Non-Consensus Investing

Being Right When Everyone Else Is Wrong

Rupal J. Bhansali

• Publisher: Columbia University Press
• Year: 2019
• ISBN:
  9780231549769
• Topic: Business
• Subtopic: Trading
• Index: Business

At a time when many proclaim the death of active investing, Rupal J. Bhansali, global contrarian, makes a clarion call for its renaissance. Non-consensus thinking has resulted in breakthrough successes in science, sports, and Silicon Valley. Bhansali shows how to apply it to the world of investing to improve one's odds of achieving above-average returns with below-average risks. Her upside-down investment approach focuses on avoiding losers instead of picking the winners, asking the right questions instead of knowing the right answers, and scoring upset victories to achieve the greatest bang for one's research buck.

Through a series of counterintuitive concepts and contemporary case studies from her firsthand experience of investing in fifty markets around the globe, Bhansali describes how to perform differentiated fundamental research to uncover mispriced stocks. She candidly shares her failures and mistakes as well as her successes and triumphs. She also weaves in her personal journey, recounting how she overcame the odds to succeed in a male-dominated profession and offering advice on breaking the glass ceiling. Non-Consensus Investing is a must-read for anyone who seeks to understand why active investing disappointed and how it can succeed—analysts and amateurs, fiduciaries and financial advisors, aspiring and practicing money managers, as well as students or investment enthusiasts.

1

How My Passion Became My Profession

My personal and professional lives are so highly intertwined, it is futile to discuss one without the other. My unconventional upbringing and eclectic work experiences have shaped my investment philosophy in many subtle and significant ways so it seems appropriate to share that personal journey with you before I describe my philosophy.

In this opening chapter, I tell the story of where my fascination with equity markets began, and how my passion went on to become my profession.

The Early Years: Unusual and Unconventional

From the beginning, my life took an unconventional path.

Most kids grow up on fairy tales and fables. I grew up on stock stories. My father owned a stock brokerage business, and since my childhood bedroom doubled as his home office, I often heard him talking to his clients. When the market or a certain stock was not performing well, they needed a lot of hand-holding. I remember how cogent he sounded as he laid out his investment views. Even though I was too young to fully understand what he was saying, I figured out that investing is a lot about managing expectations and emotions, not just money.

My dad became an accidental entrepreneur at the age of twenty-one, straight out of college, to support himself and his siblings. Even though he had no investment skills to speak of at such a young age, his timing was great—it was the early 1960s and stocks were rising—so he was able to build up a good roster of clients eager to invest. Flushed with success, he decided to go the next step and advise clients rather than simply execute their instructions. His business flourished.

Then, after years of success, he took a step too far and, by the early 1970s, started to trade on his own account instead of only on behalf of clients. This exposed our family to the vagaries of the stock market and transformed our lives into a roller-coaster ride on the “mark to market” train. If markets were down (as they often were in the mid-1970s and ’80s), money became tight, and I was late paying basic bills such as tuition fees. It is not an exaggeration to say that the vicissitudes of the stock market became the backdrop of my existence. I was not sure I would be able to finish high school, let alone go to college. Thus, at the age of nine, I learned the meaning of the expression “Bills don’t come due at market tops.” It was a harrowing lesson, but also the beginning of a counterintuitive way of thinking about investing: not losing money is as important as making it—if not more so.

The saving grace amid this volatility was that my dad had the fortitude to hold steady in the face of setbacks. Thankfully, many of his stock picks eventually made money, allowing me to finish my schooling at Queen Mary High School and graduate in business and finance from Lord Sydenham College in ­Mumbai, India. This bittersweet journey taught me the importance of patience and not letting short-term pressures torpedo sound long-range decisions.

Despite the turmoil, I was fascinated by the markets and followed every twist and turn with the intensity teenage girls usually devote to makeup and boys. I noticed that not only did many of his stocks go up, several were genuine hits. I remember two in particular: Philips India Ltd., the Indian subsidiary of the Dutch consumer electronics conglomerate, soared from fourteen to eighty-four rupees, and Great Eastern Shipping from twenty-four to seventy-five, in a few years. I can vividly recall the thrill of watching those prices rise, knowing that my father’s ideas were being vindicated and he was giving his clients peace of mind as well as profits. This is what led me to appreciate the power of active investing: you can get a lot of bang for your research buck. I knew then that I wanted to make this my vocation, a profession in which I could do well and do good.

