Inverting the aperture: Investing through a contrarian lens

Thomas Mucha, Geopolitical Strategist
Tarit Rao-Chakravorti, Equity Research Analyst
2022-09-08T09:54:57-04:00  | S1:E12  | 26:43

The views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk.

Episode notes

Contrarians are a breed apart. Bucking conventional market wisdom, they seek opportunities to invest in companies where fundamentals are solid but valuations are so dislocated that other investors may not want to touch them -- at least not yet. Equity Research Analyst Tarit Rao-Chakravorti joins host Thomas Mucha to explain his process and how he looks to the macro environment, history, news headlines, and even works of fiction to source contrarian ideas.

Episode highlights:

1:10 What is contrarian investing?

3:40 Considering the macro environment

6:00 Contrarian opportunities today

8:15 Avoiding value traps

10:15 Importance of behavioral finance

12:40 Researching extremes

14:40 Engaging with struggling companies

16:30 Importance of communication

19:10 Tarit’s career path

21:40 Tarit’s book recommendations

24:00 If you weren’t an analyst at Wellington…?  


THOMAS:   Today’s topic is contrarian investing, going against the grain of the market or of conventional wisdom to find the best stock market opportunities. Now, Warren Buffett may be the most famous proponent of this investment style, but he’s certainly not the only one. Wellington has its share of contrarian investors, of course, and I’m thrilled to welcome one of them here today to the WellSaid Podcast. Tarit Rao-Chakravorti is an equity research analyst who conducts fundamental analysis across a variety of industries, and who’s always looking to swim against the tide, especially in a market and a geopolitical backdrop that’s been so volatile this year. Tarit, welcome to WellSaid. 

TARIT:    Thanks, Thomas. Glad to be here.

THOMAS:   So, let’s start at the top, for those listeners who may not be experts in this line of thinking. So Tarit, please define contrarian investing, at least from your perspective. You know, what’s the main idea, how does it work?

TARIT:    It’s like love, everyone has their own definition of what’s contrarian. But I can talk about how I think about it and how we tend to think about it on our team. We tend to think that people in markets overreact and they overreact in the short term, both to good news, so to the upside, and you know, stocks maybe get ahead of themselves. Or they overreact to short-term bad news, to the downside, and things get too low and priced too negatively. What we’re trying to do is focus on the latter group, areas where people have gotten too negative on the outlook and focused on short-term news and lost sight of what “normal” might look like in the medium term. And the way that we do that on our team is by using a philosophy that we call “low, low, low.” So that’s, we’re looking for stocks that are trading at 10- or 15-year relative lows, low valuations, and with low expectations. Really, we’re trying to pick up those names where the market has overreacted and by being a bit patient, we can be differentiated in the medium term.

THOMAS:   So, low, low, low, I like that. So, what are the primary risks and the rewards of this strategy? I mean, how do you think of it through that lens?

TARIT:    I don’t know if I think about it in risks and rewards, I think there’s kind of upsides and downsides. I think as a researcher, one of the upsides is that you get to look at interesting companies when no one else is looking at them. So, we meet companies that are at 10- or 15-year lows in the share price and often they’ve been abandoned by the market, they’ve fallen into a period of pessimism or apathy. This often can coincide with big transitions, when they’re trying to really change their business or turn things around, and so personally, I find that fascinating, and you get to have some really interesting conversations that are quite different from some of the more mainstream conversations you hear about in investing more broadly. I think the downsides are that there actually aren’t that many companies that are at these multi-decade lows. And so perhaps you miss out on some of the newer things. So typically, we like to have about a 10-year time history, for any stock that we’re looking at. It just helps us get a sense of what normal looks like through the cycle. Then the downside is you don’t look at newer names or IPOs or things like that. And so, there are tradeoffs, and I think a lot of it’s about matching your investment style to your own personality and interest.

THOMAS:   Well, speaking of the cycle, the global economy this year is moving into a period of high volatility, higher inflation including food and energy prices. We have all this economic uncertainty from the Russia-Ukraine war, China-US tensions over Taiwan, change in central banks’ postures. Now, all of this seems to be setting up some bit of a risk-off period, a growth-value inflection. How does this backdrop impact your outlook for the contrarian investing style?

