History does repeat in empires and in blue chip stocks (2024)

OPINION

Those looking at the history of blue chip stocks as indicators of their future success only need remind themselves of Constantinople.

The city bridged Europe and Persia, was capital of the Roman Empire from 330, was captured in 1453 by the Ottoman army and served as the heart of the Ottoman Empire for centuries - until the empire went into decline, and ultimately was dissolved in the treaties following World War I. It was officially renamed Istanbul in 1930.

Companies that grow to become behemoths on the stock markets, commonly called blue chip stocks, tend to draw investors because they have performed well in the past. We might define this as companies like Coca-Cola or McDonald’s, or the oft-discussed FAANG tech stocks, which are now more accurately MAMAA: Meta, Apple, Microsoft, Amazon, Alphabet (Google).

Do blue chip companies perform better than their lesser-known counterparts? Well, not for long. We can look at the US stockmarket from 1927 to 2022 for examples. Shortly before becoming a top 10 largest stock, these stocks often performed well above the market – almost 27 per cent higher on average annualised returns.

Five years after becoming a top 10, they were underperforming the market by an average 0.9 per cent per annum. 10 years out they underperformed the market by 1.5 per cent per annum... meaning after that 10 years, that adds up to a 15 per cent underperformance. Specifically, Intel was posting an excess of 29 per cent in the 10 years before it became a top 10 largest stock. In the next decade, it underperformed by 6 per cent.

That would be a bit of a sting in the wallet if you were holding on through blind faith, believing their past performance is a guarantee of future results.

We have a few doozies we can use as examples here in New Zealand. Fletcher Building and A2 Milk come to mind; at their respective peaks, both of these companies were the largest listed in NZ by some margin.

Starting with Fletcher Building: The company saw some dizzying heights around mid-2007 with share prices over $12, and again in late 2016 with some lesser but still respectable $10 share prices. Since then, the last significant peak in their NZX summary shows at $7.85 in June 2021. As of writing this article, the most recent share price was a $4.12 high.

A2 was one of those classic buzz-generating investments, especially with the DIY share trading crowd (this was also when companies like Sharesies were first getting traction, making it easy for anyone to pick and choose their own stocks. Cue a flurry of social media threads dedicated to crowd-sourcing investment strategies). Ultimately, the milk company left a sour taste... A2 shares peaked at $20.84 in July 2020 after exponential (and volatile) growth. By 2022 they were sitting around the $4 mark, having fallen spectacularly in value.

Back to Constantinople, now Istanbul: If entire empires can fall given enough time and driving factors, companies on Top 10 lists definitely can. History gives us many examples: Assyrian, Babylonian, Egyptian, Hititte, Persian, Greek, Roman. For more recent history of business empires, just look at the stock markets.

New shiny stocks (mainly tech companies these days) are prone to draw attention. There has been a lot of chatter around AI company Nvidia recently, which is predicted to grow by 30 per cent this year by some analysts. Yet if we follow the typical trajectory of top-performing or top-growth companies, Nvidia could be the next Constantinople. Or worse, it could be Atlantis – seeing investors trying to join in well underwater by the time everything settles. Only time will tell.

From an investment perspective, the rise and fall of “sure things” always provides an opportunity to reinforce the importance of diversification. It reminds us that markets are volatile, and that we need to avoid having our eggs in one basket (or country, or asset class).

The more reliable approach is to structure equity asset allocation around the characteristics that research demonstrates drive long-term higher expected returns - namely size, relative price, and profitability - while maintaining broad diversification across names, sectors, and countries. History would say it’s much safer to take this approach. That’s not to say you should never invest in blue chip stocks, but don’t bet the farm on them. By diversifying your investments, you can have your cake and eat it too.

Investors need not go it alone. Engaging a trusted, local fiduciary can help – a burden shared is a burden halved, and life is too short to waste trying to time the markets. With a well-constructed financial plan, a strong, globally diversified portfolio, and the right advice for your situation and goals, getting your financial house in order can be a lot easier with the help of a friendly “face-to-face” expert.