2

I'm wondering whether you think investing mostly in blue chips, that have significantly fallen in value (compared to their industry), would be a good investment strategy for me, and why you may think it's not a good idea.

To give some background to my position, I'm a recent graduate about to start a relatively well paying job with which I can easily cover my expenses and save some money. I'll probably invest about 50% of my saved money, perhaps as described below. I'm also lucky to have a money cushion from my grandparents and no debt.

I am thinking about a portfolio in which I would invest in companies that are large, reputable and historically usually successful, but have crashed in share price recently (Think VW, Transocean or Tesco at the moment). It seems that institutional investors often like to follow others and allow a stock to decrease in value much more than may be reflective of its true value. I want to take advantage of the fact that (I believe) this is often the case and the value of the stock will increase soon in the future. In addition, its much easier to choose stocks compared to looking at all the companies that are following the market trend reasonably closely.

Do people think that this is a strategy that would be able to beat the market? I know that finding the right time to enter is never easy, diversifying is always important etc. and haven't come up with formalised criteria of when I would invest (I'm thinking something like 30% loss in a year compared to industry average), but it's an idea that has been playing on my mind recently, and would like to hear whether people think it could be a good one.

Improve this question
6
  • 1
    some people do that. you can sustain heavy losses for a long time, and when do you want to get out? Look at BP since it's 2010 disaster. It has never recovered to highs, and you would be about breakeven right now if you bought at the bottom. Just when you think the company itself is getting back on it's feet half of a decade later, the entire macroeconomic picture around oil changed.
    – CQM
    Nov 10, 2015 at 16:23
  • Should probably go read some first: The Intelligent Investor: The Definite Book on Value Investing.
    – Ross
    Nov 10, 2015 at 16:33
  • 1
    If you do do this, I would highly recommend not dumping 50% of your savings just into this strategy all at once. Take it easy, put a small amount in, and see what happens over time. Use that time to read up on value investing and other such matters. There is potential in the strategy you describe, but also a lot of risk, and if you aren't careful you could lose a lot of money.
    – BrenBarn
    Nov 10, 2015 at 18:44
  • @Brebarn don't worry I don't mean 50% of my savings but 50% of the money "left over" from what I earn but don't spend. Also I'm not suggesting I would invest all of this money into this strategy.
    – fishlein
    Nov 10, 2015 at 19:11
  • You gave some recent examples, how about a past one - Enron.
    – user9722
    Nov 10, 2015 at 20:20

1 Answer 1

Reset to default
3

You can't do this automatically; you want to understand whether the drop is from a short-term high. is likely to be a short-term low, or reflects an actual change in how folks expect the company to do in the future.

Having said that, some people do favor a strategy which resembles this, betting on what are known as "the dogs of the Dow" in the assumption that they're well trusted but not as strongly sought and therefore perhaps not bid up as strongly. I have no opinion on it; I'm just mentioning it for comparison.

Improve this answer

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .