Steve Romick

Steve Romick, FPA, talks about market volatility, and how to manage risk on CNBC. Steve Romick says that he is building up cash (now close to 35%) because he is finding less bargains in the market. Like Michael Burry, Romick also owns some farmland.

Video and computer generated transcript below:

H/T ValueInvestingWorld

europe, let’s get some thoughts from our guests. the $11 billion fpa crescent fund is nominated for domestic stock fund manager, not of the year, not of the two-year, not three-year, five-year, but of the decade, but not for the century at this point. and you can’t nominate yourself, right? as far as as i’m aware. who won? bruce berkowitz. we called him. but we could only get you today. that was funny. really? yeah. uh-oh, he’s leaving. you’re out of here. you don’t need to be insulted, right. can we get bruce on the line? here, put this on. where’s mack. steve, do you at this point, i saw some, meredith whitney has never been this bullish. do you think we’re in for a multi-year run here? god, i hope not. why? because you want to be special in picking stocks. you don’t want the market to go up in general? we think of ourselves as value investors, doing work on companies. and what’s different about what we do on average is the fund that we manage is go anywhere fund. one could say there’s moreplaces we can lose money. yeah. but be that as it may, we’rebuying common stocks, preferred stocks, convertible debt, andbank debt. you’re having trouble with valuation. finding ideas, investments that have a margin of safety that meet our own risk reward. it’s not a cash isn’t a top down decision for us, but if we don’t find things that meet our risk reward. how much of a pullback would you need to deploy a lot more? the s&p 500 doesn’t have to decline at all, remains flat and the specific industry group breaks down and we can put a lot of capital to work. i see what you hope for. as an investor, you like things to be cheaper. what’s your larger view of the fact — do you think you’re going to have this opportunity? i think at some point –that microphone. it’s okay. are we on? yeah, we are on. that’s great. go ahead. the larger view — the larger view that we have is that for what we think about what the future’s going to bring, we’re scared what the feds are doing and other central banks around the world. as if an academic argument is going to in some form. two said in 2007 there wasn’t a subprime crisis. in 2008, said they weren’t going to dip into a recession and saidthat fannie and freddie were fine and in 2009 said they weren’t going to monetize the debt. and in 2012 said that we’re in the process of learning by doing, these same people were going and giving trillions of dollars to make a bet. and our hope is that and the world’s hope is that this bet will turn it into reality. we find that suspect. we’ve never seen a point in time in history with so many people trying to do so much to manage an economy.so i think we’ve moved. we’ve morphed to this government-managed capitalism. it’s become a faith-based onomy. and at some point we’re confident that volatility is going to increase again. we have a great economy and the government can do a lot to it and i think we’ve seen evidence it’s still going to dookay. aren’t we kind of — isn’t that the flip side of what you’resaying? sure. we’re not going to manufacture 13 million cars forever. we’re not going to onlyave 2,000 home starts. did he just talk you out of a bullish stance there? no, we’re sticking with our bullish stance. we think the second bull market begins spring, and we have a 1,625 year end target. the average period of — are you more technical? no, i’m a pretty hard corefundamentalist. but 2 1/2 years is the average duration of the secular bull market. you’re talking like a technician now. he gave you a lot of reasons. you just said that the fundamen are — it’s finalcomy. it’s starting to progress. earnings of the s&p are good and i think first quarter earnings are going to show that earnings in 2013 will be very healthy growth again. i think the focus for 2013. and this relates to steve’s point, it’s interest rates. people are concerned about all the balance sheet expansion gone on by the fed. they want to see the ultimateimpact to inflation, to interest rates, and that’s why if interest rates only go up gradually over the course of this year, we’ll get much more p/e expansion. you think there can be p/eexpansion, which means we’re not at peak valuations. still shy of 15 times trailing earnings, usually get to new market highs with 16, 17, and usually climbs to 28, 29 p/e. i think the focus is interest rates for the last year or two. you can’t believe what you’re hearing. well, i guess as of seven minutes ago, officially, which since it’s spring is when david’s began, right? and begins in the spring. pretty much. seven minutes ago. i think it’s rather notable that here today on cnbc you effectively called it. i think it’s great. spring and the bull market. well, the valuation has he not seen. we know the p is out there on the screen right now, but the e. if we cut that and you can say the p is on the screen, you don’t care, you’re not watching what you’re saying. i absolutely am not. i’m good with that. what do you mean? i don’t know. the p is on the screen, if we cut — it’s like, you know, the ppi, if we cut pp. okay so — for seven minutes, eightminutes, and we dove straight down. and you lost your mikeabout — okay. but in your view if you do it on cash flow, things are expensive? things are not wildly expensive, not cheap, butpresupposes the ability of a company to maintain margins if not expand margins if you look out at corporate estimates. how much cash do you have right now? approaching 30% right now.and what would be normal? normal actually is 25%. the record we’ve created. hasn’t b a great 19 years. it’s been okay over 19 years. if you were from 1982 to 2000, that would have been bad? yes, a lot of people look at our cash and will say, oh, got alot of cash, have a negative view. cash for us is actually anoptimistic view. when you really do need that capital, like in 2008 and 2009, it’s not that easy to go sell something else.wait a minute, you are optimistic now or aren’t optimistic?something good is going to come — you have a lot of cash, sonow you’re optimistic. optimistic he’s going to be able to spend the cash, which means he’s pessimistic on the markets. thank god andrew’s here to translate. he’s just concerned about the p on the screen. all right. so that is — how he summarized it is correct? that’s accurate. you think you’re going to have an opportunity to deploy? sure. if sequestration hits, we’re going to end up with opportunities in certain defense companies. we have completed for some companies we wouldn’t mind buying if the price was right. so nominated for — you’ve been managing money for a decade? okay. in the last decade, what would you think your internal rate of return would be? what do you need to do to get nominated for morning star, do you think? i can’t remember what the returns were for the decade. some place around 11%, i think. per year? compounded. pretty good.impressive.