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Are You Prepared to Look Dumb While Investing?

A few weeks back, my fellow Fool Stanley shared his take on the hardest thing to do in investing. It may be a surprise that the hardest thing to do for him was in fact, doing nothing. His article reminded me about a story which I would like to share here.

Doing nothing may look dumb

The story was about basketball Hall of Famer, Rick Barry. He was best known for perfecting one of the most unusual free throws in basketball. You see, Barry’s free throws were done underhanded, or what is often taunted as a “granny shot”. As you can see in the tweet below, taking the underhanded free throw could make you look quite dumb in the process.

One thing’s for sure though – there was nothing silly about his accuracy. Barry converted some 90% of his free throws throughout his career on his way to basketball’s Hall of Fame. In contrast, some of the biggest stars in the game were able to only make 50% of their shots.

So, although his free throw process would look dumb at times, I reckon that few could argue with his results.

Looking dumb, some of the time

Often times, investing for the long term is not the smoothest ride. There will be times when the share price-action of your investments will make you appear to be “dumb”. Let’s go back to Stanley’s article and use the example of diamond manufacturing equipment maker Sarine Technologies Ltd  (SGX: U77) that he shared.

In the table below, I had gone a step further and summarized the company’s business progression in terms of revenue and earnings per share (EPS) from 2006 to 2013. I’ve also included the share price progression for Sarine Technnologies in the table.

Year Revenue (in S$ million) EPS (in cents) Share Price (as at 31 December) % recurring revenue of total sales
2006 46.1 3.99 $0.45 0%
2007 53.5 3.59 $0.40 0%
2008 47.7 0.71 $0.09 0%
2009 30.0 0.65 $0.26 0%
2010 58.5 4.23 $0.43 >10%
2011 74.9 6.63 $0.61 12.5%
2012 77.9 7.37 $1.00 25%
2013 96.4 8.67 $1.85 30%

Source: S&P Capital IQ; Google Finance; Company Earnings Presentation

Sarine Technologies’ share price closed 2006 at S$0.45. In the years that followed, the forlorn investor might be quite discouraged with the share price performance. By the end of 2009, Sarine Technologies was down to $0.26 – that’s a significant 40% drop from where it was in 2006. There would be little comfort to be found in the company’s revenue and EPS as well. Both metrics took a beating during the Great Financial Crisis of 2008-2009, and ended up lower compared to 2006.

If the share price was how the investor was being scored, he or she would appear quite “dumb” to be holding on to a company that was still down after four years.

Keeping your eye on the business, not the scorecard

It is no doubt challenging to be in such a moment – with the taunts raining down on the forlorn investor as it did with Rick Barry. But as tough as it was, this would turn out to be the very moment when Foolish investors should keep their focus on the business, and not on the share price. If they had done so, they would notice that significant changes were afoot in Sarine’s business model.

At the start of 2009, Sarine Technologies took a hard look at its business, and decided that it needed to be more sustainable during economic downturns. As such, the company started to evolve its business model to one which included recurring revenue. Previously, Sarine Technologies’ revenue came almost solely from the one-off sale of capital equipment to diamond manufacturers. The company’s change in its business model ultimately proved to be successful.

By the end of 2013, the company went on to more than double its revenue and its EPS when compared to 2006. With the reverse in its business performance, Sarine Technologies’ “40% share price loss” in 2009 reversed course and became a satisfying 311% gain by the end of 2013.

To be sure, it’s not to say that all stories will have a happy ending like what Sarine Technologies had. The key takeaway is that a continued focus on a share’s business would help the Foolish investor to arrive at more objective – and useful – conclusions.

Foolish takeaway

Falling share prices may make the investor look downright foolish (small f) at times. But, this is where we take our cue from Rick Barry: Be comfortable looking dumb, and instead, continue to focus on converting the free throws (in our case, it would be the focus on a share’s business).

After all, a company’s share price often tells us little about how its business is doing. So, we would be better off focusing on its business and the developments in the horizon.

So, go on. Take a deep breathe. Steady yourself. Breath again. Keep your eye on the ball (the business). And then decide.

If we can keep our objectivity while others are losing theirs, we may find that we can turn “foolish” investing into Foolish investing. Fool on!

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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.