Steven Romick’s Speech To CFA Society Of Chicago
H/T Dataroma
I’m reminded of a gentleman who discovers a genie in a bottle. Granted one wish only – apparently even genies have pricing power – the man asks for peace in the Middle East. The genie backs away and says, “That’s way too difficult. Give me something easier.” The man ponders his options and asks the genie instead, to help him pick a good mutual fund. The genie quickly responds, “Let me get to work on the Middle East.”
I’m now entering my fourth professional decade managing money. And one thing I’ve learned is that there’s no shortage of surprises. What should happen, doesn’t always. What could happen comes to pass instead. And sometimes, what can’t happen actually does. Investing, like life, is imminently unpredictable. There are surprises – some good, some bad.
Steven Romick: Surprises - some good, some bad
Personally, I never thought I'd be a widower. I thought I'd have two kids, maybe three, but certainly not four. And I thought at least one of them would be a son. People think investing is tough. I’m outnumbered 5:1 at home.
Professionally, I thought I would be a lawyer, not a portfolio manager. Many of the clients I thought wouldn’t make it through a market cycle are still with me decades later. But there have been other clients who didn’t last much more than a year.
I’ve had great confidence in many of my investments, like when I believed the Hong Kong holding company that I purchased at less than cash value couldn't lose me money but it did. Thankfully, there were upside surprises as well, like when I invested in a national arts and crafts retailer, hoping to double or triple my money but instead ended up with almost a 15 bagger.
When I started the Contrarian Strategy and its flagship FPA Crescent Fund, I just hoped to invest in a way I enjoyed – broadly, without regard to industry, capital structure, asset class, region or market cap. Most consultants told me I couldn’t do all of that if I wanted to be successful. From then to now, I don't know who is more surprised - me or the consultants.
As the Roman philosopher Pliny the Elder noted two thousand years ago, “The only certainty is that nothing is certain.” Or, as that modern-day philosopher Mike Tyson said, “Everyone has a plan ‘til they get punched in the mouth.” I’ve therefore learned not to be too precise, and now operate with a range of expected outcomes. Accepting uncertainty, in turn, has also allowed me to take instruction from those with good ideas. I’ve learned to take chances, recognizing that not all of them will succeed.
Steven Romick: Preservation of Capital
We – the Contrarian Value team at FPA – are disciplined value investors who spend the majority of our time trying to understand what makes a business tick. When we find a good business that might be misperceived and may be ticking a bit faster than the market’s perception, we buy it. We also understand what types of investments are out-of-bounds, i.e. outside our circle of competence.
A value investing orientation is something I think you’re born with. Or perhaps it was ingrained in me by watching how conservatively my grandparents lived their lives. They were fearful of not having enough as compared to nowadays, when many people want more, more, more. My widowed grandmother bought milk by the gallon because it was less expensive and then froze most of it because she wouldn’t be able to use it all before it soured.
The bottom line is that I’ve never been terribly comfortable with losing money and I therefore have always sought to protect capital before trying to grow it. When I started my own firm, Crescent Management, in 1990, I explained to people that I’d manage their savings being mindful of the downside - no differently than I managed my own very small portfolio.
That was working reasonably well and I thought my “go-anywhere” strategy could translate into a somewhat differentiated mutual fund, which led to the Crescent Fund’s inception in 1993. It was a good start.
My business grew, thanks to decent returns and lower than average risk across both stocks and bonds.
But then….You’ve heard of the Sports Illustrated cover curse? You get the cover shot and then you choke.
See full PDF below.