I could not wait to start. By the age of sixteen, I had learned accounting in high school, so I could qualify for internships on Dalal Street (India’s Wall Street). Alongside college in the mid-1980s, I worked part-time or summers as an apprentice at various firms to learn different facets of finance—from the foreign exchange desk at Citibank to the corporate finance and leasing department of an investment bank. By the time I was twenty-one, I had edited prospectuses, calculated residual values on leasing portfolios, and learned how to read balance sheets. I took on any assignment I could lay my hands on, from mundane tasks such as proofreading marketing material to complex ones involving researching regulatory barriers to venture capital financing in emerging markets. It may not sound like scintillating work, but I was drinking from a fire hose and it felt exhilarating!

During my undergraduate years, I noticed that when my classmates began planning their future, most took the conventional path of looking for a job. But through my dad’s stockbroking business, I had firsthand exposure to the possible benefits of entrepreneurship, and I wanted them to at least think about it. So, I organized a competition called “Mind Your Own Business” in which students would present their original business plans and review business models, not just financial models. I guess you could say this was my first attempt to challenge conventional wisdom.

As irony would have it, I walked away from my own family business in India. I dreamt of going to New York, where I could practice money management as a profession. I knew if I wanted to be a top athlete in my chosen field, I had to compete in the Olympics. In investing, the Olympian battleground was not India but the United States of America, where the most sophisticated investors proved their intellectual worth by competing against benchmarks such as the S&P 500. Little did I realize I was signing up for an epic battle—the one between active and passive investing.¹

But my dream to manage money quickly faced its first of many obstacles—money itself. The surefire way to secure a visa to America was to be a graduate student, but tuition for an out-of-state student (especially an international one) was prohibitively expensive. I began to look for a scholarship. My prospects looked bleak: I did not qualify for a need-based scholarship, and one based on scholastic merit seemed like a long shot. Then I learned about the Rotary Foundation and the scholarships it offered to well-rounded individuals. I was on pins and needles during the multiple rounds of interviews for the limited number of scholarships available. I felt daunted by the stiff competition but ecstatic when I made the cut. Finally, I was on my way to America.

But I almost didn’t make it.

In the summer of 1991, just days after I bought my ticket to America, the Indian rupee devalued by 40 percent, which meant my expenses in dollar terms shot up by 66 percent! My heart sank. Fortunately, in reading the fine print, I discovered my scholarship was denominated in dollars, not rupees, so the devaluation did not affect my plans. But you can bet that ever since that gut-wrenching moment, I have read financial footnotes with an eagle eye and paid close attention to currency risk.²

Shortly after landing in America, I had my first taste of culture shock. I had chosen to do my MBA at the University of Rochester because it was in New York, the financial heartbeat of the world. I did not know that the university was in the state of New York, not the city of New York. In India, the names of cities and states are different, and I had assumed that to be the case everywhere else. It never occurred to me to check. If only I had triangulated information, instead of assuming it!³

The Formative Years: What to Do and What Not to Do

I had hoped to work on the buy side of Wall Street rather than the sell side. The buy side comprises analysts and portfolio managers who manage money and buy stocks; on the sell side are brokers (like my dad) who execute trades placed by their buy-side clients. But of course, timing is everything, and mine was not good. I expected to graduate from my MBA program in March 1993, so I started looking for a job in 1992, which happened to coincide with a deep recession. Equity, bond, and property markets were all crashing, Wall Street was downsizing, and buy-side jobs were in short supply.

My specific circumstance was even tougher. I needed a work visa when my student visa expired. To get a work visa, I needed a job. Without a job, I had to leave the country. My dream was evaporating before it could even start.

I could not let that happen. After a disheartening search that seemed interminable, I managed to get a job at a boutique sell-side firm, Crosby Securities, which specialized in emerging markets. To be frank, it was not my dream job, but it was the only one I could get that would let me stay in the country, so I took the position and gave it my best. In hindsight, it turned out to be a terrific launch pad. My colleagues were great role models, and my clients included the who’s who of money managers in North America (JP Morgan, Capital Guardian, Templeton, Wellington, Tiger, Soros, and countless others). This gave me a ringside view of their investment successes and failures, philosophies, and processes, as well as their product strategies and organization structures, and exposed me to a wide range of macro views, investment styles, and stock debates.

“The signature element of my upside-down investment process: it focuses on what can go wrong, not just what can go right.”

