GRVY Volatility causes Heart Attack

April 16, 2012 | Comments (5)

It was too early to pop the cork to celebrate GRVY. After hitting a high of $3.30 or $.340, the stock price is back down to the low $2′s.
But it does not matter and should not matter.
This post was originally just going to be a brief message to ignore short term volatility but that changed as soon as I wrote the first line.


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Jae Jun

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It was too early to pop the cork and celebrate GRVY’s climb. After hitting a high of $3.30 or $3.40, the stock price is back down to the low $2′s.

But it does not matter and should not matter.

This post was originally just going to be a brief message to ignore short term volatility but that changed as soon as I wrote the first line.

Because I have a lot riding on GRVY and I know many of you also hold the stock as well. I also know exactly how I feel about the movement and maybe my reflections will benefit you too.

Backing up to 2010 and 2011

When my first full season of investing began in 2008, I attributed all of my success to my “rookieness”. Someone commented that I must have an iron stomach to handle huge swings and to be able to buy when down 50%. But looking back, it was more lack of experience and not know anything that allowed me to glide by such volatility and to ultimately profit from it handsomely.

Then after the 2009 season of huge gains, everything came to a halt starting in 2010.

Ironically, my stock picks were fantastic, if I had held it longer. I would have had multiple baggers as well as one that eventually went up 1,000%.  But the point is that I missed out on everything.

I missed out because I cared too much. I was trying to continue the strong performance from the previous year. It was just trying too hard and too much.

Well, that is what I thought.

What Really Happened

Half way through 2010, I was extremely frustrated because nothing was working. It felt like I had the anti Midas touch.

But during that mid 2010 season, upon some deep reflection, everything pointed to one issue, and it was quite clear what it was. I was just so arrogant that I didn’t even think it could be a possibility.

I couldn’t handle volatility.

The Next Step

Knowing what the issue was and finally being able to admit it to myself, I did what I had to do.

I did nothing. I didn’t buy or sell or research anything. I did nothing in terms of activity.

What I did do was start reading behavioral finance books. Buffett’s letters are fantastic for that. I read other books and letters by prominent investors.

All of a suddent, it felt like I had an experienced coach beside me giving advice.

If this was sports, it was my turn to bat, and with my rookie season over, I wanted to impress everyone to cement my position on the team. The only problem was, I kept wildly swinging at everything, but thankfully there was somebody who had experienced it all, telling me to slow the game down because I was all over the place.

Turning Point

And so I was finally able to break free. That was the pivot point I needed. Believe it or not, it now feels like I am numb to volatility. My mind is back to how I handled things back in my rookie season, except that I now have a lot of tools and knowledge to go with it.

Maybe you never went through the little struggle I did, but I’m sure many have or are still struggling.

So here’s my advice. Slow it down. Take a deep breath, take your eyeballs off the stock price and refocus on the big picture.

Now, let’s talk about GRVY.

GRVY’s Big Picture

The recent drop has nothing to do with the business. I repeat it has nothing to do with the business and I am going to address the main concerns that I am hearing about.

1. Bad Game Reviews

To set the record straight, I have not read any reviews of the game on some national tabloid that is slamming the game. Now that would be a big concern, but there is none of that.

RO2 went live less than a month ago only in Korea. The future is bright. The first RO certainly wasn’t a hit within 2-3 weeks of release. Gravity kept improving the game and made it into many different formats and still lives on today.

It is just a small minority of unhappy gamers complaining. More noise comes from complainers than happy gamers. It’s a fact of life. Dislike a product and you will try to tell the world. Be happy about something, and you’ll likely only tell people when asked about it.

I’m sure the huge hit World of Warcraft had plenty of complaints during its Beta stage and immediately after launch. Taking gamer complaints as a sign that the game will be a failure is a huge mistake.

It is important to differentiate noise and valid information, because not all information is good information.

2. Lack of Management Communication

Management has no reason to reassure investors of stock price movements.

The stock and the business are two separate matters. I would sell my position if management showed more importance in trying to comfort and please investors about the falling stock price instead of spending that time to run the company.

When I went on the yahoo board, there are a few people who constantly contact Investor Relations to try and get info. This is really a waste of time and more of a step to reassure yourself.

I prefer companies that do not hold investor conferences or even give earnings guidance. Lack of communication by management is a plus for companies who are meeting milestones.

3. Steep Decline in Stock Price

There was clearly a huge buying spree leading up to the date of RO2 official launch in Korea which pushed prices above $3.

The game is released only in Korea. This is not a world wide launch and is therefore not receiving wide spread attention. This must have been a huge disappointment for many, especially those who were trading on momentum.

The beauty of GRVY lies in the future as the game matures and RO2 expands to other countries.

Look at GRVY’s Big Picture

If it was 2010 or 2011, I’m sure I would have sold at $3 and have been proud about it. But my selling philosophy doesn’t revolve around selling just to pocket some gains when I am confident the value is much higher.

