Blue Chips or Basura

My friend and I had a chat earlier today. He was asking how one can earn in the PSE if the basuras are off-season? Adrenaline junkie! 😉

“What if we’re all just holding blue chips? Wouldn’t that be boring? Who, among “retail” traders, earns from buying blue chips? What are blue chips?”

In the Philippines, blue chips are the companies that compose the PSEi. There are thirty (30) of them. In general, a blue chip is defined as:

A nationally recognized, well-established and financially sound company. Blue chips generally sell high-quality, widely accepted products and services. Blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and reliable growth. – Investopedia.com

With that definition, for more conservative folks, it seems that the blue chips are the way to go. Anyway, the conversation got me thinking about the blues. What if, indeed, one just randomly picked five blue chips at the beginning of the year and just held on to them? How would her portfolio look now?

First, the thirty performed as follows:

   Min. 1st Qu.  Median    Mean 3rd Qu.    Max.
-72.070   2.177  15.700  18.610  31.360  84.740

with DMC being the biggest loser*** (-72.070%, check footnote) and FGEN leading at 84.74% YTD. By the way,  super thanks to the guys behind Philippine Stock Exchange Composite Index RESTful API, I was able to automatically download the prices for the samples. Hopefully, there are no errors in the database. In any case, if you had bought all thirty, and distributed your capital equally among them, your portfolio would be ~18.61% up YTD.

Anyway, so, I wrote a super, super short code in [R] and did 20,000 in-silico experiments that samples 5 blue chips at a time.

Sample runs:

Again, the scenario is this: what if I randomly chose five issues and equally divided my capital equally across them at the start of the year? What would be my YTD earnings? Here’s the result.

Min.     1st Qu.  Median    Mean    3rd Qu.    Max.
-31.870     9.269     17.970   17.640     26.480    64.720

Result says that, on the average, one would earn around 17.60%; maximum would be around 64.72%; and worst scenario, -31.87%. Of course, this may not be the case for other years; but, given how relatively healthy our market has been in the last four years, the blue chips really wouldn’t have been such a bad way to go, especially for those who couldn’t day trade.

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*** Jitka Samak: “DMCI is up +44% YTD. You’ll have to adjust your data to account for the stock div they issued this year. 🙂 ”

Some related reading that was pointed to me after I raised this random question on Twitter earlier today: http://www.businessmirror.com.ph/selling-is-for-winners/