Steve Romick: Trade Into The Gold You Can Eat, Farmland < 3 >

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Romick: I mentioned my former employer’s disdain for MBAs. I don’t have anything against MBAs.

We’ve hired a number of different MBAs. But not everybody on our team has an MBA and nor is it a necessity to be able to be a part of our team. We have people, some who have MBAs, some who don’t, but the most important thing is have they been inoculated with the value vaccine.

If they have that sense of value in understanding businesses and they do good work to report on such, then we embrace them. We have people on our team who have very little business experience. I mentioned to you before, we started talking just now that we have a journalist on our team, a Pulitzer-Prize-nominated journalist, who helps us dig a little deeper in companies, to learn that which may not be as readily apparent just by reading the trade magazines or speaking to the company or reading Wall Street research.

Forbes: Reminds me of our former editor here. He was editor from the ’60s to the late ’90s. He made it a point not to hire people from journalism school or from newspapers, because he said, “Then I have to reteach them to what journalism is.”

Romick: This journalist did come from journalism school, one of the better ones in the country.

Forbes: Talking about the Fed, why hasn’t this promiscuous, huge increase in the balance sheet of the Fed led to traditional inflation? Some would argue, and I believe it, it led to the housing bubble. You could never have had that, if you had a stable monetary policy. But we haven’t repeated the ’70s yet.

Romick: Well, capacity utilization still isn’t quite at that level, I think, to push you over the edge. And there’s different kinds of inflation. You can get inflation in different ways. You can import that inflation by having a weak dollar, for example. It seems at this point in time anyway that if you go into the dirty clothes hamper and you pull out the dollar shirt, it’s the cleanest of your dirty clothes.

Forbes: It reminds me of the way you describe investment prospects. You say, “We wish there was more to be excited about in the portfolio today.” You think things are fairly priced, overpriced?

Romick: I think they’re at least fairly priced. We look through our portfolio. Of I look at our win column, that which we’re making money in, it’s fairly universal. And we’re not that smart. If you’re making money on everything, it means that things are going a little too well, at least as far as we’re concerned.

It’s okay to be down for a period of time. We don’t mind stocks going down or bonds falling. It gives us a chance to buy more of them. But things are priced very, very well. There isn’t a lot of fear out there. The fear is of not getting enough of an income, which is pushing people into risk assets. So if you were to think of the stock market in the context of what’s happened with quantitative easing, so quantitative easing, market’s going down, quantitative easing comes in, market goes up. Then there is an easing, the market’s going down and it goes back in, then market goes back up. And that’s what’s been happening. So if you look at the expansion of the Fed balance sheet along with risk assets, the correlation’s right there.

Forbes: So that’s why you had this photograph in your end report, you describe this “rock in earthquake prone Los Angeles”?

Romick: Yes, that rock in earthquake prone Los Angeles is a $9.5 million boulder that was purchased by the Los Angeles County Museum of Art and placed over, spanning a walkway. You walk underneath this thing and you look up and you’re admiring the fact that this seems to be levitating. It’s calledLevitated Mass and it’s very reminiscent to us of what this market is.

There’s a lot of false underpinnings to what’s driving asset value is higher. For me, I look at this and the idea — you showed me a picture of people looking up at this big boulder — and if there’s an earthquake, I’m not going to be walking there. I’m going to walk around it. We take that same approach to the stock market, to investing, whether it’s stocks or something else. We want to make sure that we have a margin of safety. We want to, as we like to say, prepare for the worst and hope for the best.

Forbes: Farmland. You call it “Gold I can eat.” Farmland has really gone up very sharply in the last 10 years.

Romick: It has.

Forbes: Do you feel this is like the replay of the ’70s, where once the inflationary bubble is popped, this thing will crash? Why farmland now?

Romick: Interestingly, we haven’t had the inflationary bubble yet, as you just pointed out. So I think you’re going to have that first before you’re likely to see that pop. When we first started about farmland and investing in farmland, it was a few years ago. So yes, it has increased since then.

But I think that, look at gold for example, why people own gold. I don’t know, gold is a one-decision investment. It’s a bet against fiat currencies. It may be a good bet. It’s not one I feel competent in making. I don’t know how to value gold. I don’t know if it should be a thousand dollars an ounce, the rough cost to pull it out of the ground, or $1,600 an ounce, where it is today, or whether it should be $2,000 or God forbid it’s $4,000 because government may take it away from you.

So I don’t really feel comfortable making that decision nor charging people a fee to make that decision for them when I feel that they have the same ability to make the decision as myself. I look at farmland. Farmland has increased in price. But farmland, interestingly, will benefit from the same things that gold will benefit from.

If there’s inflation, farmland will benefit. If there’s a decline in fiat currencies, particularly the U.S. dollar, farmland will benefit. Ag prices are denominated in dollars. So if the dollar drops by 50% versus the won, for example, in Korea they can buy twice as much or their economy can benefit by not having to spend as much for the same amount of food.

But it’s also a play on emerging economies. There’s more protein in ones diet in emerging economies. So as one comes out of poverty, they eat better. So in the U.S., where we eat more, they’re eating better in developing, emerging economies. So if you consider that it takes a pound to grain to get a pound of grain, in a grain-based diet, it’s two pounds of grain to get a pound of chicken, four pounds of grain to get a pound of pork, and seven pounds of grain to get a steak, and more if you want foie.

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