TARIT:    As bottom-up investors, really what we’re focused on is executing on that process that we talked about: low, low, low. I think often times the short-term news can distract you and that’s what leads to these dislocations. We try not to think too much about whether we’re heading into a risk-on or risk-off period, but instead, we’re trying to find names where we think the market has gotten really dislocated. And so, when I think about macro, I actually tend to kind of invert the aperture. So, because we have these large number of positions and we look across all these geographies and market caps, we can find these buckets, occasionally, of certain types of stocks. So, it could be auto parts companies, it could be tech stocks, and so looking at those buckets, I find to be very helpful in thinking about macro. Because a lot of people try and look at top-down macro indicators and then come up with where they think those are going. So if they think rates are going higher or lower, or something like that. And then they drill down to what stocks do well in that macro environment. But through our process, what I try and look at is what buckets are showing up as attractive to us, and what is that saying about what the market thinks is most mispriced? So, what macro outcomes is the market saying are least likely, and is this level of discount extreme, relative to history? So, with events like what you’ve talked about, you know, high inflation, economic uncertainty from Russia and Ukraine, that just tends to create more dislocations and potentially open up new buckets for us[WDE1].

THOMAS:   So, without naming companies, where do you see the opportunities in these buckets? I mean, what buckets are popping right now in your research process?

TARIT:    The first area that seems interesting to us, and probably isn’t too much of a surprise, is Europe. We continue to find names that a few years ago had been thought of as decently well-run, reasonable companies that have fallen to 10- or 15-year lows because of the extremes of the past couple years. And, to us, that just seems, perhaps too extreme. So, we’re really excited to be able to pick up these companies that have strong balance sheets, they’ve been around for decades, they have good franchises, leading market positions in Europe. And so, a lot of it is, being willing to be patient and look through what is undoubtedly a very painful situation at the moment. And I think a second bucket is in Japan, where we’re finding lots of opportunities up and down the market-cap spectrum. So Japan tends to be a good environment for our style, there are a lot of stocks in Japan, they tend to move up and down a lot, there’s a lot of retail trading that pushes the prices up and down, so you do get these dislocations and stocks can fall to those 10- or 15-year lows. And then an important component of what we do is we focus on strong balance sheets. Japanese companies tend to hold a bit more cash or securities on their balance sheets and run them a bit more conservatively. Now, some people might view this more negatively, and view it as inefficient capital structure. But actually in our process, we like time to be on our side because we’re not exactly sure when that short-term negative news starts to turn positive. So, we don’t want the company to be under pressure from a balance sheet perspective. There’s lots of consumer stocks, industrial stocks that have fallen to 10- or 15-year lows but have strong balance sheets and can wait it out. And I think the final point that I’d bring up is this is where for me, Wellington’s a fantastic place to be a contrarian, because we have colleagues in Tokyo who are locals, who’ve known these companies for decades, who have forgotten more about them than I will ever know. And so, I get to tap into their knowledge when I’m looking at a small-cap Japanese name, so it really does help me get all the way up and down the cap spectrum and across industries as a global generalist.

THOMAS:   Let’s dig into that research process a bit more. You’ve mentioned it a couple of times, and obviously research is one of the main themes of this podcast. I’m curious, how do you avoid value traps when you’re buying these low-priced out-of-favor stocks?

TARIT:    That’s a great question, Thomas, and it’s a fair one. There’s a quote I’ve heard a couple times, and it may be apocryphal, but I’ll attribute it to one of our PMs, Jim Shakin. And he says, “Value traps are what growth managers call mistakes.” And that might be a little glib, but I think sometimes it’s a question of, we can get things wrong, it doesn’t necessarily make it a quote, unquote, “value trap.” And really what we focus on in our process is trying to find names that have strong balance sheets, because we are aware that bad news can kind of persist for a while, and it may take a little bit longer than we expect for things to turn positive and the market to recognize that. So, if companies have a strong balance sheet, that gives us more confidence that time is on our side, and the company will be able to last through the storm, and then hopefully, benefit on the other side.

THOMAS:   The other thing you mentioned, Tarit, is you look at a lot of stocks all at once. I’m curious, how do you keep track of such a large universe?

