Episodes

Dan Ferris:                 Hello, and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.

Corey McLaughlin:    And I'm Corey McLaughlin, editor of the Stansberry Daily Digest. Today we talk with Rupal Bhansali, CEO of Double Duty Money Management.

Dan Ferris:                 It's been five years since we had Rupal on the show, and I'm telling you that's way too long. Once you hear her talk, you'll be like "Wow, you should have her on a lot more." So, I promise you we will definitely try to do that. But let's just do it right now. Let's talk with Rupal Bhansali. Let's do it right now.

                                    Rupal, welcome back to the show. It's been a little while. It's been five years since we talked to you the first time. Time flies.

Rupal Bhansali:          Yes, it does. And a lot has changed for me personally, but happy to be here again.

Dan Ferris:                 Yeah. So, I have to tell my listeners, Rupal and I are so much on the same page about investing that I hope this doesn't seem like I'm throwing her a bunch of softballs, but it just might. So, the first thing I want to talk about is last time when you were on the show, we focused mostly on your book, Non-Consensus Investing, which I keep my copy close by. I keep it with all my other value books which are closest to my hands. And I would like to sort of just reiterate – maybe we could just reiterate your process and your orientation. And if we could start – Non-Consensus Investing, a lot of people call themselves non-consensus or unconventional. They say they're looking for things that other people don't find, et cetera, et cetera, or they're using outside-the-box thinking and diverse points of view and those things that you guys do. I wonder if you could sort of define these things the way your firm defines them make them a bit more concrete for me.

Rupal Bhansali:          Sure, Dan, I think you're absolutely correct. It's easy to bandy around these terms and a lot of people use them. I think it's the art of the execution that matters. As you well know, there are lots of things that people know are good for them, whether it's exercise or value investing, but they don't practice it. So, it's easy enough to preach it – it's very hard to practice it. And I think that's one of the key differentiators. I've done it for three decades. I've done it in international markets. I've done it in the U.S. markets. I've done it in all caps, small caps. I've have done it in emerging markets, developed markets.

                                    So, I think when something works universally and across time, it is classic, it suggests that we are doing something right. And of course we've delivered in terms of our investment objectives of winning by not losing, which I think is the biggest differentiator. And to me, it's actually the definition of value investing, is the margin of safety. And I think a lot of contrarian investing devolves into trying to do the opposite of what other people are doing.

                                    To me, that's actually not what I define as contrarian investing at all. To us, it is about having a different point of view, that if proven correct, i.e. or known consensus point of view, if it defies or falsifies the consensus view, then you can stand to make a lot of money. And it really is defined in terms of an upset victory. In sports, people talk about, if you bet on the winning team that everybody else thinks is going to win, you may be correct and they may end up winning but you don't make a lot of money placing that bet because the odds reflect that price, that probability. But if you bet on the team that nobody else thinks is going to win and then that team does end up winning, now you stand to make a lot of money.

                                    To me, that's contrarian investing, which making a conscious decision to invest in something based on a thesis that plays out. So, not just doing the opposite of what everybody's doing, which to me is just being a lemming in a different way, just being the anti-momentum investor. To me, that's not analytically sound. So, contrarian investing is both behavioral in terms of doing something and going against the grain, not being afraid to do it, having the courage to do it. But proceeding that, you'd better be correct because being non-consensus and incorrect is a recipe to lose a lot of money. So, contrarian for the sake of contrarian doesn't work.

Dan Ferris:                 All right. You actually – when you answered that question, you quickly got to a topic, the margin of safety, that is sort of at the very core, and the idea of avoiding losses, which is – it's not very exciting sounding but it is extraordinarily important. Most people, many of our readers, boy, they want a big idea, they want to make a lot of money real fast, but we have to sort of be the adults in the room and tell them that what you want to do it first is not lose any money. So, this brings us to the subject of risk, where we wind up – I'm telling you, Rupal, with traders, futures traders, options traders, stock traders, long-term investors, value investors, we always wind up on this subject of risk, which is very important to your firm, I know. And you screen stocks not on valuation or growth but on risk and quality. I love the sound of that. How do you define risk? When you screen for risk, what are you looking at?

Rupal Bhansali:          Look, risk is a forward-looking assessment. That's No. 1. So, it's not what people have experienced as having gone wrong but what could go wrong in the future that can also be a source of risk. But I think at the heart of risk management and at the heart of the definition of risk is in the world of investing, it's not losing money. It's what Warren Buffett said is the No. 1 rule of managing money. And people have forgotten – they identify him with quality and value investing, but the No. 1 thing he believes in, which is very important, is not losing money. Because if you lose money permanently – and that to me is the definition of risk, losing money permanently, not short-term volatility – it is extremely hard to make up for the lost ground.

                                    So, I'll give you an example. Let's say you have $100 and it goes down 50%. Now you're down to $50. If you have a winning idea that goes up 50%, you think minus 50% and plus 50% should wash each other out because they're all percentages that sound equal. Well, guess what? You're making that 50% on a lower number, $50, so all you go up to is $75. In fact, every time you make a loss, you have to make multiples of that loss to just breakeven. In this example, minus 50%, you have to go up 100% to just go back to where you were. If you lose 90%, you have to find an idea that's going to generate 900% returns to make up for the losses that you had. So, I think people don't realize that losses are more costly than gains from a percentage standpoint because you lose money from the higher number. A hundred goes to 50, but you make money from the lower number of 50.

