How to make money on blue-chip stocks

NYSE:JPM

On June 4, 2012 J.P. Morgan stock fell to $31/share after April/May 2012 trading losses were made public.  The Chief Investment Office said the losses were based on transactions booked through its London branch. A series of derivative transactions involving credit default swaps (CDS) had been entered into as part of the bank's hedging strategy.  The trader, nicknamed "the London Whale" had accumulated outsized CDS positions. An original estimated trading loss of $2 billion was announced, with the final actual loss expected to be substantially larger.

For the average investor, CDS positions, hedging and "whale-sized trades" are not important.  What is important is that the stock went on sale, creating a buying opportunity for long investors (long investors plan to own the shares, or buy them and hold them for a period).

If you had bought JPM at $31.00/share in June, it would be worth $41.00/share today, delivering a return of  32% on investment in less than 5 months.  When a corporation with a valuation of $152 billion goes on sale, it's usually a buying opportunity, but make sure that you investigate the facts that had caused the loss in valuation, before jumping in!

NASDAQ:CSCO

On May 21, 2012 I opened a long position in Cisco Systems, Inc., another blue-chip Dow stock.  

Cisco is valued at around $100 billion. The corporation designs, manufactures, and sells Internet protocol (IP)-based networking and other products related to the communications and information technology (IT) industry and provide services associated with these products and their use.

On May 9, 2012 Cisco stock had closed at $18.78/share.  But, after announcing poor results for their last fiscal quarter - as had happened several times before - we saw Cisco's shares tumble over a few days to just under $16.00/share, a drop of >10%.

To a counter-intuitive investor, this means that the stock was now priced to buy.  While some (mainly smaller) investors closed their positions (i.e. sold their stock) at a loss, other investors open new long positions (buying shares to hold), benefiting from the discounted, low price.

This stock, like any other, will ride the market's up and downs.  If you went long on Cisco towards the end of May or early June 2012, you'd be up by >15% in the 6 months or so since "the stock went on sale" in late May.  This gain is despite the stock hitting a new YTD low on July 24 2012, of $15.12/share.  On Friday, December 7 2012, Cisco's stock closed at $19.33/share.

I have opened and closed positions on CSCO periodically, but without actively trading.  I simply limit losses as best I can, and take profit when I have achieved a satisfactory return on my investment.

If you want to enjoy a positive return, pick up the stocks of these giant corporations when they go on sale, but carefully, doing a little research... and buy when they're red (and on sale), selling when they're green... not the other way around, and without emotion!

Disclosure/disclaimer: I'm currently long on Cisco

The summary above does not constitute investment advice by a professional investment advisor, but rather an attempt at simplifying the complexity of the timing of equity investments, that most inexperienced investors have to ponder.