 2009 just to keep up with inflation as tracked by the Consumer Price Index. While many blue chip companies will vastly outperform these figures, many businesses will also dissolve into insignificance or go bankrupt. Who could have guessed the downfall of so many banks and automaker companies during 2008 and 2009?

The Argument for High Growth Stocks

On the other hand, promoters of high-growth investing will point to stocks such as Google that soared to seven times its IPO price in under four years. The counter-argument would be if someone timed their entry and exit wrong, they could lose half of the investment in just over one year on the very same stock. Volatility is dangerous.

The Tale of Two Methodologies

An investor who does not wish to actively manage his portfolio should seek the aid of a highly regarded wealth manager instead of trying to guess which company is a good long term investment. The market, as tracked by the Down Jones Industrial Average, is trading marginally above where it was 10 years ago. This suggests that buying and holding an average stock in this index would be a poor investment over the last decade.

As well, Morningstar reveals a total return rate of only 3.79% over the past 10 years on the 6,003 funds tracked as of November 2nd 2009. Clearly, getting a decent return is more difficult than blindly throwing money at the market.

The investor who does not mind actively trading both bull and bear markets may find more profits in high-growth stocks than blue chips. Why?

Well respected investor William J. O’Neil, author of How To Make Money Selling Stocks Short, will tell anyone that high-growth stocks will be leaders in bull markets, but often fall the hardest during bear markets. If a trader can find a consistent method to trade high-growth stocks long in up markets and short in a down markets, his profits will dwarf the buy and hold investor. But that is a big ‘if.’

How does one trade high-growth stocks without the market crushing him like an elephant sitting on a grape? One way is to use a system that times buy and sell transactions with market sentiment. An example of this is swingtrading. The other is much simpler and involves the use of protective put options on high growth securities. Both methods will be discussed in future articles.

The copyright of the article Blue Chip versus High Growth Stocks in Shares/Stocks is owned by Kurtis Hemmerling. Permission to republish Blue Chip versus High Growth Stocks in print or online must be granted by the author in writing.