The term “blue chip” originated amongst gamblers, where it is used to refer to the gambling chip with the highest value. Today, this term is commonly used in the stock markets to describe companies that are, in some way, superior.
I will thus be adopting a definition similar to that of the Singapore Exchange (SGX) – a blue chip is a “common stock of a nationally known company, with a long record of profit growth and dividend payment”. These companies are usually reputed for its quality management, products, and services.
However, do these stocks provide superior returns?
Behavioral Biases of Investors
First, let us run through some behavioral issues that affect our decision-making.
Studies have shown that investors have the tendency to build portfolios on assets they are familiar with. This bias can be explained by investors’ distorted probability judgment due to over-optimism with familiar investment instruments, hence underestimating the ...
...