Gravity Volatility Tough On The Heart

Apr.16.12 | About: GRAVITY Co., (GRVY)

It was too early to pop the cork and celebrate Gravity’s (NASDAQ:GRVY) 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 Gravity 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 sudden, 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 Gravity.

Gravity’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 Gravity lies in the future as the game matures and RO2 expands to other countries.

Look at Gravity’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 Gravity 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 (NYSE:BRK.B) 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 Gravity 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 Gravity 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