This amazing experience proved instrumental in shaping my own investment philosophy—not just what to do, but what not to do. By learning from the best and leaving out the rest, I was able to develop a counterintuitive discipline (non-consensus investing) which I have honed and applied over a career spanning twenty-five years.

The other interesting aspect of my first stint on Wall Street was that hedge funds were also my clients. Hedge funds make money by buying stocks that go up (going “long”) as well as “shorting” stocks that are expected to fall (going “short”).⁴ As a result, not only did I have to produce “long” ideas, but I had to come up with “short” ideas as well. This experience of thinking about both the long and short sides of the trade has become the signature element of my upside-down investment process: it focuses on what can go wrong (and how much the stock can go down), not just what can go right (and how much the stock can go up).

Then my life took a momentous turn. One of my clients at this first job was the hedge fund Soros Fund Management. They made me an offer, and I jumped at the opportunity, even though it meant a 50 percent pay cut. This was my chance to shift to managing money rather than brokering stocks. It has been among my best decisions ever. Over time, my learning, earnings, and career prospects vastly improved compared to the bleak future I would have confronted on the sell side. I see it as a profound reinforcement of the lesson I learned watching my father’s career: if you choose long-term gain over short-term pain, you come out ahead in the end. It has served me well in investing and in life.

As the years rolled by, my roles and responsibilities expanded. My next stint was at Oppenheimer Capital, and my remit expanded from emerging markets to developed markets, from international equities to global equities, and from analyst to portfolio manager. Later I went from being head of international equities to chief investment officer of global equities. Clients expanded from multibillion-dollar private and public pension plans to trillion-dollar superannuation and sovereign wealth funds. Assets under management also grew from the millions to billions of dollars.

There were other changes, too: from receiving breaking stock news via fax and research reports via snail mail to consuming them online; from being tethered to a PC in the office to traversing the world with a laptop and a smartphone; from emerging markets and junk bonds being revered to reviled and back to being revered again; and from active investing going out of favor to coming back in vogue to going out of style again.

The one thing that did not change was my resolve to deliver superior investment results and solve for the seemingly mutually exclusive goals of achieving higher returns with lower risk. All my learning and experiences culminated in my unconventional investment discipline: non-consensus investing.

Non-consensus investing is not simply doing the opposite of what everyone else is doing. It is deeper and broader and requires its practitioners to develop skills to recognize when widely held investment views are likely to be wrong. It is consciously trying to establish whether you have a differentiated point of view on a company’s fundamental prospects and intrinsic value and then courageously taking the unpopular side of the trade—buying when others are selling and vice versa. Non-consensus thinkers are not simply contrarians in a psychological or behavioral sense. They are analytical and independent thinkers who try to figure out what is misunderstood about the business and mispriced in the stock.

Non-consensus investing adopts an upside-down investment approach—doing things contrary to convention, such as examining the counterfactual instead of reviewing the facts or conducting research in an atypical sequence. For example, most investment processes typically try to shortlist securities that meet some preset criteria, usually minimum growth rates or maximum valuations. My approach is the opposite. Instead of trying to select companies, I look for reasons to reject them. By first and foremost looking for things to dislike and identifying what can go wrong, I proactively try to reduce the risk of being blindsided if adversity arises. Even if it does, I am prepared for it and can insist on getting paid for it. Those who look for things to like end up overlooking things that can go wrong and assuming more risk than they bargained for. Also, most conventional investment processes revolve around seeking returns; non-consensus investing aims first to identify and manage risk. It is a counterintuitive approach, but in my experience, the correct one.

They say there is nothing worse than being poor. I disagree. The worst thing is being poor after you have been rich. My childhood was a roller-coaster ride on the money train, with as many wrecks as riches. ...

Table of contents

• Cover 
• Title Page
• Copyright
• Dedication
• Contents 
• Acknowledgments
• 1. How My Passion Became My Profession
• 2. “And” Not “Or”
• 3. Stocks or Bonds?
• 4. To Stand Apart, You Must Stand Alone
• 5. Score Upset Victories
• 6. Do No Harm
• 7. False Positives and Negatives
• 8. Ditch the Database, Embrace the Search Engine
• 9. From Victim to Victor
• 10. Value Investing = Margin of Safety
• 11. Sizzle Fizzles, Patience Prospers
• 12. North Star
• A Special Message from Me to You
• Index