                                    Now, imagine you have this 100% winning idea. You need it to just breakeven, as I mentioned in this previous example. But imagine if you had only lost 20% instead of losing 50%. So, now your original $100 would have been $80. Now, if you put that 100% winning idea to work, you're at $160. You're coming out way ahead. What made the difference was not the winning idea. It was the losses on the losing idea that made the difference to your net gain. So, this is why risk management, aka loss management, is critical to overall compounding of capital. And in fact, I would argue it is the easier thing to do, is to avoid losses, as opposed to trying to find those multibaggers that will go up 100% and 900%. So, why not do the easy thing? Why make it harder on yourself?

Dan Ferris:                 That's a great point. I've never heard anyone put it that way.

Corey McLaughlin:    Me neither.

Dan Ferris:                 That's good.

Corey McLaughlin:    Why is it easier? Why is it easier to avoid big losses?

Rupal Bhansali:          I think if you do – I think it's actually easier to figure –

Corey McLaughlin:    For you, at least.

Rupal Bhansali:          – out who the losers are in the business world. That's pretty apparent out there. A lot of people get seduced by these companies. And you asked me a related question, quality, which I think it's a flip side of risk. High risk tends to be low quality and high quality tends to be low risk, which is why quality and risk to me are two sides of the same coin. But a lot of people confuse what we mean by quality. And the other thing that people confuse or conflate is that you can pay up for quality and you'll still be OK. If something is overvalued and you overpay for it, you're still going to lose money. Just because it's quality, it's not going to stop you from having those losses necessarily. Perhaps you will lose less, but you will still end up losing if you overpay for something.

                                    So, the way to really invest is to not only figure out what you're paying for something, which is what sometimes again people confuse value investing is, with a low multiple. I don't. Value investing is low downside, not low multiple, which is why we define it as margin of safety, i.e. even if you're wrong on your thesis, you don't lose too much money. That's your low downside. Imagine the degree of forgiveness it gives to your analytical firepower that you can be wrong and still not lose too much money.

                                    Now, the flip side that everybody tries to do is to be correct and yet not make any money. I just gave you that example of you bet on the winning team. If you think Apple's going to report $20 of earnings and it does, you're correct. You've made that correct call, but yet you won't make any money on that correct call because it's already in the price. And so, I would argue that the definition of value investing, the definition of risk management is low downside. If you don't know how to figure it out in terms of the business and how much you can end up losing, don't try your hand at it. Give it to someone else who knows how to do it. That's No. 1. Most people don't know how to assess the downside of a stock. You're correct. And I did make it sound like it's easy to just not lose money. It's easier than actually making money. It's a relative thing.

Dan Ferris:                 Relatively.

Rupal Bhansali:          And I meant it more in the context of it's really hard to come up with ideas that go up 100% and 900% but it's easier to not lose the 50%. And that's kind of what I was talking about. The same old adage: prevention is better than cure. Or differently put, if you can avoid making the losses, the burden of you to come up with more winning ideas and extremely high winning ideas is lower. And that's what makes your research go easier on you and your ability to find ideas in a pretty mild market, in a pretty efficient market go up. It's not – the market is not replete with inefficiency. It's few and far between. But in order to find those few ideas, you have to be laser-focused. And that's kind of what we try to do, is we try to first and foremost eliminate anything that we think is going to be extremely risky.

                                    The definition of risk here is companies that are structurally disadvantaged or structurally poorly managed, whether it's capital allocation, whether it's balance sheet, whether it's an industry structure. I mean, those things are not that hard to find. A lot of times people get seduced into investing in those because they come at a low multiple, but low quality and low multiple is not value investing. Value investing is high quality at a low multiple. You do it by having a point of view that's different from everybody else.

                                    So, I'll give you an example. Take the auto industry. Everybody knows it's a pretty cyclical industry. It's a pretty challenged industry. It always was. It's become even more challenged. I mean, all these sorts of threats coming along, whether it's EV, disintermediation, technology, autonomous driving, tariffs. I mean, God help you, from every which angle, you're getting other threats. So, everybody knows the auto industry is risky and I'm not going to take the other side of the coin on that argument.

                                    But within the auto sector, which is the priced very low because it's low quality, it's got challenged prospects, there is a sub-component, which is the auto component of the tire industry, which is actually very high quality. Tires are extremely hard to make. Whether you have an EV or you have a gasoline engine car, you need a tire. Whether it's an autonomously driven car, whether it's an Uber or it's your own car, you need tires. Tires are also a consumer staple in the sense that they are a consumable. Every couple of years, every couple of thousand miles, you and I both know we have to replace them. There is no discretion about it. And so, I would aver that within this very consumer-discretionary cyclical sector of autos, there is this consumer staple, non-cyclical tire industry that trades at a very similar multiple because people don't differentiate, and therein lies the opportunity.

                                    Now, there are a couple of reasons why this is a high-quality industry. Let me explain. The barriers to entry in tire manufacturing are extremely high. This is why companies like Bridgestone and Michelin, which we know to be the two leading tire companies, imagine this is a Japanese company and a French company. Everybody says manufacturing has become a – China manufactures everything and at low cost and has competed away all the manufacturing advantages of the traditional industries. Well, why is it that we don't buy so many Chinese tires? We still buy expensive Michelin and Bridgestone tires because they are not easy to make. As you transition from a gasoline combustion engine to a EV, the tire specs become greater because there's greater torque. There's also the safety angle. The braking distance of an autonomous vehicle is very important, and the tire is very crucial to braking. And in terms of the weight of the car an EV, having a battery, is heavier. So, the tire has to support more weight, which means it has to be a higher-spec tire.

                                    So, the more and more you transition to these next generation opportunities in the car industry, the better it is for the tire industry to not sell to the old traditional car companies because those are lower margin tires. They're commoditized. These tires are higher spec. This is also a way to play the e-commerce trend. You have more trucks on the road because we are getting goods shipped to our house. And so, trucks obviously consume tires.

