What We Can Learn From The Sharon Bio-Medicine Fiasco

If there is one person who must be ruing having come across Sharon Bio-Medicine, it is Daljeet Kohli. Few people had heard of the stock until Daljeet put on the center stage by recommending it in his report dated 3rd July 2014. The stock was then quoting at Rs. 49.50 and Daljeet projected a target price of Rs. 74 for it.

Daljeet appeared to have a magic wand with him because soon after his recommendation, the stock took off like a rocket to reach an all-time high of Rs. 87 on 24th September 2014.

On 1st September 2014, when Sharon crossed the target price of Rs. 74, Daljeet issued an update jacking up the target price to Rs. 140, implying that there were prospects of nearly a 100% gain.

After that the price started sliding and alarm bells ought to have started ringing that something somewhere is amiss. But we were all so caught up in the heat of the moment that nobody paid any attention to the red flags.

Daljeet also did not appear to sense anything amiss because when the stock plunged 40% to reach Rs. 51, he issued an update advising investors that the valuations had become “more attractive” and that they should “buy/stay put”. He reiterated that the target price remained intact at Rs. 140.

That was a terrible tactical error because the prospect of a 174% upside (from the CMP of Rs. 51 to the target price of Rs. 140) would have seduced a number of investors. People who may not have otherwise bought the stock would have been enticed to try their luck.

Daljeet realized something was amiss when the price kept plunging on huge volumes. He checked with the management who assured him that everything is “normal”. He accordingly issued an update on 17th December slashing the target price to Rs. 66 and advised a “hold”.

Unfortunately, that also turned out to be bad advice because the stock has kept sliding. Yesterday, it plunged 16% on heavy volumes (20.74 lakh shares on NSE and 11.41 lakh shares on BSE) to rest at Rs. 28.

The total loss since Daljeet’s first recommendation (on 3rd July, when the price was at Rs. 49.50) is 43%. If you look at the price on the date of the updates, the loss is much higher.

The surprising aspect is that in fixing a target price for Sharon, Daljeet departed from his usual practice. He normally projects a conservative target for a stock and when that is achieved, he gently revises the target upwards. However, in the case of Sharon, Daljeet was extravagant in projecting a 100% upside in the first round and a 174% upside in the next.

Perhaps, the extravagant target attracted a large number of investors to buy the stock who may have otherwise stayed away from the stock and to invest a larger sum than they might have otherwise done.

Anyway, now the important question is what lessons we can learn from this fiasco.

The first lesson is that we must accept that there will be losses to be suffered from stocks no matter how careful we are. We saw earlier how investment legends like Warren Buffett and Rakesh Jhunjhunwala have also suffered huge losses owing to poor stock selection.

Even Basant Maheshwari, who advocates the practice of investing only in top-quality stocks of proven pedigree, has suffered heavy losses. In his blog, he recalls how his stock pick Innovative Industries was a “bad call” which led to heavy loss. Also, in his book “The Thoughtful Investor”, you will find several graphic examples of his poor stock choices.

However, these bad calls do not detract from the fact that in the ultimate analysis each of these investors is successful and has created a lot of wealth.

Similarly, Daljeet also made a “bad call” in Sharon Bio-Medicine. However, this does not detract from the successes of his other stock picks.

In fact, Basant concedes that he may still make “bad calls“. He states in his blog that the trick to superlative performance is to sell out at the first signs of danger while extending the gains from the ones that we get right.

We can also take a cue from Parag Parikh’s books ‘Value Investing & Behavioral Finance‘ and ‘Stocks to Riches‘. In these, the veteran value investor advocates the adoption of the “portfolio/ basket” approach in which we do not obsess over the performance of individual stocks but instead focus on the performance of the overall portfolio.

Ultimately, we must remember that investing is a mind game. If we obsess too much over the losses from individual stocks, it will create a fear psychosis and hinder our ability to take meaningful decisions to take advantage of the opportunities that come our way.

So, my suggestion is that we should put aside Sharon Bio-Medicine (and the other losers) behind us and look forward to greater investing success in 2015 (and beyond).