Should you buy and hold blue-chip stocks?

Buying and holding blue-chip companies have long been a favourite strategy for many Hong Kong investors. 

Companies such as HSBC, Tencent, Hong Kong Stock Exchange are household names, besides stable financial performance, investors are also lured by their dividend payouts offered by many blue chip stocks. 

Despite its popularity, is buying and holding blue-chip stocks a winning investment strategy? Let us explore further, but first let’s understand what a blue chip stock is.

What are blue chip stocks?

Blue chip stocks are shares of large, reputable companies, generally with large market capitalisations and history of sound financial performance. 

The origin of “blue chip” stocks came from the game of poker, where blue chips have the highest value and are considered most attractive to players.

Let's take a look back at the largest companies in the world for the last four decades

It didn’t feel too long ago when some of us declared we will never swap for a touchscreen phone and swore allegiance. Or Nokia before that. 

And now, as we enter 2024, smartphones have become an inseparable part of our lives. What we consider “normal” changes quickly.

Blue chip stocks’ business dominance are usually demonstrated by their large market caps. But let’s take a look at how the ranks of the largest public companies in the world have changed through time. 

Two interesting observations:

• Only two companies (Exxon and Microsoft) have managed to stay on the list for three decades. ExxonMobil was likely only able to stay on the list through its record-breaking US$78 billion merger with Mobil in 1998.
• Once off the list, it is unlikely that a company will get back on. This might just be random but is clearly evident by looking back at the last four decades. It could also be structural in that big companies can, at a point, be dragged down by being too big. More research must be done on this observation.

Interestingly, we can draw similar parallels in the Hong Kong stock market, where only two companies have stayed on for the past 15 years:

So the conclusion is,  whether you are a US investor or Hong Kong investor, who bought the top 10 largest blue-chip companies from a decade ago and had held onto them — you might find to be left with quite a few not so blue-chip stocks in your portfolio now.

Propelled by our curiosity, greed, and desire to improve, humans are constantly competing and innovating.

Don't get left behind.

If you think you can guess what the list of top companies by market cap will look like at the end of 2029 and 2039, we wish you good luck.

We won't make that call, because very likely many of these companies on the list are not yet in existence (even as a dream).

The power of diversification 

Instead of just picking a few stocks, our advice to clients is always to build a well-diversified investment portfolio, to ensure its resilience. As the founder of Vanguard, Jack Bogle famously said, “Don’t look for the needle, buy the haystack”. 

Looking back at the list of largest public companies in history, there are familiar names such as Nokia, Cisco, and Alibaba, which once dominated in their respective realms but have since encountered difficulties in sustaining such dominance. 

The bankruptcies of General Motors, Lehman Brothers, and closer to home, Evergrande, once the largest Chinese real estate developer are also stark reminders that even the best companies may fail at times of stress.

Dividends paid out by blue chip stocks are also not a guarantee — some of us might still remember shares of HSBC (stock darling for many Hong Kong retail investors) plunged 9.5% on 1 April 2020 when the company had to suspend dividend payments as ordered by the UK regulator.

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