While the strong dollar and extreme outperformance of the US market over the rest of the world during the bull market means that her recent returns aren’t too exciting, I am excited about her brilliance and her differentiated and well thought out process.
She focuses on risk management and has an extremely thoughtful disposition. In a world of index-hugging active funds, she is the real deal and concentrates her portfolio in her best ideas.
My Notes on the Interview
1). Her focus on risk management and risk-adjusted returns is right since the enemy of compounding is big drawdowns, because of the simple math that a 50% loss requires a 100% gain to get back to even. Like Howard Marks’s comment that if you avoid the losers, the winners will take care of themselves.
2). In this age of quant this and quant that, she has great insights on the need for deep qualitative business analysis to be performed on top of the quantitative work that she sees as simply “table stakes” and not a source of alpha.
She says you need to do the quantitative analysis to figure out the expectations implied by the stock price while recognizing that quantitative measures are essentially extrapolative of the past into the future. The key to her is to then perform the qualitative analysis of the business that may tell you whether the future is likely to be different than the past. This kind of analysis will give you an early warning of problems with (or positive inflection points for) the business before they show up in the numbers. This is how you find mispricings and generate alpha.
This reminds me of the debate over Microsoft (MSFT) over the last couple of years. Valuation aficionados like Chuck Carnevale have warned that it is dangerously overvalued, but that is if you assume the business will perform in the future like it did 8-10 years ago and should be valued similarly. I notice that MSFT is the largest holding by far in her global fund AGLOX (Ariel Global Investor), which gets my confirmation bias going as it is also my largest holding.
Her focus on the qualitative over the quantitative also reminds me of Warren Buffett’s comment that sometimes with his really great buys like See’s Candy and Coca-Cola, the numbers almost told him not to buy. It wasn’t quant valuation screens that pointed Buffett to these legendary buys, it was qualitative business analysis.
3). Her process of assigning a devil’s advocate to identify problems with bullish theses is smart. While it sounds simple, the depth of the analysis done is rather remarkable, especially given her example of how they picked apart the pro-State Street thesis.
4). While she is a value investor, she is not a fan of the financials. She sees regulatory overhangs, low rates, and deflationary forces around the world as big negatives, especially in Europe and Asia.
5). She is also not a fan of consumer staples as the social media led disruption of the sector is killing pricing power, especially for firms with products that don’t have really appealing quality and value propositions (Kraft-Heinz, Gillette razors).
6). She mentioned telecoms as the new consumer staples, as we are all addicted to connectivity and won’t give it up easily.
7). She sees the FAANG stocks as being quite risky. In particular, she doesn’t care for Apple and Netflix. Apple is still a hardware manufacturer that can see an elongation in the replacement cycle and could even go out of fashion like Nokia and Blackberry, and she also sees the services thesis as being overhyped. With Netflix her concerns are debt, losses, a recent drop in subscribers, and onrushing competition from Disney and a seeming cast of thousands.
I Am A Big Fan of Rupal Bhansali
She has obviously thought very deeply about all things investing and has a steel trap for a mind. I truly admire her Munger-like diversity of thought and pursuit of multiple avenues of inquiry. I will strongly consider investing in her funds, and will definitely watch her holdings for ideas.
“Science is the belief in the ignorance of experts.”
— Richard Feynman