This is a topic for further debate, and taking profits is not a bad thing, but personally, I find it more difficult to buy back in after having sold a position. Easier to add to my position when the stock price has dropped vs creating a new position after having exited.

If I didn’t see much upside with GRVY once it hit $3, then it is an easy sell decision, but I am more than content to hold and ride it out.

Whenever you read about the really successful investors, they all preach the same principle. Use volatility as your friend, not your enemy.

The people who bought Berkshire Hathaway in the beginning and didn’t sell after it appreciated 100% are probably still holding their positions for a 18,000% return or something.

Definitely wrong to compare GRVY to Berkshire, but the concept is the same. I’m willing to wait for the big picture to unfold.

Consider that RO2 will be localized and released in about 6-7 additional countries. Licensing revenues will continue to pour in, additional income from providing support will also drop to the FCF line. Its newly purchased games are doing well and adding to profits.

RO2 doesn’t have to be a huge success. A mild success is enough for the company to look completely different than it is now.

I valued GRVY as below a couple of months back.

  • Conservative value: $3.00 range
  • Normal value: $5.00 range
  • Aggressive value: $7.00 range

Continue to focus on the big picture and you will realize that we are still at the very beginning. It just felt long because the game has been delayed for 7 years.

Disclosure

Long GRVY

About Jae Jun


Jae Jun is the founder of Old School Value. He is on a mission to provide practical and actionable value investing tools, tutorials and educational material to help empower the individual investor. Keep in touch with Jae via any of the methods linked below.

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  • bill

    i see alot of my own journey in your post. great insight. i’m trying to keep my eye on the far horizon, but the waves are getting steeper and more frequent. question is, how bad a storm are we looking at?

  • http://www.oldschoolvalue.com Jae Jun

    knowing what you are holding is like knowing what type of boat you are on to fight the waves. Storm could become worse, but no storm lasts forever. Just need to hang on and be alert.

  • Sungsta

    Hey Jae, I’m not seeing the competitive advantage that this company has compared to WOW, Final Fantasy or the other MMORPG games that sprouted up with social network being the new hub to deliver these games to their intended audience. My wife is unconvinced regarding the potential success of Ragnarok 2. How is Ragnarok 2 able to retain and increase it’s user base when there are so much competition in this field?

    The company has a strong balance sheet but looks like it’s slowly diminishing. Square Enix who makes all the FF14 had to apologize for how poor FF14 was during its release and I think Square Enix has a pretty strong brand and goodwill compared to that of Gravy. If Square Enix who’s like Goliath is having trouble making an addicting game, what does Gravy has that Square doesn’t?

    I would have loved to got into Gravy with you when it was a NetNet bizillion years ago but I guess right now, I can’t seem to see the competitive moat that your seeing.

    I prefer Diablo 3… My childhood with my 75mhz Packard Bell!

    Later Bro.

    Sungsta

  • http://www.oldschoolvalue.com Jae Jun

    Great points Sungsta.

    Keep in mind that GRVY isn’t a Buffett investment. It was a cheap net net with positive operating profits and has only now broken out of net net territory. GRVY is now a cheap stock with multiple catalysts.

    As you’ve pointed out, in the gaming world, I don’t see much of a competitive advantage. Too much of a hit or miss in the game industry.

    So let’s subtract that from the equation for now. What I’m left with is a company showing steady profits as of 1-2 years ago. Since then, new games, even if they are mediocre has been adding value to the balance sheet.

    Now back to RO. Loyal fans will play it for sure. While FF is a huge franchise and has released FF up to no.14, RO is only up to no.2. I’m more inclined to think that FF has probably diluted its user base by offering so many new versions over the years. Not everyone is going to play from FF1 all the way to FF14.

    Compare that with RO. I would bet a big majority of RO1 players are going to try out RO2. Even if it is just out of curiosity.

    Balance sheet is still strong. Company is spending on acquiring new games for growth which is great.
    At current prices, GRVY doesn’t need competitive advantage. It just has to normalize back to the mean.

  • Sungsta

    My wife being a avid MMORPG player is reluctant move to other MMORPG games. Her character cost probably a couple grand already and all the hours she must have invested in the game. Square Enix really established a strong moat by making their fans become their character(Sakuracon / animecon), high switching cost (not wanting to lose your character you love), the brand that pretty much everybody knows, network effect is pretty much all their subscribers who play all their games which also complements the size advantage.
    I failed to convince her otherwise to try out other games. The bond is just too strong even though their last game wasn’t such a success. Something I like to see in a company with a strong moat but not in the wifey.

    Going back to GRAVY, without research I wouldn’t know how well they retain their customer base. By acquiring other games, I suppose they can increase that with the amount of cash they got. On the other hand, Gravy to me looks like a target for an Acquisition but that’s just wishful thinking. I’m more reluctant in jumping in the pool with you as I form my own investing philosophy. I would take a dip if they ever dropped down in the 1.10 range like last year… Who knew?

    Thanks Jae and good luck!

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