Non Consensus Investing

Speaker: Ms. Rupal Bhansali, CIO, International and Global Equities Portfolio Manager, Ariel Investments

Moderator: Sunil Singhania CFA, Global Head Equities, Reliance Capital Ltd.

Contributed by: Jainendra Shandilya CFA

The 8^th India Investment kicked off on January 12, 2018 and  Rupal Bhansali hogged the limelight by slicing and dicing the myths associated with investing. The theme of her presentation was Non-Consensus Investing and she stated that the best things in the world are simple and smart, like the Apple of Steve Jobs. There have been people who dared to pick winner far from the consensus and the classic example was of Billy Beans of Oakland Athletics. The advantage of non-consensus investing is high return at lower risk; however, one must understand that this is possible only when one is correct and proves the consensus wrong. She started her presentations with a classic example of Blackberry, how this tech company, once a darling of growth investors, lost out in the race of investing. Blackberry had the advantage in terms of technology as during the era of 2G mobile telephony, the bandwidth was not sufficient to process too much of data along with voice calls. Blackberry did a fine job of compressing data and that allowed its users to communicate seamlessly without bothering about call drops, etc. The technology, however, moved forward with the migration to 3G and 4G and this advantage did not remain unique to this instrument. The share price of blackberry, which rallied to around 900 percent during its heydays, soon lost momentum and also the charm. The stock price lost so much that it is unlikely that stock will reach its high watermark of yesteryear. Why investors lose out on this kind of stock is they try to see the performance of the stock in its financials which is a lagging indicator of a stock performance. The share price of Blackberry and Nokia performed very well during their heydays, however, they are not in the race now. What about Apple? “Apple is no longer a technology company and maybe it will also have the same fate at some point of time”, feels Bhansali. The reason why Apple does not look promising is there is nothing in it that is unique to its platform. Almost all the top apps used worldwide, viz. Uber, Snapchat, Facebook, Spotify, etc. are also available on other platform. The fast charging technology, wireless charging, etc. is not in the domain of Apple. In other words, it is no longer ahead of the curve -inventing the way it did before.

She picked up another winner from her portfolio and showcased how the myths associated with stocks needs to be debunked to get ahead of the curve. The example of Michelin  Tyres was a case in point. The myths associated with tyre industries are they are a low tech commodity, have high sticker price, have low ROIC and especially so in a declining car sales world. “If this was really true, why did Chinese not flood the market with Chinese tyre”, asked Rupal. The fact is a non-consensus investor would look at tyre stock as high tech and differentiated product and it’s a value for money. Also, tyres can’t be reverse engineered as the process used by each company remains unique to itself. Normally, a tyre is supposed to serve two purposes; one it should grip the road well and at the same  time, it should not be too heavy to be a drag on fuel efficiency. By its very design, therefore, there is trade-off between road grip and fuel efficiency. Michelin, through its design and innovation, was able to provide solution to the car industry and therefore it is the favourite of big auto companies such as BMW, Mercedes, Audi, to name a few. The result of this strategy is evident from the 2X return of Michelin stock compared with the whole tyre industry.

Microsoft is another stock that proved consensus wrong. Normally, consumer staples are consensus favourite, however, market never looked at Microsoft as consumer staples. What Microsoft does is to provide us software constantly and this is what we consume in our day to day life. “I can live without shampoo for a day but not without software”,  she asserted. The result was, Microsoft outperformed the consumer staples industry(Proctor & Gamble) by 3.7 times over a period of a little over five and a half years. Though many in the audience felt it is not the right comparison as Microsoft has underperformed other “consumer tech” companies of the famous FAANG group. In investing it is very important to understand quality. Upset victory over consensus can only be gained by buying quality, however, investors should avoid misunderstanding quality. Both Blackberry and Nokia could have passed for quality due to their past successes, however, investors should understand that as consumer electronics such products could be either hit or miss. She went on to show how avoiding loss is very important in the initial years of bad results and the example in this case was her own performance viz-a-viz the MSCI EAFE Index for 10 years since 2001. From a casual look at her performance it would  seem a very lacklustre performance compared to the index, however, what transpired at the end of the horizon was her portfolio beat the index by a significant margin of 3.6 percent. All this was possible due to compounding of high initial performance where her portfolio lost less than the index did and thereafter the index could never catch up. In all, a $100 invested in Rupal’s portfolio could have grown to $234 in those ten years, whereas the same money could have grown only to $167, notwithstanding the very depressing results of 2008. Rupal stated that her book chronicling all her investing story will be out by September 2018. As her clients will be expecting another stellar performance from her, her fans will wait for her magnum opus.

• JS