TARIT:    It’s definitely hard. The global reach at Wellington is fantastic, and one thing that I’ve always found really useful is we look at this giant bank of research, of written research. And on pretty much any stock in the world, you can go back and read a note, even if it’s five or ten years old, and it gives you some starting point, someone internally to talk to about the name. And I think people think of contrarians as, you know, you’re looking at stuff that no one else is looking at, but that doesn’t mean no one else ever looked at it, and in fact, a lot of the names that I end up looking at are pretty familiar to people, whether it’s our industry analysts or other team analysts or portfolio managers. It’s just that they haven’t looked at them in a while. 

THOMAS:   One of the other things that jumps out at me as we’re having this conversation is the psychological aspects, of trying to understand what’s in the market, what’s priced, what’s not priced. So, what degree does behavioral finance, the market sentiment curve of enthusiasm, despair, apathy, and so on, how do those psychological aspects factor into your research?

TARIT:    Oh, it’s a huge part of it. I think part of the core of our philosophy is that people overreact and they lose sight of the long-term and what “normal” could look like. That has a deep rooting in behavioral finance. I think we try not to get too specific about where we are in a sentiment curve, because things can always get worse. But it’s really about making sure that the companies that we ultimately invest in are able to kind of last through tougher periods. One other point that I’d add is this is where having a long time horizon really, really matters. So on our team, it’s not uncommon for someone to pull up a 20-year or 30-year chart, say, “well, this was cheaper 20 years ago.” And, of course things change, but having that long-term perspective, I find it helpful as a younger investor particularly to give you a sense of the range of outcomes. And if you look at just a three- or five-year chart, one can forget that the range of outcomes is usually quite a bit wider than we think. Again, I think that gets back to behavioral finance and people end up surprised when things move outside of the one standard deviation that they’re expecting.

THOMAS:   Now, on this point of time horizons and market timing, how early is too early to an idea here? I mean, what’s the thought process there?

TARIT:    It’s a tough one. I think we are willing to err on the early side. We don’t necessarily look for a stock to bottom before we think it’s interesting. Really, what we’re reliant on is history. So, if a stock is getting to a relative price that’s back at the Global Financial Crisis level or the eurozone crisis level or the 2000 tech bubble trough, that’s a sign to us that things are pretty extreme. And so, if we keep in mind those historical bands, I think that helps us gain some comfort. Things have to get a lot worse for it to drop materially further below these historical troughs, but it’s certainly one of the harder parts of the job. 

THOMAS:   What are some other bases for coming up with ideas here? I mean, are you looking at things through the sector level, the thematic level? What are some other lenses here that you can employ?

TARIT:    My research process is I’m just trying to do research all the time, when I open the newspaper, when I go to the store… So a lot of it is more standard things like running screens on stocks that are at 10- or 15-year lows, or valuations have compressed. But I also try and look at running screens for newspaper headlines that say “all-time lows” or “all-time highs,” or analyst reports that say “all-time lows” or “all-time highs,” because that just gives us a sense of what could be extreme. For example, earlier this year when China had the lowest birth rate ever, that to me seemed interesting, so I spent a week meeting with infant formula companies and diaper companies in China. It’s a good starting point that these stocks are probably depressed if the birth rate is at all-time lows. And maybe they could be interesting fits for our portfolio. Or, conversely, last year when grain prices were hitting all-time highs, again, that’s an extreme to the upside, so something else must be underperforming, and what I started looking at was food producers in emerging markets. So companies that make things like chicken or pork; staple products. And these are pretty durable demand and growing demand in emerging markets for these kind of products, and obviously, with grains being a huge input cost, if input costs are at all-time highs, you’d think margins are going to be depressed. But unless you think that input costs will remain at all-time highs forever, sort of logically you’d think, “Okay, margins can get a bit better from here.” So that’s often where I find new ideas, is looking for those kind of second-order impacts beyond just the standard screens and of course listening into the morning meeting and other meetings at Wellington.

THOMAS:   So, it’s a real connect-the-dots kind of process. 

TARIT:    Ideally, yes.

THOMAS:   Yeah.

