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?
That’s the riskiest part of the story because now they have to throw money into a loss-making venture just to keep their installed base going. They have to incur a multimillion-dollar investment just to keep their customers coming to them. Netflix and Disney [Apple streaming competitors] are in a much better place because Apple has [little] content. So it’s a desperate move on their part. They’re playing defense rather than offense.
What’s the top holding in your portfolio?
Microsoft. The part [of their story] that’s being underestimated is the amount of growth they have left in their web services’ cloud computing platform, Azure. Even though it’s growing at a rate in the high double-digits, we see significant growth for many years to come. They’re very well positioned because they have a hybrid cloud, which is what some of the largest companies in the world use. Microsoft is the only company in the world to offer an [available] hybrid — public and private — which is what big companies want. Amazon offers only a private cloud.
What else do you like about Microsoft?
People haven’t appreciated yet that Microsoft [which scored big with the Xbox video game console] is going on to become the Netflix of the video gaming business with their XCloud video gaming streaming service. It will be in the cloud — [so] you can play games anywhere. You don’t have to be at home to play.
You write that in 2012, when others were saying that Microsoft would stagnate and decline, you had the opposite point of view. Please elaborate.
People thought that Apple’s success was coming at Microsoft’s expense. That simply was incorrect. Apple was succeeding in the consumer marketplace and not making a dent in the enterprise market [organizations vs. individuals], which Microsoft rules. They’re two different end markets. That was a big misunderstanding.
The second misunderstanding related to the fact that PC sales were falling. But sales of tablets and laptops were rising. The biggest money that Microsoft makes isn’t by selling hardware; they make it by selling software. [So] as long as people were using their software on a tablet or laptop, their revenues [would grow].
In its heyday, Research in Motion’s BlackBerry device was nicknamed “CrackBerry” because people were addicted to it, you write. Why did it go from winner to loser?
People judged the company on the financial model and the metrics. It was a hit and then it became a miss because their business model was exposed to competition. What wasn’t priced into the stock was the risk of the business.
And that was?
They were becoming less relevant [not competitive with other smartphones with more capability]. BlackBerry was on top because they offered a value proposition to consumers that they couldn’t get elsewhere. But the moment consumers could get it elsewhere, they switched.
How did you realize what was happening to the brand?
As a business analyst, we understood they were becoming less relevant because the fundamental differentiated research we did told us. But neither the stock nor the financial statements showed that. They were still reporting great numbers well after the business was suffering. Financial statements are a lagging indicator.
Is that why you say, “be a business analyst — and then a financial analyst”?
Yes. A lot of people in our profession, such as securities analysts, look at the stock price and do a lot of financial modeling. But reality doesn’t play out on an Excel spreadsheet. It plays out in a business. So focusing on paying attention to what’s happening in the business: its competitive position, whether the company is winning or losing in the marketplace. A lot of things happen in the business first, and whatever shows up in [those] numbers then shows up in the stock price. By doing more research at the business level — being a business analyst — you’re able to get an advantage by figuring things out before they get priced as a stock.
You write that the top five “mental states” a non-consensus investor should cultivate include both optimism and pessimism. Please explain.
If you have a non-consensus point of view, sometimes things will be better than what people expect them to be. Yes, you have to think about and stress-test what can go wrong; but you also have to think about what can go right. To be a non-consensus investor, it’s important to always consider all points of view. When others are overlooking something — getting carried away and becoming too bullish or too bearish — this can create opportunity to take the other side. And if you’re right, you can prove them wrong.
You devoted a whole chapter of your book to gender inclusivity, in particular, women in financial services. Are women deterred from entering the industry because many men in it demonstrate sexism and are abusive to women?
That’s part of it. People think that finance is a dirty profession — that it’s full of windbags and scumbags, which is an unfortunate [opinion to have]. As with any industry, there are some rotten apples that give the entire industry a bad name. But in my mind, finance is a noble profession.
Were you shocked at the Ken Fisher episode at Tiburon’s conference this month and the resulting fallout?
No. Our industry is finally speaking with its feet rather than just paying lip service. It’s good to see that such behavior [like Fisher’s] won’t be tolerated. It’s a historic moment.
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