No Such Thing As A Blue Chip

I’m talking about your portfolio inventory which shows unrealized gains and losses. Penalty for a bad entry point can cost you 5% overnight and remain an eye sore for years and years.

Past week, I had a good Monday thanks to pops in Citigroup and Goldman Sachs while Amazon faded some. After its crash incident, American Airlines actually turned positive but its hit from the crash in DC was serious. My MLP’s eased after a long rally. Nothing is forever, but a shortfall in oil quotes can hurt major MLP’s like Enterprise Products Partners. Over time, it has built into a major holding. I’ve never lost money in an MLP that yields over 6%. 

Plenty of claw marks to go around. Microsoft dropped a bunch. Its worst day in years while IBM bounced up 10%. Tesla did another flop. I’ve been in this business for over 60 years, but cannot model Tesla.  Exxon, GM can lose plenty from the top of a cycle, too. Easy to model. I used to think there’s safety in knowing all the facts in everything but that’s a romantic fallacy. 

Calling your stock list a portfolio is also a romantic fantasy. Pretension in the market does get you in trouble. You forget how to bang out your mistakes. Tesla rumbles while Microsoft takes an historic hit. Nobody cares. Nobody ever mentions the fade away in Caterpillar Tractor. The name is too old fashioned. 

I’m overly sensitive to entry points. Get your entry points right and live happily ever after. The NYSE should issue worry beads all round. As an early on owner of Polaroid and Xerox I told my clients you can expect 2% monthly appreciation.Those days are long gone, but not forgotten.

Everyone should ask himself the same questions before trading up a storm. What is the justifiable price-earnings ratio for the market? Is it 15 times earnings or even 20 times earnings? History pretty much records that you should buy at 15 times earnings and sell at 20 times earnings. There are too many cycles that have gone such a route. 

No such thing as a blue chip stock. Take Exxon Mobil which is forever rich in oil reserves, and dividend availability, but erratic in earnings. Results do swing as much as 50% based on energy quotes and refinery profit margins. 

This chart shows Exxon trading near $100 a share in 2016 but under $40 in 2020 and 2021. Not exactly what you’d expect for a story stock.  Tom Watson, headman at IBM told me they had bet the company on development of its IBM 360 computer model. 

The market itself is forever a prisoner to interest rates in terms of its price-earnings ratio valuation as shown here. If you believe as I do that Treasury bond yields are going to range closer to 5 percent,  we are talking about a price earnings surprise on the upside. 

Overvaluation never ends. After the market’s 2020 retracement it still sold at a huge premium over book value. Call it 1.9 times book and yielding a measly 2%. Getting back in? Know the risks.  Most money managers functioning today weren’t around for the page turners. Like the Cuban face-off with us years ago. Paul Volcker in 1982 took interest rates up to 14% to rid us of inflationary expectations. Nothing you could blame the Russians for or imagine could happen in the U.S. 

I’m not ready to domicile in a double-wide trailer because I believed in America 365 days, year-after-year. Oil futures bottomed at $20 a barrel in 2002. Two years later, futures ticked at $40. Their peak was $140 a barrel in 2019. It took oil futures only 2 years to double. 

The deep basic is know when you’re overmatched in markets and then stay away, hands in pockets.