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Are You Prepared to Look Dumb in Bear Markets?

It’s tough being an investor in the past couple of months.

The Straits Times Index (SGX ^STI) – a market indicator for the Singapore stock market – has sunk by more than 20% from its peak in April this year. At the 20%-decline mark, the market is considered to have reached bear market territory.

With the index’s decline, it’s not a surprise to find that many other shares have fallen too. They can range from oil and gas outfits like Keppel Corporation Limited (SGX: BN4) to telecommunication firms like M1 Ltd (SGX: B2F).

In sum, the past few months – in particular August and September – have been uncomfortable times to be an investor. But, to invest well over the long-term, we may have to be comfortable at being uncomfortable.

Be comfortable looking dumb in the short term

In the table below, you can see the revenue, earnings per share (EPS), and historical share price performance of diamond manufacturing systems maker Sarine Technologies Ltd (SGX: U77):

Sarine Technologies' business and share price performance

Source: S&P Capital IQ; Google Finance

Sarine Technologies’ share price closed 2006 at S$0.45. In the years that followed, the forlorn investor might be quite discouraged with the company’s share price performance.

By the end of 2009, Sarine Technologies was down to S$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.

Circling back to the present, we may be seeing the same picture play out again.

The current bear market turmoil and tough industry conditions have hurt Sarine Technologies’ share price as well. The firm’s EPS over the last 12 months has dipped by more than 50% compared to where it was at the end of 2014. Shares of Sarine Technologies closed yesterday at a share price of S$1.70. Viewed in the shorter term – it’s a 30% decline from the end of last year.

This 30% stock price decline may make the investor look rather dumb over the short term. And, more pain may yet come. Sarine Technologies had announced yesterday evening that it’s expecting an operating loss in the third-quarter of 2015 due to a continuation of the rough industry dynamics it has been experiencing in the earlier part of the year.

Yet if we take a longer term view, shares of Sarine Technologies have risen by 278% to S$1.70 since the end of 2006. This is supported by an EPS that has risen by a respectable 42%. In my view, that’s a great long-term return and a fair tradeoff for looking dumb over the short-term.

A Fool’s take

Shares may rise and fall at times. The trick to obtaining satisfying long-term returns may be to stay focused on the underlying business behind the ticker and observe how it is performing. If a company’s profits can rise materially over the long-term, its shares may soon follow.

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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.