                                    Then you have the mining industry. We know there is a mining boom in the sense of demand for commodities, copper, whether it's EV-related or semiconductor-related, we try to play this to the mining cycle, but it's very boom-bust. It's extremely risky. On the other hand, the mines are further and further away from the ports and the railroads. So, you have to truck those very big shipments of iron or copper long, long distances from the far away mines. Again, you need heavy duty tires. So, now you can see how the tire is part of a growth industry, not perceived as such because the conventional wisdom is it's just part of the auto industry, but I've just given you examples which you know to be true right in front of you. It's not some sci-fi thing. And yet, the mix shift of going and supplying tires to these industries is a higher mix, so they'll make more profit margins in the future than the past. And yet they're trading on practically single-digit multiples with high-dividend yields and net cash balance sheets.

                                    This is what I mean by having a contrarian point of view, having an analytical point of view that also is behaviorally hard to justify. People are like "Why are you owning anything related to the auto industry in this market environment?" And the answer is because it's supremely misunderstood and we know the tire companies are going to win no matter what. And in fact, if less new cars are sold, this is better for them because they make more money in the aftermarket, replacement market than in the OE market. So, I've just given you multiple ways to win, few ways to lose. That is my definition of value investing, low-risk investing, high-quality, low-multiple investing.

Dan Ferris:                 Wow, that's great. Does your definition of risk also include – it sounds like we avoid probably bad balance sheets. You mentioned cyclical, highly capital-intensive industries you mentioned. So, those are just some basic things that you avoid. How about the – just the auto-parts industry like O'Reilly and those companies. How do you feel about that? We've covered some of those in our newsletter and they've done pretty well.

Rupal Bhansali:          So, I think we want to be careful about two things when it comes to value investing. It's not just about the quality, whether it's value or growth investing – to me, they're all sort of tied at the hip. I want to get the best of both worlds of growth and value investing. That's my definition of truly intrinsic value investing, which is I want the high quality and growth that typically a lot of growth investors go for but they overpay for it. To me, that's what's happening in an O'Reilly. It certainly is a high-quality franchise. I'm not going to dispute it. But the market's already discovered it and it's more than in the price, which means even if you and I are correct that it's a high-quality franchise, there is not much money to be made there. On the flip side, when I gave you the example of the tire industry, because people have not cottoned onto that thesis, it's not in the price, there is way more money to be made there. After all, investing is about making money, not about fulfilling our ego of being right.

                                    So, I would just say that is where people conflate. They chase high-quality thinking: "This is the way to invest." It is one way to invest and a partial way to invest. It's very important to own quality but it's also important not to pay up for it. That is what reduces risk in the investment, because even if I'm wrong and even if the tire industry has a bit of a hiccup, if the transition to EVs takes longer, there are so many ways to win and anywhere that opportunities are in the price, even if I end up being wrong on that thesis, I won't lose much. And remember, the first principle of investing is, even if you don't make money, try not losing it in the first place. So, this is what I mean by having that risk-to-worth ratio squarely in your favor. And that's what good investing is about: insisting on high quality but making sure you pay a low multiple for it. Very hard to do. And that's why we professionals –

Dan Ferris:                 Very hard to do.

Rupal Bhansali:          – spend all our life, career, it takes us decades to master this craft and find those ideas anywhere in the world. That's why we cast our net wide. It's actually very hard to find in the U.S. of late. I would confess to you most U.S. stocks are very expensive. International, however, is full of opportunity.

Dan Ferris:                 Yeah, I couldn't agree more. So, you mentioned Bridgestone and –

Rupal Bhansali:          Michelin.

Dan Ferris:                 – Michelin, both foreign stocks. Are there any other names off the top of your head that you that you like outside the U.S. right now?

Rupal Bhansali:          Well, my entire portfolio. So, I –

Dan Ferris:                 Your entire portfolio is outside? Good for you. That's smart right now.

Rupal Bhansali:          Well, we invest globally of course. We invest in the U.S. but there are very few opportunities, so we are very, very underweight in the U.S. We're also underweight in hot markets like India. I'm not picking on any particular country, and we are open to investing anywhere in the world, but I would just say that the best opportunity is right now, frankly, even within international, to be found in emerging markets, in particular Latin America. I think that sometimes when these markets become extremely overlooked, they're very out of favor. People think that they're very risky, which, of course, to me, all investing is risky. The U.S. stock market is risky and international markets are risky. Equity investing itself comes with risk. And so, I would like to own those companies where the risk is already in the price so I'm being paid to take the risk rather than just talking about risk in a standalone fashion.

Dan Ferris:                 Sounds good. How about – how do you address risk management at the portfolio level? So, we – eventually, we get here with all the professional investors we talk to. If it's a trader, they always say, "Well, we enter positions this way and that way and that way." And in the end they always say, "But the most important thing is position sizing," and they use stop losses and things, which you might not necessarily do. But is there anything you do at the portfolio level with position sizing or anything else as a risk-management tool?

Rupal Bhansali:          Sure. Look, I think that investing is about acknowledging humility and acknowledging that there are some things that you can never know and will not know. And for that reason, even though we want to only invest in high conviction ideas, which we do, we also want to be diversified. And that might sound like a contradiction. You want to be diversified and yet you want to curate. I think that you can solve for it by making sure that each idea – and at minimum we will own 30 stops in the portfolio. We think that's a reasonable level of diversification without dilution. But within those 30 stocks, what we try to do is make sure that the investment theses underpinning them are uncorrelated.

