What?s Happened to Blumont, Asiasons and LionGold Corp?

All three shares have been suspended by the Singapore Stock Exchange ?to safeguard the interests of the market as there could be circumstances that would result in the market not being fully informed.?

All this has happened on an otherwise quiet day in which the  Straits Times Index  (SGX: ^STI) is currently down by only 0.2% to 3,139 points.

So, what exactly has happened to those shares?

I have no idea, and I will likely remain clueless until SGX or the respective companies shed more light on the matter. And even then, the real answers might never be known.

Understandably, existing shareholders  will  look at their portfolios and demand answers. But that might not be the right  question to ask.

First, a short story?

My Foolish colleague David Kuo recently  shared  a great story about a private ?investor? named Bob:

?Bob, you see, felt that blue chips were a little boring. In his mind, he could not see the attraction of buying a stock that only returned around 8% a year. (Oh dear. If only Bob knew that such an investment could double in value in around nine years.)

So, Bob decided he would chance his hand on a stock tip he got wind of at a local coffee shop. It seems that a little birdie told him that a particular penny stock was set to explode into life.

So at the first available opportunity, Bob phoned his broker to place an order for one lot. As it turned out, the shares rose sharply. So, a delighted Bob phoned his broker to buy more.

His broker advised him against it. But Bob was adamant. And sure enough the shares rose even further. Every time the shares rose, Bob would be on the phone straight away to buy even more. And every time that he did, his broker would warn him against it.

Then one day, the shares fell.

So, Bob quickly called his broker to sell his holdings. However, his broker was unable to find any buyers.

A perplexed Bob asked his broker why he couldn?t find a buyer for his shares. After all, there must have been plenty of buyers out there since the shares had risen so sharply previously.

?Not really?, his broker replied. Then came the shocker. ?You see, Bob, the only person out there buying the penny shares was you?.

? Then, the right thing to ask

It?s a great story by David and it is warning of sorts about the dangers that lurk behind penny stocks.

But while the situations involving the three shares will each have their nuances and differences, there are some parallels we can draw with hapless Bob.

Blumont had risen  from six cents a share a year ago, to S$2.45 on 30 Sep 2013. It wasreported  that  on 2 Oct 2013  the Securities Investors Association Singapore (SIAS) ?has called for a speedy investigation into the unusual rise in share price in Blumont Group.?

With the company trading at 500 times its last-12-months? earnings and over 60 times its book value at that time, SIAS also ?emphasised that shareholders need to know the reason behind [the price increase].?

The same goes for Asiasons and LionGold. Shares in the  former were  S$0.98 a share at the start of Sep 2013 before zipping up 197% to a high of S$2.91 just  nineteen days  later on 19 Sep 2013. Asiasons? shares then slipped very slowly to S$2.70 yesterday? And we know what happened next.

Meanwhile, LionGold closed at S$1.16 a share on 1 Aug 2013 before it climbed 50% in short order to hit a peak of S$1.75 on 27 Aug 2013. LionGold?s shares subsequently declined steadily before culminating in today?s drastic sell-off.

During the meteoric rise of all three shares, did shareholders ever question if the price increases can be justified by the changes in the company?s fundamentals?

Or, were the companies so undervalued ? or  very,  grossly  undervalued ? that the rapid price gains can be substantiated?  Those  are the real questions to ask!

Bob?s sole rational in buying shares was  because  the price rose. And when it fell, he suffered.

If Blumont investors were jumping onto the bandwagon  because  a price increase was their only lodestone for evaluation, then they will  naturally be lost when their reason for buying is no longer there.

On the other hand, if the reason for investing in the company was a belief in its long-term potential in the minerals and resources industry, in which Blumont has made substantial recent investments, then this episode might prove to be a blip, albeit an ugly one.

Foolish Bottom Line

Stock market prices can fluctuate irrationally and often wildly. That means to say that prices can keep rising even when the underlying businesses have poor fundamentals. If that?s the case, then don?t be surprised when the bottom falls out one day.

On the other hand, prices  can  collapse despite strong fundamentals. That?s when investors need to exercise discipline and not give into fear. A purchase during times of irrational distress can even set the stage for spectacular returns in the future.

Ultimately, investors have to recognise that business fundamentals are the main  drivers of  long-term shareholder returns. In the long run, it?s the  businesses  that matters.

  Source:  The Motley Fool