Featured Events | Mar 02, 2020 | Gabelli School of Business
Misdiagnosing Quality the Biggest Mistake People Make in Investing
“How can we change the paradigm of investing when we want higher returns and lower risk?” This question was posed by global investment contrarian Rupal J. Bhansali to an audience at the McNally Amphitheater on February 18th.
At the event, sponsored by the Gabelli Center for Global Security Analysis, Bhansali, chief investment officer and portfolio manager for International and Global Equities at Ariel Investments and author of the book, “Non-Consensus Investing: Being Right When Everyone Else is Wrong” (Columbia University Press, 2019) provided a framework and best practices for non-consensus investing.
Drawing from her extensive experience in the investment industry, Bhansali referenced an epiphany which led to the realization that people fundamentally misunderstood quality and the critical role it plays in non-consensus investing.
She noted, for example, that one of the first things practicing investment professionals will tell their clients is that they favor quality businesses. But, Bhansali countered, the biggest mistake people make in owning quality – besides overpaying – is misdiagnosing it.
“Imagine if quality wasn’t quality. We’d be in big trouble, especially if you paid a lot for it. If you’re incorrect about quality, you’ll lose money,” she warned.
She explained that in investing, the consensus perspective is that if you want higher returns, you need to have risk, but she defiantly rejects that claim. “I refuse to settle for that sub-optimum compromise,” she said. Instead, she said, by using her approach, which involves adjusting ones’ perspective, one can have high returns and low risk. She refers to this contrarian approach as “Silicon Valley Meets Wall Street.”
An Approach for Filtering Knowledge
Borrowing concepts used primarily in the medical community, Bhansali attributed her investment success to identifying the false positives and the false negatives. In fact, she explained, that’s the fundamental goal of research. With this in mind, she noted that if something is misdiagnosed as a quality investment (what she describes as a false positive) it will result in losses and penalty points. But, she posed, false negatives and false positives can also help investors better understand quality. They could even present significant opportunities for the investor to select winning investments.
Throughout her presentation, Bhansali used several powerful case studies to illustrate how successful non-consensus investing requires more than simply doing the opposite of what everyone else is doing, such as how to recognize when consensus investment views are likely to be wrong. She also focused on alternative concepts such as avoiding losers as opposed to picking winners, the importance of asking the right questions rather than knowing the right answers, and scoring upset victories to help people achieve the “best bang for your buck.”
Avoid the Albatross, And Advice for Female Investors
Bhansali explained that in doing research, it’s important to understand and look for the things that happen in the business first, which are subsequently reflected in the financial statements. “It’s a very upside-down approach to investing. We call it non-consensus for a reason. It’s not a conventional way to do research.”
She described the kind of investing she practices as Intrinsic Value Investing, which focuses on discovering the difference between a business’ worth and stock price. ”Intrinsic value investing is different from other forms of investing because it cares about what you are getting: the quality of the business, its growth profile, risk profile and longevity profile, or lack thereof,“ adding that without knowing what a business is worth, you cannot determine whether value exists.
Bhansali emphasized that with investing, not misunderstanding quality is as important as understanding quality, and notes that to succeed in investing, “you need to find the winning stock but what’s even more important is that you need to avoid the losing stock. That’s the albatross. The more you lose, the harder it is to make up.” She noted that investing is so difficult because “people keep solving the wrong problems in the wrong way.”
During a Q&A session, one of the topics Bhansali focused on was her goal of encouraging women to join the investment profession. When asked how it feels to be one of the 1.3 percent of female money managers in the U.S., she responded, “lonely,” noting that “we need more women, particularly in this profession.”
She finds it heartbreaking that women shun financial professions and blames some “rotten apples” for giving the industry a bad reputation, something that she feels is unwarranted and prevents women from entering the field. Pulling from her own experiences, she called on men in finance to do two things: first, when there is a woman present in a business meeting, make eye contact with her. Also, during a business discussion, she stressed the importance of deliberately asking women present for their opinion.