                                    So, if I own a Michelin, for example, which is a tire company, I will try to own something that is not correlated to the tire industry, where the thesis is not the same thesis as I have on the tire industry – so that each individual idea will perform to its own merits in an uncorrelated fashion. That to us is the definition of idiosyncratic returns. The investment thesis on one does not depend upon the investment thesis of the other. And if one of them does not work out, it does not mean that all of them don't work out. So, to me, the biggest sin amongst investors who have concentrated portfolios is that they make them thematic portfolios. They make a single bet on AI. And while there could be multiple stocks and they can position size them 2% or 3% or 5% or whatever they do, if all of them are a bet on the same thing, you're really not diversified. It doesn't matter how many number of stocks you have. They're all a bet on the AI theme.

                                    And so, that's what I would caution. I think people don't know how to understand underlying – what I would call factor exposure and really in layman's terms thesis exposure. And that's what we try to understand, the underlying exposure. So, for example you can have a bank who's extremely exposed to net interest margins, so they depend upon interest rates going up. If you have another story, which also depends upon interest rates going up, it doesn't matter if that other story is not a bank; those two stocks are going to get correlated. And that's what you want to avoid. That's really the benefit of diversification, uncorrelated investment theses.

                                    The second thing is that in terms of risk management, I mentioned that you want to be diversified, which means you want to cap your position sizes. No matter how much you know something, you never know what can go wrong. I'll give you a classic example. About a decade-plus ago, unfortunately, one of my top 10 positions in the portfolio was BP. You remember British Petroleum? It was a very blue-chip oil company. Out of the blue, they had that oil spill in Macondo, and before I knew it, I lost 50% in a week. And the worst part was that averaging down would not have helped, buying the dip would not have helped because before I could blink, the news came out that the management team was potentially aware of that risk and did not do anything. And that multiplied the error because if you knowingly – it's one thing to have an accident. I mean, you can get unlucky and that's one thing. But what really got that company into trouble is not just the accident – it is that they were aware of the risk and did nothing about it. So, then your insurance claims don't pay. Then it's considered negligence. It's considered gross negligence and now you have tort payments, damages, triple the damages, on the outcome. And that almost put the company out of business.

                                    So, thankfully, even though it was a top 10 position, even though I had conviction, it was only a 4% position. And this is what I mean by having other ideas in the portfolio that are not correlated. And so, we still delivered back then – this is when I was in my former shop at MacKay Shields and I was managing a mutual fund, so that data is there for the public record out there about my BP position – we still delivered a five-star performance – the mutual fund that I managed had a five-star ranking despite all that being as part of the performance. I'm just giving an example of how you can make a really big mistake, unintended mistakes. No matter research could have been prepared me for this outcome, et cetera, and yet we did fine because we were diversified and had capped position size.

Dan Ferris:                 All right. Sounds good.

Rupal Bhansali:          And our research told us not to double down on the mistake. Aa lot of people doubled down thinking "Oh, this is the Exxon Valdez moment and they'll recover from it." I mean, this is not the first time an oil company has had an oil spill. But I told you, the biggest difference, and that is what our research showed, is that they were potentially grossly negligent, and that is why they could have become even bankrupt. Now the fact that they didn't was a very positive outcome, but we could not take the risk of that, losing 100% of our capital, and so we moved on. But that's kind of the difference between – knowing what to do is not just the position size, but when the stock goes down, how do you know whether you should double down or quit? That's where the fundamental research and the knowledge about the industry and the landscape comes into the picture.

Dan Ferris:                 Well, you're making it easy for me to ask the next question. How do you know? Yeah.

Corey McLaughlin:    When do you sell?

Dan Ferris:                 How do you know?

Corey McLaughlin:    When do you sell?

Rupal Bhansali:          Very true. I think a lot of people –

Corey McLaughlin:    Nobody thinks about this. How do you sell? When do you sell?

Dan Ferris:                 Or not. When do you double down? When do you sell?

Rupal Bhansali:          Absolutely. I think buy discipline is far easier sometimes to execute than a sell discipline, not just analytically but also behaviorally. So, it's a great question, Dan. Here are the three litmus tests for me in order to sell something. The biggest one is if your thesis is busted. The way you keep honest about it – because it's again, you can rationalize that your thesis is going to play out; it's a matter of time. Value investors sort of always argue "Gee, I'm just early, I'm not wrong." You can be – one can be guilty of that. And so, the way to hold yourself honest, whether it's your thesis busted or it's just going to take longer to play out, is to look at the operating performance of the company. If the stock is not performing, that's not the litmus test. But if the business is not performing to your expectation, that is what I mean by thesis-busting. That's when you need to move on.

                                    And I've done that multiple times in my career. And thankfully, because I've done it early on – the best loss you can take is the quickest one because mistakes compound over time. And the opportunity cost of that capital being redeployed can be very high, not to mention the actual cost of the loss if the stock continues to fall, because many companies, they end up becoming value drops or falling knives. So, I would say, hold yourself honest to is your thesis playing out in terms of the operating performance of the company, not necessarily the stock price?

                                    The second thing I would say is, if there is a better idea, you've really got to be very, very mindful not to fall into love with your stocks, especially your winning stocks – it's something that we all can be guilty of – and to always ask yourself, what is the upside/ downside? If you had to replicate your portfolio today, would you put new money to work into it? It's a good question to ask. And if you play – if you roleplay with yourself, "Would I put new money to work in this idea?" and if the answer is no, it's time for you to redeploy that capital into something else. And the third test, of course, is if you – beyond the thesis being busted and beyond, as I said, there's a better place to deploy capital, if you find that you are guilty of not being diversified – remember, I told you, you want to position size, you want to make sure a position does not get too large. Sometimes a profitable position can get very large, but that's also a good time to pay it back, not perhaps quit completely but to rebalance a bit. Those are the three reasons to sell. And to know when to sell, more importantly.

