One of few mistakes I made but I didn't lose money

One of few mistakes I made but I didn't lose money
I have seen so many investing-related articles about the authors' or someone's successful investment(s). I would like to share my bad investment that I nearly lose small amount of money.

I realized that I made a mistake when I started investing in 2010, right after my degree graduation.

What stock?
I invested in Orus Xelent Technologies Inc (ORSX) in 15 April 2010 at the price of US$0.5367. It was just statistically undervalued stock. It was one of my early stock purchase I made in US stock market.

About Orsus Xelent Technologies Inc

ORSX is a China-based company involving in the designing and distributing cellular phones for retail and wholesale distribution. It also manufactured cellular phone models.

When did I realize my mistake?

Clearly, at that time, I was value investor with 100% quantitative analysis. Getting my investing philosophy right, I thought I should be able to distinguish good and bad China-based companies. Oh boy, it is impossible! The only way to avoid is to study the management's ethics rather than financials itself. I think Kee Koon Boon's fraud analysis is excellent. I wished I had a lot of time to study his work and apply his analysis on Asia-based stocks. I choose to study management's ethics which is less time consuming compared to the aforesaid fraud analysis.

With no news coming from ORSX, I realized my mistake by then. It was one year later. There are two red flags after I re-read its annual report and its behavior:

1) ORSX outsourced the phone manufacturing to third party - it is totally unheard of.
2) ORSX advertised itself for having award winning cellular phones. That is fine but it has not communicated its plans about how it dealt with the new waves, coming from the smartphones, that may affect ORSX.

I believe that there are many more red flags in other people's eyes looking at ORSX's available information.

Happenings During the Holding Period

If you google it, you will find that there are not much news about it. ORSX had to do reverse split its share so that it can artificially change price per share from low figure to high figure. It is because US stock markets, except OTC market, requires all stocks to maintain above certain share price. Failure to do so will cause the stocks to be delisted (moving from heavily regulated stock market (NASDAQ, NYSE, and AMEX) to zero regulated stock market (OTC).

Unfortunately, with zero financial statements after 2010, it was effectively delisted.

I nearly compounded my mistake. How did I do that?

When it was delisted, I studied infrequently about its price movement. I notice that it has certain price band between $x and $y. I did a dollar cost average by purchasing ORSX stock at US$0.05 on 16 November 2012.

Therefore, I set US$0.10 per share as our selling price and did reverse engineering to find out how many shares we need to purchase in order to break even after taking account of hefty trading cost associated to OTC market.

It is very risky plan. I am glad that we got ‘get out of no jail, free’ card. 

How did I not lose the money?

I rely on two facts:

1) The stock market is not fully efficient at all the time.

2) There are a lot of investors exhibiting irrational behaviors in any stock market everywhere.

Eventually, I sold all of them in three different dates because it is thinly traded in OTC market - US$0.10 on 22 February 2016, 1 February 2017, and 23 May 2017. In the end, I earned absolute profit of 20.8%.

Frankly, I don't know why buyers would buy at that price. I am just lucky man. Luck don't appear every day and it is far better to rely on my own skill rather than luck. That is why I do not advocate to do this way. It is first and the last time I would do it.

With that experience, I agree the following statement spoken by Benjamin Graham in 1963:

"My views thereon are definite and strong. In my nearly fifty years of experience in Wall Street I’ve found that I know less and less about what the stock market is going to do but I know more and more about what investors ought to do; and that’s a pretty vital change in attitude."