The Easiest Way to Avoid Losing Your Investment Capital

In this day and age of increasing financial wizardry and sophistication, it’s easy to think that the secret to not making investing losses lies with with the possession of the best technological tools around to help predict market movements or with hedging your investments using arcane derivatives.

But in the spirit of Occam’s razor, a problem-solving principle which states that the simplest answer is often the correct one, the secret to not making losses might be something as timeless and elementary as not selling your shares when the chips are down.

You see, I had purchased shares of diamond manufacturing equipment maker Sarine Technologies Ltd (SGX: U77) last March at S$2.46 each. After my purchase, things went smoothly, with Sarine hitting a high of more than S$3.20 first in October, then again in early November. It was nice to be sitting on paper gains of more than 30% within a few months – but I didn’t sell.

Things then went south quickly and suddenly. The firm’s shares started dropping in late November, with the magnitude of the fall increasing sharply in December. I had written about that episode in an article titled “Why Has Sarine Technologies Ltd Dropped By 20% In Less Than 2 Weeks?

As I noted in my article, Sarine Technologies had tried to place some context for its share price declines in December. It did so by posting the following commentary after stock exchange operator Singapore Exchange had questioned the firm for possible reasons to explain said share price movement:

“As noted in [the earnings release] for Q3 2014… the diamond industry, in which the Company operates, has been, and is likely to continue to be, during Q4 2014 and early 2015, adversely affected by credit shortage, increase in polished diamond inventories and the divergence in the prices of rough stones and polished diamonds. Based on recent publications made by leading figures and analysts in the diamond industry and based on queries made to the Company following such publications, it appears that such trends have indeed continued.”

But as I also pointed out in my article, the company had been facing similar challenges since at least 2012 and yet has still managed to grow its business. The following chart, which also appeared in my earlier work, gives a great description of the firm’s growth despite not enjoying the smoothest of business conditions over the past few years.

Sarine Technologies' business metrics

Source: S&P Capital IQ and Company’s filings; data for 2014 are as of 30 September 2014

The firm’s resilience, as well as its future growth opportunities, gave me confidence to hang on for the rough ride. During that phase of sharp declines in December, Sarine Technologies’ shares had hit a low of S$2.16 and that represented a loss of some 14% from my purchase price of S$2.46.

It’s still early days yet, but the company’s close at S$2.64 today has turned my 14% loss into a 7% gain. So as you can see, my simple act of not selling despite seeing a quotational loss on my investment had saved me from making a permanent loss of my investment capital.

Of course, simply holding on to your shares wouldn’t work if the business you own is in a permanent decline. Print-advertising outfit Global Yellow Pages Limited (SGX: Y07) is a great example. Its shares have clocked losses of more than 90% over the past 10 years because it had seen its revenue and profit shrink dramatically in an age where advertising dollars are steadily streaming online.

Yet, when it comes to businesses which stand a good chance of earning materially higher profit five, 10, or even 20 years from now, standing pat when faced with temporary quotational loss on your shares can not only be the easiest way for you to avoid losing your capital, it can also be a great way to earn great long-term returns.

There’s nothing to guarantee that Sarine Technologies’ business and share price will grow materially higher in the future. But in my own personal case, seeing its shares lose value temporarily due to short-term volatility – without its business showing signs of permanent deterioration – would never induce me to sell my stake. This line of thought is easily applicable to other shares for me as well.

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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 writer Chong Ser Jing owns shares in Sarine Technologies Ltd.