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1 Useful Trick to Discover Great Investing Ideas

On 29 July 2009, online shoe retailer Zappos agreed to be acquired by Amazon.com for US$1.2 billion. For Zappos Chief Executive Officer Tony Hsieh, it had been an incredible journey of discovery in bringing his once fledgling company from US$2,000 in orders per week to US$1 billion in sales in 2009. He chronicled his journey in his book “Delivering Happiness”.

It turns out that apart from running Zappos, Mr. Hsieh has another favorite pastime – poker. What is different though is that this serial entrepreneur was able to glean interesting insights and parallels between business and poker. In particular, he had these poker lessons to share about evaluating market opportunities and strategies in business:

“Table selection is the most important decision you can make.

It’s okay to switch tables if you discover it’s too hard to win at your table.

If there are too many competitors (some irrational or inexperienced), even if you’re the best it’s a lot harder to win.

Differentiate yourself. Do the opposite of what the rest of the table is doing.”

At the Motley Fool, we look at businesses, not tickers. When evaluating businesses, it could help to have as many lenses as possible to view it. As such, the points above can help guide our evaluation.

For a local context, we can look at Riverstone Holdings Limited (SGX: U77). The company is a premium glove manufacturer whose customers are mainly from the cleanroom and healthcare industries. The company has managed to steadily increase its revenue over the past six years. This is summarized in the graph below.

Source: Riverstone company presentations

Prior to 2009, the company only focused on the cleanroom industry. A trigger for change come in the fourth quarter of 2008, where its revenue suffered a sharp 12.7% drop. This drastic experience might have prompted management to seek other industries – or in poker parlance, selecting new tables to play in.

In Dec 2013, Chief Executive Officer Wong Teek Son commented that Riverstone took the decision to move into the lower margin but more resilient healthcare glove industry for the long term sustainability of the company. There were also further reasonings behind the moves, and it seems to line up well with Mr. Hsieh’s business lessons. This is summarized below:

The strategic move to the healthcare industry appears to have worked. Together with the economic recovery, revenue for Riverstone has more than doubled since 2009, and its share price has followed suit.

As of the closing price of S$0.915 per share on Friday, shares of the glove manufacturer has increased by 83% since 1 Jan 2009. The increase in revenue has also prompted Riverstone’s dividend to rise from 2 cents in 2009 to 2.6 cents in 2013. It currently trades at a trailing PE (price/earnings ratio) of 14.2, which is on par with the PE ratio of 14.1 for the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks the Straits Times Index (SGX: ^STI).

It can be said that evaluating a business is “more art than science”. There may be no one complete way to do it. Business lessons from entrepreneurs may provide some very useful clues to assist our attempt in building a strong investment thesis for a company. And, the more business lessons we can absorb, the better we might get at finding great investing ideas.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.