Steven Romick is an outstanding investor with a long history of beating the market in the FPA Crescent Fund. Romick is an absolute value investor with a broad investment mandate. He invests in a variety of asset classes including stocks and bonds, but also alternative assets such as farmland and real estate.
Romick is a smart guy, and you can learn a lot by reading his letters and watching his interviews. He’s different from most value investors because he willing to invest across capital structures, across asset classes, and across geographic boundaries. He’s a “go-anywhere” investor, but at his foundation, he’s an absolute value investor. As he says in the interview below, he’s just looking to find bargains, wherever they are.
Here are just a few of the highlights from the interview with Steve Forbes:
Good Things Happen to Cheap Stocks
- He’s a contrarian. He invests all over the world, but he sums up his philosophy by asking “Where is the bad news?”
- He doesn’t care for the Fed’s monetary policy. Quantitative Easing is forcing people to accept more risk to get an acceptable return.
- He wants a margin of safety with all of his investments. “Prepare for the worst, hope for the best.“
- Buy farmland over gold (“farmland is edible gold”). He doesn’t know how to value gold, but farmland will benefit from the same reasons that gold will benefit (inflation), but it also is a play on emerging economies. Plus, farmland produces a yield vs gold that has no yield.
- He discusses his thesis on a variety of his holdings. He commented on one stock we own, which is Microsoft. He says MSFT is priced as if the future will be bleak… it’s priced for no growth.
I always try to take one thing away from each thing I read or watch that might help me improve my own investing. There are a number of things to take away from this video, but one thing that I found interesting was his answer to Steve Forbes’ question that was basically, ‘why do you think Microsoft will do well in the future’? Romick’s answer was:
“I don’t know that it will. But it’s priced as if it won’t.”
He caps it off by reminding us that “Good things happen to cheap stocks“. This is important to remember as a value investor, as the stocks we invest in usually have problems, often significant problems in the underlying business. But this is what causes them to be cheap, and sometimes unduly cheap, thus offering an opportunity to make money. But the real benefit comes when/if the business itself does better than what the majority expect, which happens more often than most investors realize.
This “positive surprise potential” is an added benefit to owning unloved stocks, and it’s what Romick is referring to when he says “good things happen to cheap stocks”.
Watch the entire video here.
Disclosure: John Huber owns MSFT for himself and for clients.