Dan Ferris:                 All right. I don't know if anyone has answered that question so decisively. Except for traders. Traders always say, "Well, I establish my stop loss when I go into a trade." That's different. But what you just gave us is really, really quite excellent for the sort of investing I think most of our listeners do.

Rupal Bhansali:          Dan, we never want to leave any decision to the market. A stop loss is nothing but telling the market to decide for you. We want our own research to decide for us. So, if the stock corrects, in and of itself, that does not bother us. What we need to understand is was our research, our expectations about the company incorrect? That's in our control. If we think that the research is correct and the stock is falling, that's the opportunity to double down on it, frankly. So, again, you want to have control in your hands, not give it to the market or to anybody else.

Dan Ferris:                 Say that last part again. That was – that sounded really – that really summed it up. You want to keep control in your hands, not give it to the market.

Rupal Bhansali:          Correct. You don't want the market to decide for you when you're going to sell something or not. You want to figure out yourself, what is the intrinsic worth of that business? Is the fundamentals of the business performing to your expectation? The market is only telling you what the stock price is. It can be up or down, but the market is not telling you what the fundamentals of the business are or what to expect from them. That's your research telling you that. So, that's what I mean by, your thesis is in your control. All that the market determines is at what price you get to engage in your thesis or your expectation.

Dan Ferris:                 OK, so I'm glad we got here because of course sell discipline is – it's really tough and you gave us a great answer on when to sell. But I wonder about if you take – I'm going to just use Costco as an example. I'm not saying it's attractive at 61 times earnings. It's absolutely not. However, I've thought about these things. And another company that comes to mind is Constellation Software. It trades in Canada. Just a brilliantly run company. But they're never really cheap. It's really hard to get them at something that looks like an attractive price. And yet, they just – as Charlie Munger might have said, they're just pounding out money year after year after year. And you could have bought the thing 10 years ago for 30 times earnings and you'd have made multiples of your money. Does that just wind up in the "too hard" pile or do you really just have to analyze it differently and forget about the multiple?

Rupal Bhansali:          You should never forget about the multiples. So, valuations always matter.

Dan Ferris:                 All right.

Rupal Bhansali:          That said, I think – I've owned Costco from time to time in my career. And I agree with you, of course. It's a franchise that is par excellence. I think part of it is because they're very disciplined about their own franchise and that's what makes it such a great investment over time. But I think the Achilles heel of growth investing, because partly people justify high multiples, whether it's O'Reilly or Costco or any example that you might want to give, is sort of backward looking. Because it has worked out, now people give the argument "Well, it's such a great franchise. There's nothing like it."

                                    The problem is that's not a consistent phenomenon. So, not all high multiple stocks deserve those high multiples. So, that's not an investment discipline. And that's kind of what I would argue, that if you want a discipline, it's something that should work every time, everywhere, across environments. It should work in inflation, deflation. To me, an investment discipline is classic. So, to my mind, a lot of stocks that people argue have done well is because their fee multiples have expanded, not because their earnings have expanded to the extent that we would have thought appropriate to justify those valuations.

                                    And I would say that you can go back to the 1990s where a lot of companies argued that Microsoft and Johnson & Johnson and blue-chip companies of their time, Walmart included, should trade somewhere between 35 to 50 times. I mean, I don't remember the exact multiples but they were quite high. And then what happened is it's not that Microsoft went on to become a poor-quality company or Johnson & Johnson, but their valuations were so stretched that for 10, 15 years they de-rated. Their earnings had to catch up with the multiple and you did not make much money on them. Walmart, on the other hand, was a worst-case scenario, which is they got a threat in the form of Amazon that nobody saw coming in the '90s, and lo and behold, their multiple crashed. So, this is the danger of growth investing, that you think you own a darling stock, you think you own a franchise. What if that darling turns out to be a dud? What if its franchise prospects change forever?

                                    And thankfully, Walmart of late has adapted. But what if it had not? And then you're owning a company that is extremely expensive and now is incurring a lot of losses and the opportunity cost of being in those names is extremely high. I would argue for every Costco, there are almost 50 non-Costcos. So, to try to find the one Costco, I would say you're easier avoiding the other 49 non-Costcos. Because that's what will happen to you.

Dan Ferris:                 That's great point. It's true.

Rupal Bhansali:          You'll get those 49 non-Costcos in your desire to find that one Costco. And it's really hard to find the one Costco, but you might end up with some of those 49 non-Costcos. Now you've got poor returns in your portfolio. And I told you the albatross of investing is to avoid those losers and losses.

Dan Ferris:                 Right. People talk about this like you can identify the 100-bagger beforehand, but nobody knows what their best performer is going to be before it actually does the performance. It's always backward-looking. So, it's a great point. And just in – to keep going with the example of Costco, it's retail, man. It's hard. How many retailers are like Costco? Almost none. So, that's a very good point. The people I know, for example, who have made money in things like – well, venture capital is that way and exploration mining. They take a hundred positions and they make all of their money on five or six of them.

Rupal Bhansali:          Exactly. Exactly.

Dan Ferris:                 I'm not kidding. Five or six. Most people can't do that. It's crazy. They couldn't weather what you'd have to – they couldn't put up with what you'd have to put up with to find the Costco and get those other 49. So, this is a very good point. And I guess it's addressed by what you said before: You've got to be humble. You're not always right. You've got to size things correctly. And you can see there's a balance there. There's a balance between our conviction that we're right about the risk and the quality and the fact that we know we don't know everything.

