Avoid losers instead of seeking winners. That’s the crux of the unconventional approach to stock-picking taken by Ariel Investments’ Rupal Bhansali, chief investment officer and portfolio manager of international and global equity strategies.
What’s she avoiding now? Apple. In an interview with ThinkAdvisor, she explains exactly why.
The active investor, to whom risk management is paramount, focuses on inflection points rather than data points. The objective is not to prove but to disprove. Her first goal? Avoid losing money.
As for Apple, she views the company’s stepping into entertainment next month with a streaming service “a desperate move.”
In the interview, she also discusses her top pick: Microsoft, a company about which she remained enthused at a time when others forecast its stagnation.
In her just-released book, “Non-Consensus Investing: Being Right When Everyone Else is Wrong” (Columbia Business School – October 2019), the CIO details her “upside-down” stock-picking approach and how her use of differentiated fundamental research uncovers mispriced stocks.
Investing in 50 markets globally, Bhansali heads Ariel’s New York City office, which, over the last seven years, has gathered more than half the firm’s $13 billion total assets under management.
Previously with Soros Fund Management and Oppenheimer Capital, Bhansali has managed the Ariel International Fund since its 2011 inception. It has an annualized total rate of return of 5.34%.
ThinkAdvisor recently interviewed Bhansali, who was on the phone from Los Angeles. The non-consensus global contrarian, who grew up in India, where her father owned a stock brokerage, argues that “for every ‘Boglehead,’ there’s a role and room for a ‘Contrarianhead.’”
Here are highlights of our interview:
THINKADVISOR: What’s your outlook for international investing for the next two years or so?
RUPAL BHANSALI: The question isn’t about investing in the U.S. vs. investing [internationally]. The question is: Do you think value [investing] will come back or stay in the doghouse? I’m calling for a big comeback in value. It has already begun.
In picking stocks, you look for reasons to reject a company. Please explain.
Most people think investing is about picking the hot stocks. Actually, you have to pay more attention to avoiding the losers. That’s what affects performance a whole lot more than people realize.
You first consider the investment’s risk and then the return, so you write. Why?
To me the definition of risk is the concept of permanently losing money. Making money is the goal; losing money is the risk. So before I even think about making money, my first goal is to avoid losing money. It goes back to investing being more about avoiding the losers than picking the winners.
How do you define non-consensus investing?
Non-consensus investing is another term for genuinely active investing. The very misleading headlines about active investing suggesting that it’s underperformed is because people confuse “pretend” active investing with genuinely active investing. The kind of investing I do [is based] on research that focuses on inflection points rather than data points. That’s genuinely active investing.
Consumer electronics company Sony went from being a growth stock to, eventually, regarded as “distressed value,” you write. It had “lost its competitive advantage.” Sony “is a good example of a value trap that was mistaken as value,” you say. Now you pose the question, “Is Apple the next Sony?” Please explain.
Apple is a consumer electronics company that’s misunderstood as a technology company. The iPhone contributes the bulk of its profits. It’s very important to keep growing your installed base [number of units in use] — to keep getting people to buy your new product. But if your installed base is shrinking, you become a melting ice cube.
Is that what you see happening with Apple?
The iPhone 10, out last year, was quite the flop. It wasn’t competitive: Other phones have better features and cost less. So people aren’t replacing their iPhones at the rate they used to because there’s no value proposition to do so. The iPhone is no longer competitive. It used to be a premium product at a premium price for a reason.
What’s your outlook for Apple, then?
I’m not saying that Apple will disappear; but I argue that Apple will disappoint. Growth stocks can’t afford to disappoint. You constantly have to deliver value to your customers; otherwise you’re going to get substituted.
What about Apple’s getting into the entertainment business with its Apple TV Plus streaming service?