Practical analysis for investment professionals
19 February 2018

Rupal J. Bhansali: Insist on the “And” Proposition

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.

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.”

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.

“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.”

If you liked this post, don’t forget to subscribe to the Enterprising Investor.

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.

Image credit: ©Getty Images/ JDawnInk

About the Author(s)
Peter M.J. Gross

Peter M.J. Gross is an online content specialist for CFA Institute, where he has managed blogs for the CFA Institute Annual Conference, European Investment Conference, and Middle East Investment Conference. Previously, he worked at Hampton Roads Publishing Company and at MFS Investment Management. Mr. Gross holds a BA degree from Connecticut College.

12 thoughts on “Rupal J. Bhansali: Insist on the “And” Proposition”

  1. Nope says:

    It’s unbelievable that our CFA dues are paying for someone to write something like this.

    1. Peter M.J. Gross says:

      Hi Nope,

      If you have specific recommendations for improvement, I’m always open to suggestion.


  2. NITIN V says:

    This is terrific thought process.And something we don’t hear often. When whole world is being made to focus on bond yields , investors gain when they start thinking on the long term prospects of the company and not what TV “Experts” are saying !!!

  3. thang says:

    i think cfa program focus too much on risk analysis , among this is the choice between low risk and high return.

    but in fact, we can find out a stock with high return and low risk. cfa books do not tell us how to find this stock.

    to find this stock, we need to analyse competitive position of a stock. but cfa dose not analyse competition enough. MBA program is very good at competition analysis and help us better to choose a stock with lower risk and high return.

    the strong point of CFA program is the deep analysis of portfolio. but the anaysis is reduandant. if we keep more than 10 stocks in different industries , most of risk specific to a company are diversified away. most funds keep more than 10 stocks , so most fund do not need to understand portforlio.

    the key to stock investment is to find a good stock. but cfa dose not tell us how to find a good stock.

    brand identity is a competitive advantage which make a profit of a stock grow and keep other stocks unable to grow. but cfa never analyse brand name.

    i buy some stocks in vietnam. for some , i gain success, for other, i fail. my success and failure is all caused by brand name concept.

  4. thang says:

    doing business is taking risk but it is not alway that we have to choose between low risk and high return. it about we have to find out the business which is lower at risk and higher at return by superior management skills taught in MBA program.

    cfa propose that we can not find low risk but high return company and advance to make a portfolio with grand analysis. if this proposition of cfa is correct , no company grow faster than its competitors. or if a company grow faster than competitors just because it is more lucky when it take high risk and high return business.

    before the edes of cfa , there is only two kinds of business , low risk with low return and high risk with high return. if the business world work this way, the big company is big just because they take higher return with high risk and they are lucky in doing so. in fact, big company is big because it create competitive advantage and get more profit at lower risk.

    cfa teach us a business world in which there is no business with lower risk and higher return . cfa teach us a business world in which every business with higher return must contain higher risk. if this business world exist, we do not need MBA program and good managers. in this business world, everybody is the same. lower risk, lower return and higher risk higher return.

    this passage tells us about the natural way of working of business world.

  5. thang says:

    this article is great because it focus on competition analysis, which is key to stock investing. thank you the author

    I am a successful stock investor in vietnam.

  6. thang says:

    the main point of this article is that we need to know the differentiation among products. many product looks similar but they are different. understand this differentiation is key to understand the competitive advantage.

    i am a successful stock investor. though without a master degree, i have read many books in MBA program and CFA program. i am willing to open a fund in US. I am looking for a partner in US.

  7. thang says:

    to be a good investor you have to understand products well

  8. thang says:

    cfa focus on how risk can be diversified away when you keep many stocks. cfa do not focus on how a specific company can grow faster than other companies in the industry.

  9. thang says:

    thank you author for his posting of this article. i can call this “paradox”. non concensus is also good.

    this is still about competitive analysis. if we master understanding of differentiations developed by Porter , this article is easy to understand.

    we use competitive analysis and our intelegence to get a case with higher return and low risk. the case with lower risk and lower return or with high return and high risk is just common case of investment, which is explain in cfa books.

    differentiations by Porter is a concept with which we find out why companies are different, why this company grow why other dose not grow.

    when i read “competitive advantage” by Porter, i see it is great. one thing i want Porter do is Porter should analyse competitive advantages in each industry. what is competitive advantages in manufacturing, in retailing, in airlines and pharmacy.

    thank you author for giving us a concept of differentiations.

  10. thang says:

    in which book in cfa program, competitive advantage is discussed. pls tell me. i forget. thanks

  11. thang says:

    Porter write the book “competitive advantage”. this book would be more interesting if Porter talk more about durability of competitive advantages than about competitive advantages. the books focus on what is competitive advantages. I hope Porter would write another book names ” durability of competitive advantages in each industry” .

Leave a Reply

Your email address will not be published. Required fields are marked *

By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.