Rupal Bhansali, Chief Investment Officer, Ariel Investments, In Coversation With Rtn. Mehul Sampat

CAN YOU TELL US ABOUT YOUR FORMATIVE YEARS AT DALAL STREET, BEFORE YOU MADE IT TO WALL STREET? AND, WHAT IS IT THAT LED YOU FROM DALAL STREET TO WALL STREET?

I am thankful to Rotary, first of all. It is a privilege as I am a product of Rotary. This is what it looks like when you (Rotarians) donate money for a good cause, it is an investment that pays off. It was the scholarship that allowed me to make my journey across the oceans.

To answer the question, it started when I was a child. I had a head start – my dad was a stock broker, studied at Sydenham College and, in the 1960s, when the markets were booming, the family business was doing great. We were going to good schools and everything was great. But then the 1970s came along and the stock market crashed, as did our
family fortune.

From a very early age, I have been exposed to the ups and downs of the market in a personal way. When I was nine ears old and I wanted something, I went to my mom and I asked her if I could get it. She said, “Sure, you will, when we have enough money.” As a nine-year-old I was trying to understand what is money and why don’t I have it and how do
I get it? So I had an exposure to finance at a young age and, my understanding of accounting as the language of finance, allowed me to explore internships when I was in undergrad college. One of the secrets of my success is that I started working young. There is nothing like hands-on experience – I was very fortunate in that Bombay Dalal Street was the place to be – but that is how it all began.

In terms of why I came to America: If you want to be an athlete, you will aim for the Olympics, you will aim for the best. As a stock broker, I knew that the toughest market in the world to beat was in America, so that’s what got me there.

You have had multiple interactions with Warren Buffett, please share any learnings or wisdom that you picked up from him.
He is an inspiration to my generation. He is the best of the best when it comes to the practice of intrinsic value of investing which I am most drawn to. One of the advantages of being in America was the ability to interact with him. The first time I met him was at a fund-raiser and I was pitching stocks to him because, again, that is what you do if you get a chance to meet the guru. I am grateful that he is a very generous person, and it doesn’t matter who you are or where you come from. You walk up to him, and he will hear you. But I knew I would not get much time because of the crowd, so, I wrote a letter to him and I told him some of my stock ideas. He was very generous and a month later he wrote back to me and, I have that letter preserved in my closet, because, it says, “It’s clear that you think like me”. It is the biggest compliment I can get.

Now, sadly, I didn’t qualify to become his deputy, I came a little late, but nonetheless one stays in touch and I am grateful that people like him make themselves available. I have learnt the notion of paying it forward and giving it back: it is a twin track – you do good for your self but you also do good for others.

You have worked with another investment stalwarts like George Soros. What led you to that?
This is an example of how you can turn a liability into an asset. I came to America in the early ’90s and I graduated in 1992-93. It was a terrible period to look for a job because Wall Street was downsizing. Nowadays, recessions last for a short period of time but back then it was a protracted recession: it was the first Gulf War, the stock market was crashing… so, I didn’t get a job on the buy side; I got a job on the sell side which I absolutely hated at that time.

I had not come to America to pitch stocks but I took it because it allowed me to stay in the country. The advantage was the best that could happen to me, that job, because I was on the sell side, all the who’s who of money managers in America were my clients. So, everybody from Templeton, to JP Morgan, to Wellington, were my clients. I got a chance to absorb all the different investment styles, what works, what doesn’t work, you could have not asked for a better opportunity.

Hedge funds were also my clients, so I not only had to come up with long ideas, but I also had to come up with short ideas and that became one of the signature elements of my process. Today, when I not only think of what can go right and how much the stock can go up but also what can go wrong and how much the stock can go down. This is because I had to pitch for hedge funds; Soros was a client of mine and they heard my stock picks and they liked my research and so, one day they picked up the phone and said, “Would you like to come join us?” And I was like yeah!

I was happy that my work could speak for itself. I really didn’t know anybody when I came to America, so, to be able to land your dream opportunity through your work, was great. It was the same way I got my job in Dalal Street. Although my dad was a broker, I never told him that I was looking for a job in Dalal Street, I never wanted to get in through his connections, I never wanted to work for my own family business which would have been easy but I think I learnt early on to stand on my own.

So, that is how I got into Soros and then the interesting thing about that experience is that Soros is really like a macro-hedge fund, that is the opposite of what I specialise in which is micro. But, again, that is useful experience. When you come up in 50 countries around the world, you need to understand the macro, country analysis. Today, people refer to it as sovereign risk and sovereign analysis but that is no different from macro analysis. I joined Soros is mid 90s after he made a big bet and won a billion dollars, so, to learn from these people is priceless. And, by the way, when I made the transition, I had to take a huge pay-cut. I was doing very well on the sell side, but when I moved to buy side, they don’t pay as much. But I would not have exchanged that decision ever because the sale side is a very different trajectory and buy side opens up the world to me. So, right decisions made in terms of long-term gain for short term pain.

How is Warren Buffett’s style of investment as compared to George Soros’?
It is as different as night and day. Buffett is an excruciatingly long-term investor; when you ask him what the investment horizon is, he will say perpetuating, forever, which is a right way to think about it because if you have a great idea, then time does work for you and you don’t have to keep churning.

Soros and Stan Druckenmiller, his right hand, were really keen to figure out how to make macro bets, and macro environments tend to fluctuate a lot more given that they can be influenced by the political regimes, monetary and fiscal regimes and so on, so they are shorter term in nature. Buffett is the antithesis of that and it is great to see two very different approaches but both delivering the goods and that is what is called markets.