Rupal Bhansali:          I think there's a lot to learn from Silicon Valley when it comes to value investing. I know that sounds like a crazy thing to say, because Silicon Valley is all about growth investing, but I think the two principles that Silicon Valley has used effectively, I want to sort of translate – even an abstract form, it makes a lot of sense to our industry. One is "Fail fast, fail cheap." Acknowledge your mistakes early and move on. I mean, that's what Silicon Valley does. They iterate. If something works, they'll pursue it. If it doesn't, they'll stop it. I mean, they're very unemotional and detached about it. I think that's very important to value investing to acknowledge that.

                                    The second thing is, it's not just about failing fast, I mean, which is one thing to acknowledge, but you fail cheap. And what it means is, you don't incur a lot of costs upfront. You kind of don't lose too much money. So, test out a feature. Do A/B testing. If it works, it works. Release your software very quickly, even though it's not fully baked, because that's where you start getting revenues in the door. And yes, you might have some bugs in the software, yes, you might have some issues, but perfection is not what you're after. You're trying to iterate. You're trying to be agile. I mean, that's what a lot of software companies realized and that's what actually was a recipe for success.

                                    And I think in investing, that is to say that you want to acknowledge that you're going to be wrong about something. You just want to accept that. I mean, it's not about perfection. It's about knowing that you're going to get some things wrong. The issue and the goal should not be that you won't get anything wrong. That's too high a bar. I keep going – I don't want to create such a difficult bar for myself to execute on. What I want to do is, even if I'm wrong, I don't lose too much money. That's the difference. I don't mind being wrong a lot as long as I don't lose a lot of money.

                                    And I think that's – people confuse frequency and severity. You can make a lot of mistakes, but if those mistakes are not costly, it's just lessons learned. That's beautiful. But if the one mistake that you make is super costly, you're out of the game. And that's kind of what you really want to keep in mind. It's this analogy of baseball: Wait for the fat pitch. And if you hit the wrong – you swing the bat too many times in the wrong hole, you're going to get out of the game and then you don't get to play again. And that's what value investing is about, risk management is about. It's about not saying that you will never fail, that you will never lose – you will – but make sure that the cost of what you get wrong is low. In growth investing, the cost of what you get wrong is very, very high because you've already paid up for it. Value investing is "bird in the hand is worth two in the bush." Why? You might think you're getting two instead of one, but the two could just fly away and now you've got zero. That's growth investing for you.

Dan Ferris:                 Yeah. And overall, I think the phrase "Heads we win, tails we don't lose too much" goes a very long way. That really does sum up what you're doing very well from –

Rupal Bhansali:          That's in my book. That's exactly what I mean by non-consensus investing.

Dan Ferris:                 Oh, yeah. I know. I stole that from you. Although, to be fair, I need to be fair to my friend, Mohnish Pabrai. He said that before I –

Rupal Bhansali:          I see.

Dan Ferris:                 – heard it from anyone else, but then I saw it. So, the two of you get all the credit for that. But yeah, it goes for the portfolio level and for the individual bottom-up analysis on the companies, too. "Heads we win, tails we don't lose too much."

Rupal Bhansali:          Exactly.

Dan Ferris:                 You look down before you look up.

Rupal Bhansali:          That's right. That's very well put.

Dan Ferris:                 Yeah.

Rupal Bhansali:          And you asked about my process earlier. One of the things that we do differently is, we have a devil's advocate assigned on the team to give us pushback on our thesis, to give us pushback if the thesis is not playing out. This is one way of staying honest. The other is to just roleplay and do a pre-mortem and a postmortem. We ask ourselves the question "What if this stock is down 30%? Why would it have been down 30%, 50%? When it is down 50%, are we going to double up or not?" And if the answer to that is no, don't engage in it in the first place. So, these are some of the things that you can do even as individual investors, but it's really hard to do. I would actually say, do what you're great at doing and let people like you and I manage the money because this is what we do for a living. We've trained ourselves to do this over and over again and sometimes it's money well spent. But again, it's – everyone can make their own determination as to how they want to proceed with their investing. But I think people who think investing is easy have it wrong.

Dan Ferris:                 Right. It is. What was it Munger said? "If you think it's easy, you're stupid."

Rupal Bhansali:          Something like that. Markets play mind games –

Dan Ferris:                 That's a great quote.

Rupal Bhansali:          – and people don't realize that till it's too late.

Dan Ferris:                 Yep. Charlie was a smart guy. So, I have to ask a question that – I almost feel like I don't want to ask it because it almost pollutes the conversation but I can't not ask it. I know my listeners are thinking about it. And that question has to do with the current environment, the macro environment. And have you changed anything about your investment process due to the massive sort of reordering of world trade that the Trump administration is dying to do. And the wider question, is do these macro inputs mean anything to you, ever?

Rupal Bhansali:          So, we get asked this question a lot, not just in the context of tariffs, but when Brexit happened and the UK went out of the EU – I mean, you have seminal moments. When the tsunami happened in Japan and the radioactivity and the nuclear fallout, et cetera, 9/11 happened, and so on and so forth. I think people sort of think that this is an extremely unique situation. I mean, it is in terms of its context and specificity, but we face risk in investing all the time. If you actually don't know the risks you're facing, you don't know investing, or you're not doing it right.