TARIT:    They’re usually not that connected. 

THOMAS:   So you mentioned earlier, Tarit, that you have some interesting conversations with companies. And I’m curious, what’s your process in engaging with company management teams? I mean, are there specific questions or the types of answers that you’re looking for to come up with these ideas? What are the tells?

TARIT:    I’ve actually never been a very good poker player, so I don’t know if I can say very much about tells, but I think the key, Thomas, is having some degree of empathy, and understanding not only where a company’s products go, and the local context in which they’re operating, but also what the management teams are going through. And so typically when I meet a management team, things are really bad. But I get to sit across the table from them not in an adversarial way, because we’re long-only investors. I just try to be there to listen and to learn. Most of these managements, regardless of how good a job they’re doing at that time, they know far more about their industry than I do. And so, it’s really about trying to listen and get a sense of where the business is now and what could potentially change. And what I love about our style is I actually think it allows me to be an optimist all the time. So, I walk into a meeting wanting to hear about what could be good news. And I think the other element from a management meeting perspective, is that when we meet a lot of these companies, particularly in smaller caps internationally. I think we do have an opportunity and a platform to engage with them constructively on issues related to ESG, whether that’s safety amongst mining operations, whether it’s environmental impact at consumer staples companies. I think meeting them at a time when very few people want to meet them, it almost makes it easier to introduce those elements into the conversation. And so that is something that I try and keep in mind.

THOMAS:   Yeah, that’s interesting. Well, part of your job, obviously, is communication, listening and then communicating these ideas back to portfolio managers across Wellington. Wellington has a mosaic of views and opinions, so I’m curious as a contrarian, do you feel more pressure to get these calls right?

TARIT:    No, I think, contrarian or not, everyone at Wellington has a very hard job, and we’re all trying to succeed for clients in the very competitive market where rates of failure are very high. So, I think it doesn’t matter whether you’re contrarian or any other type of investor. It’s hard, and it’s stressful, but I also think this is ultimately a client service business, and our job is to shoulder that stress for clients, so that they can go about their jobs and their lives. Of course, the morning meeting is a big forum and it can be stressful for everyone to speak there, but there are also dozens of other meetings and interactions that you have as an analyst with your own team and other teams. So, our team hosts a monthly contrarian-ideas meeting where you’re allowed to speak only for two minutes and there are no questions allowed. And we take ideas from any person at the firm. So anyone who wants can walk into our meeting and pitch any stock in the world… stock or bond or any kind of instrument. So we’re just there to listen. Ultimately, we’re very lucky to do these jobs, and it’s hard, but when I think about our end clients, whether they’re nurses or doctors or firefighters or first responders, they have a lot more stress in their daily lives than at least I do, and so, you know, it helps me try and keep that perspective

THOMAS:   Yeah, I think that perspective is critical in understanding where people are coming from. That works externally, that works internally of course. As the firm’s geopolitical strategist, I also deal with a multitude of different communication environments. Everyone has a different view, everyone has a different exposure, everyone has a different holding period. So yeah, it’s all about communication and listening.

TARIT:    And I think it’s a bit about meeting people where they are, so every team has their own philosophy and process, and so an idea that works for us may work for another team, but maybe it’s a different type of idea that I need to pitch them or an idea that’s in a different phase of the thesis playing out. So, I know there are certain teams here that are also contrarian teams that prefer to see a base in the stock, so I’m not going to them while we’re still seeing negative earnings revisions. I’m going to hopefully wait until we start to see things turn the other way, when it might be better fit with their process and how they define contrarian investing.

THOMAS:   Right, a good analyst has to know his or her audience.

TARIT:    Exactly.

THOMAS:   So, I’d like to begin to end our conversation today sort of with a few personal questions. So, let’s hear about your career path, and what was it that drew you to this idea of contrarian investing?

