“Avoiding losers is more important than picking winners” in long-term investment portfolios, says Rupal J. Bhansali, chief investment officer and portfolio manager of international and global equities at Ariel Investments. In other words, “Risk management precedes return management.”
It’s mathematical, explains Bhansali. A portfolio that loses 50% one year, for example, would have to double in price (a 100% gain) just to break even. Such a huge loss could set the portfolio back years, lagging competitors, even if it had large gains in previous and subsequent years.
Bhansali herself is on a mission to find upset victories, those stocks that far outperform the consensus expectations, which is always a value approach. She eschews consensus. “There is no payoff from right answers if they’re the consensus,” she tells a gathering of journalists. “You must be right and prove the consensus wrong.”
Bhansali also criticizes passive index investing — “a good idea taken to the extreme,” with “high exit costs.”
“Passive is not an investment strategy,” she says. “It’s owning past success.”
In her new book, “Non-Consensus Investing,” Bhansali explains that passive investing dominates the stock market, creating the risk of “owning overvalued assets and contributing to price distortions and market inefficiency … When too much money chases too few goods, it bids prices up simply through technical demand/supply imbalances, not fundamental factors.”
She recalls the dot-com crash in the early 2000s and “suspects” a “milder” repeat of the downturn in today’s overvalued stock market, telling the luncheon gathering, “If markets are going to decline, alpha becomes more precious than beta. Beta will be negative.”