                                    So, I would say this is one risk of many. And to answer your question specifically, no, we're not changing anything we do. All that we are doing is what we've always done, is if this sort of environment, this new environment presents opportunities, we are researching them to take advantage of them. So, for example, during the month of April, obviously a lot of Chinese stocks sold down. I mean, big time. I mean, all stocks sold, but Chinese stocks in particular, because you had that escalating situation of not just, I don't know, whatever the numbers were, 50% tariffs went to 150% tariffs, then 175%, that I've lost track. At some point we knew – again, this is based on research, this is based on understanding of markets and posturing – that that would not last. And when the Chinese stocks got oversold to the point where we knew that these companies would find a market for their products elsewhere in the world, because they were almost monopolistic providers of certain things and these companies sold off hard, we actually added to them.

                                    So, I think sometimes people think that when they see risk in the market, they should run away, they should sort of recalibrate their positioning, et cetera. I would say this is the time to be most vigilant of trying to find those quality businesses that you always wanted to own, but were not able to, and now they finally sell off. I mean, you can dive in. But you need to have done that homework beforehand. Not every Chinese company is a monopoly producer of something and they may not find a market for their product with these tariffs, but there are a few who were and will, and those are the ones that you want to own. So, I would say in general, when it comes to any of these developments, being prepared – I mean you know how they say "Luck favors the prepared"? You get lucky in these sorts of sell-offs where you can buy things that you were waiting to buy anyway.

Dan Ferris:                 Right. Yeah. Those are the moments – I heard somebody put it – I'm going to try to paraphrase. I don't remember exactly, but they said when you find that 50 cent, dollar, or whatever it is, when you find that bargain, that's when you've won. You're just waiting for it  to work out in the market. But when you find it, that's when you've won. That's a great point. It is.

                                    All right. Well, I'm glad we dispensed with that. And I – occasionally, I'll find a value investor who will have a macro thesis to talk about, but mostly not. Mostly they come back and say, "No, not really." And that's the answer I love. Because that's a real value investor.

Rupal Bhansali:          Well, look, I – actually, if I may, I mean, we care about macro because every company is exposed to the macro. We are macro-aware, but we're not macro-driven. There's a difference. And so, what we do, again, to be far more specific, to answer your question about these sorts of episodes when markets correct or stocks correct, is we do a pre-mortem, which is we ask ourselves the question "What if this stock falls 30%?" Remember, I just answered that question before for you – or it falls 50%. And the thing is we don't ask the question "Oh, will this stock fall 30% because a new tariff will come along, or a new tax will come along, or a new government will come along, or a new competitor will come along?" We don't know why something bad will happen to the company sometimes. We just assume something might. So, the specifics of why something goes wrong doesn't matter. Our job is to ask the question "What else can go wrong? What more can go wrong? How much can it go wrong? And when that happens, will the company be able to adapt or recover from it?" And that's what we talk about.

                                    So, think about COVID. I mean, the tariff thing, I think, is – because it's contemporary, it's over-rotating in everybody's head. It's obviously, again, big news. But think about COVID. I mean, nothing was more unexpected than COVID in terms of its scope, duration, impact, I mean, it was the most – I think one in a 150-year event or something. And therefore, it's in those moments that you have to ask yourself, would you double down on stocks or not? Forget the fact that the Fed intervened, et cetera. That happened after the fact. But you ask yourself – these stocks were down 40% in a week. And I would say that's when all your research comes to the picture. We had done work on companies, which are the companies which have very high fixed costs? And we knew the companies – if revenues fall, we don't know how much and where and why, but we just assumed – and we said, "If revenues fall, which are the companies who are more exposed to fixed costs and their earnings will collapse?" But the companies that have variable costs, their earnings won't collapse because they'll just cut down those earnings. And so, those are the kinds of companies we were able to own during that COVID period.

                                    So, I'm just giving you an example. It all goes back to the research you have done, which no matter what unexpected event comes your way, you then know, what is the right question to ask and how to respond. That is the power of research.

Dan Ferris:                 Yeah, there's nothing like the conviction you get from a business you understand very well, like the way you spoke about the tire industry. I hope our listeners really go back and listen to that part three or four times, because it was so clear that you had done the work, you know the industry, you understand the dynamics, and you also know you're not always right, so you're position-sizing and everything else. And that's the sound of conviction. To me, the way you described that, I think the only higher conviction on that might be something like a Warren Buffett who says,
"We're going to buy this thing and hold it forever because we know now that we just want to hold it forever." That's like, tier one conviction. And then, the rest of us, the most we could hope to is we get to maybe tier two or three.

                                    What you just said about research is so important. It's the work you put into it, isn't it? People wonder, they think "What magic button do I need to push? Is there a metric or a moving average or a P/E ratio or something?" No, it's all the stuff you're hearing Rupal talk about: bottom-up research, understanding all the ways you could lose. It's work, man. She's got a whole career at it. It's all she does. I mean, that should tell you something. You're not going to do it easily.

Rupal Bhansali:          Dan, it's what Charlie Munger said, "Investing is simple but not easy."

Dan Ferris:                 Right. Simple, but not easy. Exactly. And I've found a lot of things in my life are. I've been playing the guitar since I was a kid. I was a music major in college. And what's amazed me is that – and I think investing is, as you say, similar to this. There's almost like no advanced class. You just spend your life working on the fundamentals. You spend your life on those simple but difficult fundamentals and you're just continually trying to get better at those. And you don't need to have a PhD in finance and trade bizarre derivatives and be a physicist who works for Renaissance Technologies to do all the crazy things they do. You just need to work hard at the simple things over and over again. It's – and it becomes like farming. You do it your whole life and it's your way of life. It's a beautiful thing when you get it right. It's a wonderful way to spend a life.

