This Stock Is a Great Example of What Investors Should Do To Avoid Losers

In investing, knowing what to avoid can be as useful as (perhaps even more so than) knowing what to buy. “It is remarkable,” investing maestro Charlie Munger once said, “how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

So, how can we be “not stupid” in the words of Munger while investing? One way to do so is to avoid stocks that look exorbitantly priced. Timber flooring services provider Jason Holdings Limited (SGX: 5I3) is a great example of the advantage an investor can have by choosing not to pay stupid-high prices for a stock.

I first came across the company earlier this May and was alarmed at its valuation.

When I eventually penned my article on Jason Holdings on 26 May to prod investors to proceed with caution with the company, its shares were trading at S$0.64 and it was valued at 330 times its trailing earnings and 9.4 times its book value. To compound the problem, Jason’s business hadn’t been able to grow much from 2009 to 2014 (see the link given earlier).

For perspective on just how demanding those valuations were, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI) – had a trailing price-to-earnings (PE) ratio and price-to-book ratio of just 14 and 1.3, respectively, back then.

Today, Jason Holdings’ shares are exchanging hands at S$0.138 apiece, a mighty decline of 78% in less than three months, after suffering a violent slide in July.

While the timing is always an issue (I was lucky to get it “right” so soon), highly-valued shares without the appropriate business fundamentals in place do tend to fall back down to Earth over time. As Benjamin Graham, the intellectual father of value investing, was believed to have said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

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 doesn't own shares in any company mentioned.