Tuesday, April 26, 2011

Orsus Xelent: Mistakes From Which To Learn

One and a half years ago, Orsus Xelent (ORS) was brought up on this site as a potential stock idea. Despite the numerous risks cited in that article, this author went ahead and invested good money in that company. The results were bad, as the stock has fallen by about 80% since that article. Perhaps by looking at what went wrong, it will be possible to avoid similar such mistakes in the future.

The first risk outlined in the article had to do with Orsus' customer concentration. Specifically, this distributor concentration led to a huge receivable balance on Orsus' balance sheet. The stock traded at a massive discount to net current assets, but this receivable balance was the largest component of the company's current assets. Unfortunately, this customer has been unable to make good on its obligations, and Orsus has now written down much of this balance.

Because of the size of the receivable due from this customer, Orsus did insure a large portion of it. Unfortunately, it did not insure enough of the receivable, as the write-down now brings the company to a negative equity position. In other words, the discount to net assets at which this company traded is not only gone, but the company's obligations now outnumber its assets! So while the margin of safety looked large numerically, it was in fact quite weak because it was dependent on the ability of a single customer to pay what it owed, and that didn't happen. Investors would do well to avoid companies heavily reliant on just one or two customers.

Another warning sign was that the company's former CEO was selling his shares at a rather frantic pace. Insider sales are often difficult to interpret, as insiders must often sell stock to lower their own risk (diversification) or to obtain/maintain the lavish lifestyles by which many managers are seduced. In this case, however, the pace of the sales was so strong (resulting in price pressure on the stock, which no seller would want to do unless he was very motivated) that maybe I should have gotten a clue.

But despite these adverse occurrences, I could have sold this stock for only a small loss. But I believe I instead fell victim to loss aversion bias, whereby I held out hope for a profit in order to avoid realizing a loss. Had I encountered this company a year after I did, I don't think I would have been interested in purchasing shares due to the company's inability to collect its receivables over this period. Nevertheless, I continued to hold the stock, which was a serious error in judgment that I believe is explained by this bias.

Unfortunately, knowing about this bias was not enough to prevent me from falling victim to it. Hopefully, having learned the lesson the hard way will save me from this error in the future. I hope this is a stock most readers avoided; and if they didn't, that they sold at a profit (which was possible) or at only a small loss.

Disclosure: None


Anonymous said...


I think Francis Chou once said in a conference: You only need to be right 2/3 of the time.

Keep it up!

Omni said...

When you post your mistakes, you show integrity. Thank you for having the guts to do this. Most will not have the courage to write this kind of post.

I suspect many people will learn an important lesson from this.

Thanks Karsan.

Omega Male said...

Finding ways you've been wrong and then changing the thinking that brought on that decision is more valuable than gold (even at its inflated prices). If anything, hopefully some of us have learned this mistake vicariously. Congrats Saj.

Anonymous said...


I think one has to be *very* careful about learning lessons from random outcomes. Not saying it's impossible, but you should be aware of how difficult it is. Remember - investing is an inherently probabilistic activity, and in that way it's unlike almost all other human endeavors. In almost anything else people do, it is very possible, and important, to learn a lesson from both bad and good experiences. But with investing, there's a huge impact from the unpredictable and unknowable.

I can give you an example from your own website. Back in March 2010 you recommended BDR. I left a comment indicating I thought you were crazy to invest in this company, given what I considered to be very relevant warning signs you yourself identified. You had written,

"The most troubling thing about this company, however, is how its CEO manages money. Not so much the money within the business, but the money in his personal life. You see, CEO James Luksch declared bankrtuptcy less than a year and a half ago... It gets worse, however. Luksch had taken out interest-free loans from Blonder Tongue before declaring bankruptcy. Luksch's daughter and son-in-law are also executive officers of the company, and therefore the CEO's personal business is clearly company business; he has made it so!"

Yet BDR turned out to be a huge winner for you. I imagine you "learned a lesson", and that next time you see similar warning signs you'll recall how well BDR turned out won't be too concerned about them. But I don't know if that's the right lesson to learn, just like I don't know if the lessons learned about ORS are necessarily valid.

Think about this for a moment: what if things had turned out in the reverse? What if ORS turned out to be a big winner because the receivable got paid off, while BDR tanked after it was revealed that the CEO had engaged in unethical conduct. What lessons would you have learned in that case?

Just thought I'd give you some food for thought...

- aagold

Emily and Paul said...


ORS is the most frustrating purchase of my career and a lot of lessons to learn on this one. Ironically this loss of a few thousand has saved me thousands in other Chinese stocks that are "cheap".

Paul said...

I gotta give props to Saj for pointing out his mistakes. Good man.

another value investor said...

"one has to be *very* careful about learning lessons from random outcomes"


I am with you on this. It's often difficult to distinguish between skill and luck. I guess buying with a (perceivedly) large margin of safety will help in those "unlucky" scenarios.

Saj Karsan said...

Thanks guys.

Hi anon and Another,

I agree that one must be careful learning lessons when results could be random-ified to a certain extent, but surely you are not advocating that we can't learn from past cases! Negatives included, its probably still the best way to learn.

Thaiphile said...

I am generally looking for investments that I believe have a >50% chance of considerable growth (50% plus, perhaps 100% or more) versus <50% chance of loss (hopefully <50% loss because of the margin of safety we value investors like). I fully expect to lose money on some of my investments but I generally make more on the winners than I lose on the losers and the winners are usually in the majority. I think that we CAN learn a lot from our big losers so that we can improve the percentages but I wouldn't dwell on them. there are NO risk free investments!!

Anonymous said...

Hi Saj,

Do you have any comments on the recent price movement of ORS. Do you think it is a scam?

Saj Karsan said...

hi anon, no idea!