Rupal Bhansali:          It is. Look, I'm very fortunate. In fact, the first chapter of my book is written – my passion turned into my profession. I got into finance at a very young age. Because unfortunately for me when I was born in the '60s, my dad was a stockbroker and he was doing very well, and so the family fortunes were rising. And he put me in a private school. I had a great life. He got me everything I wanted. And then the '70s came along and the markets crashed and so did our family fortunes. Unfortunately, we had not invested wisely.

                                    And so, I was a young child. I remember once going to my mom and asking her "I want to get this backpack" that everybody else had in the class. And she was like, "Sure, we'll get it when we have some money." And I'm this 9 year old thinking, "What is this mysterious thing called money? And why don't we have it?" And that sort of kick-started for me learning money, earning money, managing money, and of course hopefully now multiplying it. And I would just tell you that this is my passion. I don't want anybody to experience what I experienced in my childhood, where I was used to a higher standard of living and then I had a dramatically lower standard of living. They say being poor is bad. I would argue the worst thing is not being poor. Try being poor after you've been well off. That's the worst thing. You know what you're missing. And I don't want people in their later lives when they retire or when they are older to experience what I experienced.

                                    And that's why to me, managing returns is about managing risk. If you don't take care of the downside, you will not have the upside. "Double Duty" stands for that. Our double duty is that we don't just manage returns; we manage risks as well as returns. And to those who don't understand the importance of doing both, I hope this episode, this podcast has revealed why it is so important to not lose money if you want to make it.

Dan Ferris:                 All right. Well, this is a perfect moment. I'm glad you said that. This is a perfect moment for us and a perfect time to ask our final question, which is the same for every guest. And the question is just if you could give our listeners one final takeaway, if you could leave them with one thought today, what would it be? If you've already said it, by all means, feel free to repeat it. That's not a problem. But what would it be, that one thought, if you could leave our listeners with it today?

Rupal Bhansali:          Well, I'm Double Duty, so I'll give you two thoughts. One is winning by not losing. That's got to be your investment mantra. And second, I would say that for every Boglehead, there needs to be a contrarian head. So, active investors are very important beyond passive investors. And I hope that I've inspired some people to be contrarian heads.

Dan Ferris:                 Excellent. I hope so too. I'm going to steal that expression. For every Boglehead that we need a contrarian head. I love that. Thank you. And thanks for being here, Rupal. It was great to talk with you again.

Rupal Bhansali:          Likewise. Thank you for having me, Dan.

Dan Ferris:                 I also want to plug your book. I'm sorry to interrupt. I want to plug your book. It's really a good book. You can see I have my favorite spots marked. Just read it – Non-Consensus Investing by Rupal Bhansali. Thanks a lot, Rupal. Hopefully we'll talk to you again before the next five years. How about that?

Rupal Bhansali:          I hope so. We'll meet at one of your conferences. Hopefully our paths will cross again in person. Thank you so much. Bye bye.

Dan Ferris:                 Well, that was good. I'm glad we had her back. I wish we had had her back five more times. We're not going to wait so long next time. She's really great. Man, she just hammers those principles. She's like the modern Ben Graham. She just hammers all those value-investing principles like nobody else. She's great at it.

Corey McLaughlin:    Yeah, I mean, I'm convinced. If I wasn't already, I'm convinced.

Dan Ferris:                 Yeah.

Corey McLaughlin:    Well, I felt like I was sitting in a masterclass on just investor psychology, especially from her perspective and obviously the value-investing perspective as she defines it. First of all, she has her own definition for it and different nuances to it. And like with the tariffs, it's not tariffs that [is] why her portfolio is heavy non-U.S. It's because the process that they believe in got them to there. So, I like that macro-aware but not macro-driven.

Dan Ferris:                 Yeah, macro-aware, not macro-driven. I thought that was great. Yeah. Yeah, man. That was great stuff.

Corey McLaughlin:    And I want to go look up some tire stocks now because that was –

Dan Ferris:                 Yeah, I do. Yeah, that's right. I've got to look up Bridgestone and Michelin. I definitely need to look those two up. Sounds like I might have missed those. Really, really great ideas. I do love the alternative definition too. It's not about cheap stocks, it's about limited downside. And they're not always the same thing, that's why she's the modern Ben Graham, because she said, "Margin of safety, it's not about cheap; it's about limited downside." It's funny because it's kind of an obvious thing, but I've just never heard anyone put it exactly that way. So, that was valuable too. Lots of great stuff. Almost too much to recount here at the end. I'm going to have to go back and listen to this and take notes next time.

Corey McLaughlin:    Exactly. Yeah, she got into it a little bit briefly there at the end, but her background coming from India, I mean, that's a whole other story that I guess if we have her back we can get into that a little bit more.

Dan Ferris:                 That's right.

Corey McLaughlin:    And how that influenced – basically, it sounds like – how she's approached her career, avoiding those losses, is interesting too.

Dan Ferris:                 I agree. Yeah, that could be a good story. Well, that is another interview and that's another episode of the Stansbury Investor Hour. I hope you enjoyed it as much as we really, truly did. We do provide a transcript for every episode. Just go to www.investorhour.com, click on the episode you want, scroll all the way down, click on the word "transcript" and enjoy. If you liked this episode and know anybody else who might like it, tell them to check it out on their podcast app or at investorhour.com, please. And also do me a favor, subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. Follow us on Facebook and Instagram; our handle is @InvestorHour. On Twitter, our handle is @Investor_Hour. Have a guest you want us to interview? Drop us a note at [email protected] or call our listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my co-host, Corey McLaughlin, until next week, I'm Dan Ferris. Thanks for listening.

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