You need a diversity of views for a market to be a fertile source of restoring efficiency. Different people think different things about the market and what Soros brings to the market, I am not against hedge funds, I think anybody who tries to restore efficiency to the markets whether short run or long run, doing service, to me, both are role models.

George Soros wrote a phenomenal book, Alchemy of Finance which has a lot to do with behavioural finance and, so, he taught me that ultimately human beings don’t change, and he calls it Reflexivity and he talks of how humans react to events and therefore react to market developments and that never changes.

There are lots of things that change; we talk of disruption, and it is true that there is a lot of change and yet in paradoxical way there is no change. The way human beings respond to developments, it is exactly the same. So, that is what I learnt from them and I am grateful for the Indian values from my parents and my teachers. My parents always taught me to look for the good in others and what can they teach you. So, I am lucky that I have Buffett and Soros teaching me.

You authored a book recently, Non-consensus Investing: in it, you say that to achieve exceptional results you must to do something that makes you stand apart from the rest. How, in your position, do you stand apart?
One of the things that people don’t realise about investing is that it is unlike anything that you experience of think about in life. In life if you like an apple yesterday then chances are you would like to eat an apple tomorrow and in the future. So, the past is a good predictor of the future but in investing it can actually be opposite. For an example, in life, if you get the answer correct, you are off to aces, getting the answer correct is the recipe for success and that is what people think about the market. But in markets, if you get your answer correct but everybody else also thought that the answer is correct then there is no money to be made, it is already in the price.

So, being consensus correct which means your views are shared by everybody else, that yields you no returns, then you’re just regurgitating what market already knows. This is the difference in investing. On the other hand, in markets, if you have a point of view that proves correct but also proves everybody else’s view incorrect which means that your correct view is in non-consensus, well then it is not in the price, then you can arbitrage the difference. So, remember, I am a stock picker – I am here to beat the markets, not just to match the markets.

My job is to do better than the markets which means I need to generate excess returns and for that I need correct non-consensus point of view. This is why I say that to stand apart you need to stand alone, to beat the minority.

What are other top takeaways from the book?
I think this is two-part question when it comes to intrinsic value, I specifically call myself as an intrinsic value investor not just a value investor. Lot of value investors pride themselves on buying stocks that are predominantly trading in low multiples, I call them valuation investors. Intrinsic value investors care about what they are getting, not just what they pay. You ask how much to pay but you forget to ask what you are getting and that is the art of fundamental research and this is why value investing has paid in the last decade or so.

So, if you only pay attention to what you are paying, you can end up in a value trap, not a treasure that is undervalued. So, intrinsic value means figuring out what is your business worth and what are you getting, then you figure out what are you willing to pay for it, only then you look at the share price and compare if it is trading at fair price. A lot of investing is about figuring out what you are getting, information that everybody has is not worth having. The real work is to be done in terms of what you are getting.

You cover 50 markets around the world, 10,000 stocks in different time-zones and yet to found time to write a book and serve as a role-model in the industry; how did you do it all?
It requires a lot of time and attention. I am very grateful to my husband; I don’t think I would have achieved what I have achieved without some of the sacrifices that he has made in his life. Then two things: team management and time management. Team management: you can’t clone yourself and yet to have scale yourself to find people that you can groom and mentor so that they can do what you want them to do and what you are meant to do. It takes a lot of skill sets, it is intentional. If you take the right steps, it sort-of comes together.

Time management: I have come out with a lot of small and big techniques. A lot of it is about not doing what you should not be doing. So, it is a process of elimination. I tune out the world. My email address is not on my business card, people don’t know it, even if they know I only see the ones that are on my safe sender’s list and everything else goes to junk. That is one way because I face an avalanche of information and I have to create a boundary or else I will drown. I control what comes my way. I pull the research that is important to me. And literally, in my world, time is money. So, the biggest way to focus is to not get distracted. So, I don’t have a Facebook page, social media, I don’t watch TV, I don’t need newspapers. I have a curated list; I get feeds of what I need to pay attention to. You have to make sense of what you need to happen.

What is your best investment idea?
The best investment you can make is in yourself, whatever gives you the joy and satisfaction, that is how you lead a fulfilling life, investing in relationships. I will tell you how to frame your thinking of where you can find a fertile investment opportunity and where the past may not be the good guide to future. For last couple of decades, technology has worked very well, intel and software, traditionally that is how investing has framed itself that you want to own technology and that is what is going to give you results.

I would pivot and observe that you are actually reaching the limits of technology, limits of physics, ultimately everything is data centred on computer chips. I don’t think the best investment opportunities are going to be playing on physics, that is yesterday’s success story. Going forward is Genomics, investing in healthcare. If you can innovate and come up with therapies, you can also create a lot of good for society and for self as well. Application of healthcare technology is going to be at the vortex and game changing. I do think in the long run, genomics is going to have some fertile opportunities.

What measure do you employ to find out what companies are doing, to track them?
As business analyst, I believe that things happen in business first, whatever happens there will show up in the numbers and the stock market will be efficient to reflect that. So, that happens in the back end and doing research in the front-end means having a laser light focus on what happens in business, what is the company doing to advantage itself.

The way to think about research is to ask the right questions, not to try and find the right answers. We try to understand what does not add-up and when you go on that path of enquiry, your goal becomes to identify the false positives and false negatives. Identify the disconnects. This is not DIY, if you don’t know