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

Steve Romick is a managing partner at FPA Funds and was previously chairman of Crescent Management.

Irecently sat down with Steve to talk about “deep value investing,” his diverse portfolio and what a $9.5 million rock at the Los Angeles County Museum of Art  has to do with markets. Video and a transcript of our conversation follows. 

Steve Forbes: Steve, thank you for joining us. You’re in the investment business. But it didn’t start out that way. You majored in education.

Steve Romick: I did. Bachelor of Science Education. I made a left turn some place when I probably should have gone right.

Forbes: So how did you go from education to management?

Romick: Well, it’s funny, actually. I actually met a gentleman who was a friend of my father’s, who asked me to coffee at a hotel in Chicago. He was coming to visit. I went to Northwestern. And he told me that he was tired, and I quote, “of unlearning MBAs.” He goes, “I would like to hire somebody else, who I could train from the ground up. And would you be interested in that?”

I said, “I don’t know anything about finance.” He says, “Neither do the guys with the MBAs.” So I said, “Okay, I’m game.” He’s a very successful gentleman, by the name of Jeff Nathan, who ran an investment partnership. I said, “I’d love the opportunity.” So he sat me in his office with a desk abutting his. Every time he picked up the phone to call a company, I’d be on the phone with him.

Within the first couple months of being and working with him, it was really funny. I ended up in a hotel down in Laguna Beach with a guy in his pajamas, pajama bottoms anyway. I had no idea who this was. But as a young kid with no experience whatsoever, I didn’t realize I was taking tea with John Templeton.

Forbes: Eventually Sir John.

Romick: Yes. I think he was Sir John then.

Forbes: So how do you describe your investment approach? You used the word “deep value investor.”

Romick: Yes, we are deep value investors. Let me start with our goal. Our goal is to generate equity rates of return and to do so without assuming the same risk the stock market does. So we want to avoid permanent impairments of capital. So our strategy is to really invest A) across a company’s capital structure — so common stocks, preferred stocks, junior debt, senior debt, bank debt — but as well as in different asset classes.

Forbes: Going short.

Romick: Going short to some degree, as well as farmland we own in our portfolio. We purchased a lot of the subprime whole loans back in 2009 and ’10. And we looked for other types of vehicles like that in different asset classes.

Forbes: Hedge fund it sounds like.

Romick: Public version. Hedge fund light, lower fees.

Forbes: So you range everywhere. Now some would say, “How can you do that? How can you get real value added if you’re spread all over the place?”

Romick: We’re spread all over the place in terms of different asset classes and different market caps and across the capital structure. But at the end of the day, we focus on one thing. We focus on where the bad news is, where there are poor sellers. Wherever the poor sellers are, that’s where we’re spending our time.

And if you think about looking at a bond versus a stock, what’s the difference, really? If it’s a building. If you’re looking at this building that we’re in right now, we want to value it. We’re gonna try and figure out what the replacement cost is, how good is it tended, is it an A credit or a C credit, what the vacancy in the building is, what the turnover in the leases are, the terms. Then you take that analysis and look at it from an equity perspective, but think of it as a debt, as a bond, as well, the mortgage on that building. The analysis is not so substantively different. So I would argue that we are in the business of buying assets at discounts, whether they be businesses or some other kind of asset.

Forbes: 2009, for example, after the market turned, for awhile after the sharp rise, you were skeptical. You went into bonds. And you’ve reversed that since then.

source

please give me comments thanks