A good stock call isn’t just about being right — it’s also about being different, about diverging from consensus. Rupal J. Bhansali, chief investment officer and portfolio manager of international and global equity strategies at Ariel Investments, described this concept as the “And” proposition.
“Contrarians insist on the ‘And’ proposition. They refuse to settle for sub-optimal compromises,” she explained at the 8th India Investment Conference. As a contrarian value investor, Bhansali rejects the conventional idea that investors must choose between low-risk and high-return investments. She values non-consensus thinking because it sidesteps convention and finds ways to transform either/or choices into “And” propositions that deliver both results.
Bhansali explained that some of her most successful investments were in companies that avoided the conventional wisdom of either/or tradeoffs. Her success has come from identifying firms that have mastered these “And” propositions before they were recognized and priced by the markets.
Michelin: Safety and Fuel Efficiency
Forecasts in 2011 anticipated a bleak year for auto component manufacturers, but Bhansali recognized that Michelin was using non-consensus thinking to avoid a difficult tradeoff. Tire manufacturers face a competing set of either/or demands: Consumers want safer tires that grip road surfaces more tightly, but tighter grips mean less fuel efficiency. So the conventional tradeoff sacrifices fuel efficiency to deliver safety. Bhansali and her team realized that Michelin had found a way to provide both safety and fuel efficiency, which meant consumers would pay more for its higher-quality product.
Meanwhile, the market considered tires a low-tech commodity that competing firms could easily copy. “We can buy a fake Louis Vuitton bag,” she noted. “Why can’t we get a fake Michelin tire?” Bhansali didn’t buy it.
Rupal Bhansali says Michelin was a good example of non consensus investing with a large payoff #IndiaInvConf
— Sanjay Parikh (@sapari071) January 12, 2018
She found that the flood of low-cost tires from China had little effect on Michelin because its manufacturing process required specialized knowledge and could not easily be reverse engineered. “Very few people can copy what they have managed to accomplish,” she said.
Ultimately, Bhansali’s investment in Michelin outperformed not only because consumers remained willing to pay for quality, but also because tires are consumable and must be replaced as people drive longer distances. “This is what you get when you understand quality in a way that others don’t,” she said.
Microsoft: Desktops, Laptops, and Tablets
At a time when conventional investors were looking at companies providing consumer staples, Bhansali had her eye on enterprise staples. The nature of software licenses, which must be regularly purchased, maintained, and renewed by businesses, meant that they were always in demand and rarely cut from operating budgets — just like consumer staples, but on an enterprise scale. “I can do without shampoo,” Bhansali joked. “But I can’t do without software.”
Microsoft is an example of consumer staple & used widely even when buyer’s preference changed. Understanding quality is differentiation for research says Rupal. #IndiaInvConf @CFASocietyIndia @CFAIIndia
— Raj Kalur, CFA CFP (@rajkalur) January 12, 2018
This perspective helped her recognize that Microsoft wasn’t compromising. The rise of tablets and other personal electronic devices left many analysts concerned about declining desktop computer sales. Either an increase in laptop sales would mean fewer desktop computers sold, or consumers buying tablets and other portable devices would hurt laptops and desktops. But Bhansali recognized that consumers used Microsoft software across multiple device formats, making Microsoft earnings less dependent on the fate of a single platform.
The Microsoft example demonstrates that value investors aren’t confined to niche investments in obscure corners of the market. “These are mega-caps we are talking about,” she said, insisting that value investments can be found across a broad spectrum of equities.
Apple: Picking Winners and Avoiding Losers
Bhansali’s discussion of Apple drove home an important reminder: Sound investment decisions need to meet two equally important objectives. Not only must they select winners, but they also need to avoid losers. After drawing parallels with Blackberry and Nokia, Bhansali said Apple was a company to avoid.
— Deepak R Khemani (@DeepakRKhemani) January 12, 2018
“In a short span of six years, Blackberry stock went up a hundredfold,” she said. But the market’s view of the company’s long-term prospects was completely different from how those prospects played out. New markets brought threatening competitors instead of profitable opportunities, and Blackberry’s competitive advantage — its ability to compress data for easier transmission across networks — eroded with the introduction of new network infrastructure. The consensus view on Blackberry did not understand how the quality of the company was changing. “It was fading quality,” Bhansali said. “And that’s kind of what happens when you misunderstand quality and overpay for it.”
Pointing to Blackberry’s glowing financial metrics during its rise, Bhansali asked, “Don’t we all think about Apple as a similar kind of company?” Apple, she said, is behind the curve on wireless charging, rapid charging, and screen technology, warning that it was “the poor man’s platform company.”
Being Different and Being Right
“Understanding quality is the differentiation that you bring to bear when you are a good research analyst,” Bhansali said. “It is not easy to understand quality. Even after you understand it, you’d better be non-consensus about it. Even if you’re non-consensus about it, it’d better be lasting.”
In her view, the most important aspects of value investing involve using the right lens and understanding the core business of a company. “You know as well as I do that Apple trades on 14 times earnings,” she said, noting that financial metrics are lagging indicators that are widely used to forge the consensus opinion.
“To me, the stock price is a validation,” Bhansali said, “when the consensus comes around to your point of view.”
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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