TARIT:     So, I joined the firm about 10 years ago on the product side, and my undergrad background had not been in finance. I wrote my senior thesis on how to model political violence and state failure in emerging markets countries and civil war. And so, I joined products and strategies and was doing a lot of more top-down research, factor-based analysis, scenario and stress-testing. And I think it really says, what Wellington is I think it can be a place that gives people opportunities and rewards people for curiosity. And I really do owe a lot to my two PMs, Jim Shakin and Andrew Correy, who were really patient and talked to me about how they thought about investing. And it seemed a bit different from how other investors at the firm operated. I think what helped me is that I didn’t enter the job with a set idea about becoming an investor or wanting to work in a particular investment style. I got to see a lot of different styles and approaches, and this happened to be the one that resonated with me. And then I had an opportunity to work outside investing and work with the US national security community doing more scenario planning and a mix of tactical and strategic planning. And that was a great experience, but again, kind of came back to this idea of trying to find ideas and emerging threats and trends that others might not be looking at. Then I ended up going to business school and when I thought about what I wanted to do, this was pretty clear to me. And I really only wanted to work as a contrarian investor with Jim and Andrew, and very fortunately, I have gotten the chance to do that so far.

THOMAS:   Yeah, the nontraditional hires at Wellington tend to do well in this environment, so that’s interesting to hear that career path. Are you a contrarian thinker in your personal life? I mean, do you have nonconformist tendencies or anything else in your own personality that might indicate a preference for this style?

TARIT:    I don’t think about nonconformity too much, I think my wife would say my fashion sense is probably nonconformist in that it’s very unfashionable. I think I grew up in a household with a lot of debate, so that kind of primes you, maybe, to be a contrarian. And I guess I left business school and went into investing at a time when a lot of people were looking at tech and startups, so maybe that is a contrarian move. 

THOMAS:   So, Tarit, the other thing we like to do on this podcast is read. Of course, we’re all readers. Are there any good book recommendations? Ones that have really influenced you or your thinking?

TARIT:    On the nonfiction side, I’ve always been drawn to books that really help me try and consider this wide range of possibilities. And so, in my time outside Wellington, two books that really had a big impact on me. One was Future Shock by Alvin Toffler, which is kind of a foundational text of futurism, and it has actually turned out to be quite prescient in these times. And then another is Warnings by R.P. Eddy and Dick Clarke, which I think is a nice framework for thinking about black swans and what could be lurking around the corner. And then I do read a lot of fiction. I actually find fiction to be a lot more helpful to me in thinking about investing than nonfiction. I think it’s an act of empathy, helps you get into other people’s shoes and think about how people around the world might live their lives. And I’m a big fan of magical realism, so I think the two that really stand out to me are A Hundred Years of Solitude byGabriel Garcia Marquez, which is, in my opinion maybe the best book ever. And more recently, I was doing some work on copper in Zambia, and so I read a fantastic novel called The Old Drift, which is by a young Zambian woman named Namwali Serpell, and it’s a mix of historical fiction, magical realism, and Afrofuturism. And it’s just a fantastically written book and a real insight into the history of Zambia, which I didn’t know very much about.

THOMAS:   It’s interesting, I think a lot of investors undervalue the benefits of fiction, but I completely agree, and it’s all about imagination, seeing potential futures, and I think writers, artists, musicians are particularly good at seeing around corners that maybe traditional stock market analysts don’t really think about, so it’s interesting to hear you say that.

TARIT:    Yeah, I think part of writing a book is, you know it’s going to be there for a long time. So, implicit in that is there’s some pressure, I guess in some books, at least, to write something that incorporates a long-term view. 

THOMAS:   So, last question sir. What do you think you’d be doing for a career, if you weren’t a contrarian research analyst at Wellington? What are some of those other potential scenarios as applied to you?

TARIT:    Well, I don’t think I’d have much of a career if it weren’t for Wellington, but I think I most probably would be in the national security or international development space with the US government. There’s a lot of fantastic work that’s being done in various corners of our government, and I have a lot of respect for people who are doing those jobs. 

THOMAS:   Yeah, I agree, that’s a very impressive group of people, same people that I talk to all the time, so I understand where you’re coming from there. So Tarit, thanks as ever for the views. Thanks for helping us see the world through a different, more contrarian lens. Once again, our guest here has been Wellington Equity Research Analyst Tarit Rao-Chakravorti.

TARIT:    Thanks Thomas, always good to talk to you. 


Views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For  professional/institutional investors only. Your capital may be at risk. Podcast produced September 2022.

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