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.

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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.

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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.

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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.”

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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.

Image credit: ©Getty Images/ JDawnInk

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

Peter M.J. Gross was an online content specialist for CFA Institute, where he 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' articles have been published by Enterprising Investor, City A.M., Seeking Alpha, and The Hook, and his work has been highlighted by Real Clear Markets. He holds a BA degree from Connecticut College.

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

  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” .

  12. thang says:

    CFA teach us that high risk can give us high return. but competitive advantage which is not explained in cfa program will give us both high return and low risk. why CFA dose not explain competitive advantage ?

  13. thang says:

    in which books in cfa program, competitive advantage is explained. pls, tell me. Thanks.

  14. thang says:

    cfa books do not say about competitive advantage which protect company growwth. what is Risk in the mokovic Frontier line. I am sorry i do not spell his name correctly.

    Risk in this frontier line is standard deviation which measure the price change in a period. but a stock price can reduce 50 percent after 3 years. where in cfa program, this risk is explained. I do not find where .

    cfa books do not contain the any analysis the author do in this article. it is strange.

    1. Peter M.J. Gross says:

      Hello Thang,

      I’m a little confused here — I can’t tell whether your comments are addressing me, the person who wrote about the presentation from Rupal Bhansali, or Bhansali herself, the person speaking in the video.

      Bhansali gave her presentation at the India Investment Conference. Conference materials are not directly part of the exam curriculum, but they are intended to continue the ongoing conversations had by investment professionals looking to improve their practice.


      1. Thang says:

        I address no one. I just want to discuss a little about CFA books. why CFA program dose not cover the discussion similar to the author discussion. CFA program explains many formula after they assume the risk of a stock is already known.

        assumption that the risk of a stock is already known is unrealistic. ???????

        the discussion of the author is one about risk and, so, is valuable.

        I am a successful stock investor in vietnam. I am vietnamese and have to learn english hard to have middle English level. many words I write here is mispelled. I know but I do not know which words.

        I do not know what is Risk in Mokovick Frontier line. I go to cfa forum to ask but no one answer.

        the author insists that she can find a stock with lower risk and higher return. This point is contradictionary with the concensus that lower risk must go with lower return. this point is relevant to Risk in Mokovic Frontier line.

        the rule is simple. if you know a stock is riskier than bond, you require higher return from the stock. if you know stock A is riskier than stock B, you require higher return in stock A. CFA program assumes that we know the risks of all stock and we go to a portfolio with reduced risk. the problem is here, not every person know that stock A is risker than stock B. and the author idea is that she can get both higher return and lower risk.

        every person know that bond is free risk and we get 4 percent from a bond. if we invest in stock, we need 10 percent because stock is riskier than bond. all person know this case. but we can not apply this case to every investment case. makovic frontier line assume that we know risk of all stock in the portfolio and we can combine some of them into a list which have reduced risk.

        the key to investment is to identify the risk. this point is explained in this article by the indian practitioner. after we identify the risk of each stocks, we combine them in to a portfolio.

        I am reading book 4 level 1 of CFA program . and I see that for each stock we have a Risk R and an expected return. what is risk here ?

        1. Peter M.J. Gross says:

          Hello Thang,

          It sounds like you’re referencing the Efficient Frontier concept formulated by Harry Markowitz.

          Broadly speaking, Bhansali is making the same point that you made earlier — not all stocks expose investors to the same level of risk.

          From this perspective, we’re talking about how to make investment decisions for capital committed to equities, which generally assumes more risk than capital invested in safe assets.

          The tricky part consists of identifying equities that have relatively lower risks within their peer group while also offering relatively higher returns. That’s where Bhansali recommends looking for places to earn higher returns by diverging from the consensus view.


  15. thang says:

    hi, Peter,
    I do want a parner for studying CFA. but I dont have. I do not understand what is Risk in the Markowitz Frontier line . I understand that for each risk, Markowitz infer an expected return. if the risk is higher, expected return is higher. but how do we know that risk of stock A is higher than risk of stock B.

    Markowiz line do have a practical application. though we do not know the risk of each stock, we know that combine the stocks together will go to a portfolio which has reduced risk with the same return.

    but for each stock, a big task is to identify the risk of each stock. we do this by analysing competitive environment. this job is explained well in MBA program not in CFA.

    it is better to know risk of each stock before combining them into a portfolio. but in practice, we never know risk of a stock and though we do not know the risk we can still combine them to make a portfolio. though we do not know exact risk of a stock, we can better know risk by analyzing competitive positioning, the concept explained in MBA program.

    CFP ignore an important part, analysis of competitive position . CFA assumes that risk of a stock is known and from this assumption, CFA makes many theories and formula.

    am i correct? pls explain.

    1. Peter M.J. Gross says:

      It wouldn’t be appropriate for me to comment on the relative strengths or weaknesses of the CFA program.

      For finding a study partner, have you tried contacting CFA Community Vietnam?

      They may be able to connect you with other candidates in your area or discuss ideas in greater detail.

  16. thang says:

    this article show what the fund managers do in practice. they do what the CFA program dose not explain.

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