Ditching Blue Chips for Computer Chips

A cranky Nanna is not something to be messed with. I know this for a fact. I come from a long line of fiery matriarchs. The married members of the family say it’s the Scottish bloodline peeking through.

Ancestry or not, a cranky Nanna voiced her outrage at a recent Telstra Corporation [ASX:TLS] annual general meeting. Telstra shares have fallen 30% in the year-to-date, and the telco has cut the annual dividend by a third. Prompting a furious great grandmother to tell Telstra’s board: ‘This is just terrible. I am not happy at all I invested…for my grandchildren and great-grandchildren. The dividend has been cut and the share price is dropping…

No one likes to see the value of their investment fall…or watch their income drop as a result of dividend cuts. Perhaps even worse in this case is that the share price has fallen 45% from its high of $6.61 in February 2015.

While I have no idea what price this lady paid for her shares, I can relate to her frustration. Her investment here isn’t just about securing extra income for retirement, but her attempt to create intergenerational wealth.

The problem here is that when investors look to build intergenerational wealth, they start with something they know. And why wouldn’t they? If you head over to the government-backed finance site MoneySmart, one of their top ways to get started with shares is to buy a company you know. The second tip? Make sure it’s a blue-chip stock.

Telstra ticks both of those boxes. Not only that, it’s the dominant telco in Australia.

Knowing those three things, it’s understandable that investors are lured to pick up shares in the company. After all, what could go wrong?

Well, the top 50 listed stocks in Australia collectively haven’t done much of late. In fact, the S&P/ASX 50 index has barely moved since late May 2015.

Yet that doesn’t stop people — and some stock brokers — from suggesting investors would feel more comfortable with names they know. Many Australian investors find themselves buying shares in companies simply because they are household names. That means the big supermarkets, Telstra, Qantas, and mining stocks like BHP Billiton Ltd [ASX:BHP] and Rio Tinto Ltd [ASX:RIO].

And then you’ve got the major banks. My 20-something-year-old personal trainer recently asked me if he should buy shares in Commonwealth Bank, because that’s who he banks with. It’s something I hear from new investors all the time: ‘I shop at Woolworths, therefore I should buy their shares, right?’

Not always. 

A small allocation to blue-chip shares that dominate the Australian market has a place in any portfolio. But there’s every chance that your superannuation fund is heavily invested in the top 50 listed stocks in Australia anyway. Given that our super funds have a collective $2.1 trillion to manage, managed funds are often forced to funnel money into large corporations, as the smaller end of the market can’t manage such a large volume of shares or money passing through.

This can be used to your advantage. It means the ‘big guys’ of investing probably aren’t spending much time sniffing around the smaller end of the market — where the small start-ups and newly-listed companies are hiding.

But, as a solo investor, you can. Assuming you have a mainstream super fund, it gives you the flexibility to consider shunning the blue chips and look for more speculative companies.

When you whack money into blue-chip companies on the ASX, you’re pretty much buying the exact same shares as everyone else in Australia — banks, miners, telcos supermarkets and insurance companies. Snore.

However, some incredible small start-ups are so tiny that you might miss them. Ryan Dinse, editor of Exponential Stock Investor, told me yesterday that, the way he sees it, the real long-term growth opportunities will be found at this end of the market.

In particular, Ryan yabbered on about one computer company making processing chips that could enable biotech firms to process data quicker, which in turn would speed up the research process.

Then there’s the advisory company dabbling in the blockchain market that, according to Ryan, almost no one has heard of. In fact, over the course of five minutes, he rattled off a list of companies working some amazing products few know exist. And they’re listed on the ASX.

After years of watching boring banks and trying telcos, you owe it to yourself to take a look at Ryan’s research. Details here.

Kind regards,

Shae Russell,
Editor, Markets & Money

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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