Should you invest in Britain's blue chip businesses, or its stock market minnows? There's only one answer.
This article is part of our Duelling Fools feature on 'Blue Chips vs Small Caps'. Read the intro, the case for small caps and then cast your vote here.
Especially at times like now, when Britain's smaller companies are under pressure from their banks, are struggling to raise cash at decent rates, and are finding the recession heavy going.
To be sure, blue chips like Tesco (LSE: TSCO), GlaxoSmithKline (LSE: GSK) and BP (LSE: BP) aren't finding the recession a breeze -- but they're not about to go bust tomorrow, either.
Steady growth, plus dividends
And if blue chips are a safe home for your life savings in bad times, that doesn't mean that I desert them in good times, either. To me, blue chips are good investments throughout the economic cycle, in good times and bad.
When times are good, you get steady growth in the share price and an equally steady stream of dividends -- and when times aren't so good, blue chips form a nice defensive option, being big enough and well-capitalised enough to withstand the downturn.
A wide moat
Like Warren Buffett, I like buying into businesses that have a 'wide moat'. What does Buffett mean by a wide moat? He means companies that have enough good products, good brands, and good assets to be secure from upstarts coming along and stealing significant amounts of market share. That'll be a decent blue chip, then.
Take aerospace and defence giant BAE Systems (LSE: BA), which can trace its roots back to the earliest days of British aviation. How likely is it that a competitor could emerge from nowhere, and suddenly start selling military aircraft, ships and tanks to the world's armed forces?
And to put it another way, which would you rather invest in -- BAE Systems, or one of its smaller suppliers, the sort of business that my opponent Padraig O'Hannelly, prefers?
Corporate governance
To some people, the attraction of small caps is their potential for meteoric growth. "Elephants don't gallop," is how small cap investment guru Jim Slater pithily dismissed the growth prospects of blue chips. Indeed, Padraig uses that very quote in his own write-up of Slater, published in the Fool's Investment Greats series.
Well, yes. But elephants don't suddenly keel over and collapse, either. Slater Walker, Slater's 1970s finance business did just that in 1974, famously leaving Slater a "minus millionaire".
And elephants don't sell bits of themselves to others in dodgy deals that leave investors out of pocket, or engage in the sort of corporate shenanigans that Padraig himself wrote about.
Two years ago, noted Padraig, shares in retailer JJB Sports (LSE: JJB) were 302.75 pence. And just before last Christmas, he added, they touched 3.5 pence. If that's small cap investing, no thanks.
Under the watchful eye of the City's institutional investors, blue chips know they have to be squeaky clean.
Good management
I like blue chips' management, too. Don't get me wrong: over the years, I've met many managers of small, publicly-quoted businesses. They're no fools.
But it takes genuine talent -- and hard work -- to climb to the top of Britain's biggest businesses. The boards and chief executives of FTSE 100 companies aren't immune from making mistakes, but I'll bet they make fewer of them.
And, what's more, their companies are of a better size to withstand the consequences when they do. Both Marks & Spencer (LSE: MKS) and Sainsbury (LSE: SBRY) missed their footing a few years ago, but they're still with us, and just as strong.
I haven't looked too closely at the calibre of the people managing JJB Sports. But then, I haven't needed to, thankfully.
Stability
Smaller companies are vulnerable to pressure from shareholder activist groups. Over at Paulypilot's Pub, a popular discussion board for small cap investors, there's frequent mention of that at the moment -- often, although not always, in an attempt to obtain redress when small company's directors have attempted to pull a fast one on its investors.
Giants like HSBC (LSE: HSBA) -- the largest bank in both Britain and Europe -- are more immune from such pressure. Two years ago (coincidentally while JJB's shares were riding high), HSBC was under attack from activist investors dismissive of its steady-as-you-go approach to growth.
Smaller companies would have buckled under the pressure, and leapt into derivatives and other weapons of financial mass destruction. Bradford & Bingley, anyone? HSBC ignored the criticism, and emerged largely intact from the credit crunch. While its American operation has suffered, to be sure, it certainly hasn't had to go cap in hand to the government for a bailout.
Core portfolio
Note, I'm not saying that small caps have no place in an investor's portfolio. The Fool publishes some interesting share ideas, and Fools would be fools (lower case!) to ignore them.
But for most investors -- and certainly me -- a combination of low-cost index trackers and blue chips is a safer home for the greater part of your investing portfolio. By all means dabble with money you can afford to lose, if that appeals. But to sleep easily at night, blue chips are a better bet.
Where next?
