Wealth through Investing

Book Review: Non-Consensus Investing


Non-Consensus Investing: Being Right When Everyone Else Is Wrong. 2019. Rupal J. Bhansali. Columbia University Press.

In contrast to quant disciplines that depend on computers
and number crunching, non-consensus investing relies on creativity and comprises
a series of principles that help define, but not confine, the craft of
investing. Non-Consensus Investing: Being
Right When Everyone Else Is Wrong
, by Rupal J. Bhansali, chief investment
officer and portfolio manager of international and global equity strategies for
Ariel Investments, provides a framework and best practices for non-consensus

The contrarian author’s unconventional investment discipline allows investors to solve for the seemingly mutually exclusive goals of achieving higher returns with lower risk. Bhansali became a portfolio manager in 1996 and never accepted the suboptimal compromise of aiming for high returns with the requirement of accepting high risk. She describes how the origins of many major advances in human history came from contrarians who challenged conventional wisdom, such as Ferdinand Magellan, Edward Jenner, Professor Muhammad Yunus, Piers Handling, and the Oakland Athletics’ Billy Beane. Bhansali has tried to apply the same problem-solving approach to overcome a challenge as intractable as the ones those innovators faced — achieving higher returns and lower risk in investing.

Like Costco, which offers merchandise that is both high quality and low cost, and like Apple’s iPhone, which is both powerful and playful, Bhansali seeks the “and” proposition rather than the “or” proposition in achieving above-average returns and below-average risk.

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Non-consensus investing is not simply doing the opposite of
what everyone else is doing. It is deeper and broader, requiring its
practitioners to develop skills in recognizing when widely held investment
views are likely to be wrong. Non-consensus investors actively seek to
establish whether they have a differentiated point of view on a company’s
fundamental prospects and intrinsic value, and if they do, they courageously
take the unpopular side of the trade.

This approach involves upside techniques, such as examining the counterfactual rather than reviewing the facts and conducting research in an atypical sequence. Bhansali’s method focuses on avoiding losers rather than picking winners, asking the right questions rather than knowing the right answers, and scoring upset victories to achieve the greatest bang for one’s research buck.

Through counterintuitive concepts and case studies from her
experience investing in many markets around the world, Bhansali describes how
to perform differentiated fundamental research to detect mispriced equities. She
describes traveling extensively in pursuit of superior insights, from far-flung
islands in Indonesia to manufacturing hubs across Europe, from Pakistan to
Dubai, and from the United States to China.

The author shares her mistakes and failures as well as her
successes. As examples of scoring upset victories, she describes how she
avoided owning health care stocks in 1994–1999; steered clear of tech, media,
and telecom stocks in 1996–2000; sold many of her financial stocks in 2006; and
avoided the crowded trade of buying gold in 2009–2012.

Bhansali maintains that the research puck has moved from the
database to the search engine, where an edge is obtained by triangulating
information rather than merely collecting it. To find high-quality investments,
one must connect the dots that others have not. This occurs through asking the
right questions to arrive at the truth.

The book does not document whether the author’s methodology has produced superior risk-adjusted returns. Over her 25-year career, however, the mutual funds she has managed have periodically received the coveted five-star Morningstar Rating. A five-star rating equates to a top-decile performance among category peer funds.

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In the final chapter, titled “North Star,” which summarizes
the core tenets of non-consensus investing, the author urges readers to use her
principles as a North Star for achieving success. Non-consensus investing is
about mastering six intellectual and behavioral principles: (1) being correct, (2)
being contrarian, (3) being prudent, (4) being holistic, (5) being patient, and
(6) being courageous.

Bhansali describes five different ways in which a
non-consensus investor can obtain asymmetric risk/reward investment
opportunities. They include conducting differentiated research to identify what
is mispriced by the consensus, taking advantage of investors’ inability or
unwillingness to think long term, and investing countercyclically vis-a-vis
other people’s investment appetite. Two of the five ways revolve around
thinking long term, which dovetails with her view that patience is the only
free lunch available in financial markets.

The author, a woman of Asian origin, recounts how she
overcame the odds to succeed in a male-dominated profession and offers advice
on breaking the glass ceiling. She has learned from her travels that women all around
the world make the same mistakes, fall into familiar traps, and hold themselves
back in similar ways.

Bhansali did not have a mentor or role model, and her
experience shows that they are not necessary to get ahead in the business
world. She champions being one’s own best cheerleader and contends that inner
strength, motivation, and dedication are more essential than any mentor or role
model. Finance can provide an excellent platform for women, Bhansali maintains,
because it is a meritocracy.

She encourages women to consider money management as a career because, she says, they tend to exhibit traits that are well suited to the profession. For example, Bhansali maintains, women tend to approach assignments holistically and weigh all sides, which is an asset when conducting fundamental research. Data that one gathers can contain contradictions and, says Bhansali, women tend to be both comfortable with and capable of dealing with a certain amount of disorder. In addition, she maintains that women are more prone to humility than hubris and tend to think about the future and plan far ahead.

In conclusion, this book could greatly help investors in coming years, given low expected stock market returns that are likely to produce disappointing results for passive investing. Bhansali’s distinctive approach to active management stands to benefit investors during a time of below-historical-average market returns. The author’s personal journey and epilogue addressed to young women will also appeal to women considering a career in finance, especially money management.

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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.

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Mark K. Bhasin, CFA

Mark K. Bhasin, CFA, is senior vice president of Basis Investment Group, LLC, New York City.


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