Investing Tips: Should you buy Blue Chips or Small Cap Stocks?
Blue Chip Companies have a big market cap, good brand value, a lot of customers, provide good liquidity in stocks, provide good turnover in trading, Tracked by all Stock Research houses etc ….. All these are positive factors of Blue Chip companies compared to mid cap stocks and small cap stocks…. But do these factors make Blue Chip companies a Great Investment also? My answer is — No …. Why?
Because a Good Company does not necessarily mean a Good Investment….. There is a difference between a Good Company and Good Investment which most of retail investors do not understand…. When I ask investors why they invested in a particular company, they start telling the positive things about the company…. But they all miss the most important point to be remembered in Investing….. If a Good Company is trading at FAIR valuation, it becomes just an average investment…. And if a Good Company is trading at above the fair valuation, it even becomes a Bad Investment !!…. So a Good Investment means a Good Company available at undervalued price.
So coming to the main point as why I do not like Blue Chip companies…. Because Blue Chip companies are very less likely to be undervalued…. Blue Chip stocks are tracked by many stock research houses, stock analysts, HNI, Mutual Funds, FIIs…. So all the future potential of those companies are factored in the current price…. Even if a Blue Chip company is going to post 100% growth every year in next 3 years, it is not a Great Investment because all that growth potential is factored in the current price…. So how can then a retail investor make money? Read on…
Money is made by buying Good companies which are not famous, not tracked by research houses and investors…. Generally these type of companies are not very big….. But they have good business model, good margins, good future potential… Only thing is that they are not in limelight because investors are falling on each other to buy Blue Chip stocks.
Courtesy : multibaggershares