“Incompetence is the disease of idiots. Overconfidence is the mistake of experts. Incompetence irritates me. Overconfidence terrifies me.” – Canadian journalist Malcolm Gladwell
FPA Capital managing partner Steven Romick (Trades, Portfolio) cited that Gladwell quote in one of his quarterly shareholder letters. When asked by publisher Steve Forbes to explain it, Romick – who has a way with words himself – said,
“We look at the Fed and we look at the actions they’ve taken and we look at statements that have been made by Ben Bernanke, who in 2006 didn’t think there was a housing crisis, quoted as saying such. In 2007, didn’t see the subprime issues being much of an issue. In 2008, argued that there wasn’t a recession coming, that we weren’t on the precipice of a recession. And also said at that point in time that Fannie and Freddie were solid.
“In 2009, they told us that the Fed would not monetize the debt. Then in 2012, he wraps it all up with the statement that us along with other central banks of developed economies are in the process of learning by doing. Doesn’t give you a great deal of comfort.
“So this academic argument that many economists have is just that. And how it actually will manifest itself as it’s put in place is anybody’s guess. So they’re hoping that this academic argument will alchemize into reality."
He may seem verbose to some, but he wastes few words in making his point. Logic makes him skeptical at times.
“Steven Romick (Trades, Portfolio) is skeptical of today’s market,” observed GuruFocus’ Holly LaFon a few days ago, quoting Romick’s third-quarter shareholder letter.
“Investing today feels a bit like dancing the limbo, i.e. how low can you go?” Romick wrote. “With interest rates, volatility, and short interest all near lows, it’s no surprise that opportunities are scarce.”
Romick has a reputation for seeking value in all aspects of a company’s capital structure – NASDAQ.com called him “famously patient and conservative” – preferring to invest in securities "that the consensus does not wish to own." He also looks for stocks with low price/earnings ratios (P/Es), and he doesn’t seem to have had a lot of trouble finding investment opportunities that meet his requirements in the past. If he is skeptical of today’s market, many who follow him may well be, too.
At least one of the additions he made to his portfolio in the third quarter – North Carolina-based Bank of America (BAC, Financial) – didn’t entirely fit the description of a company the consensus does not want to own. Admittedly, Bank of America’s price per share has a long way to go before it gets back to its pre-recession peak of November 2006 ...
… but, if it gets anywhere near that, the more than 35% increase in his position in the third quarter will justify Romick’s confidence in the stock’s value potential.
Also in the third quarter, Romick nearly doubled his holdings in Moscow-based oil and gas company OAO Gazprom (OGZD, Financial), increased his stake in TE Connectivity Ltd. (TEL, Financial) of Switzerland by 67%, added more than 45% to his assets in Russia-based OAO Lukoil (LKOD, Financial) and hiked his holdings in Surgutneftegas OJSC (SNGSP, Financial), another Russia-based oil and gas company, by 35%.
Romick earned his bachelor’s degree in education at Northwestern University;"I made a left turn some place when I probably should have gone right,” he told Forbes magazine last year.
“I actually met a gentleman who was a friend of my father’s, who asked me to coffee at a hotel in Chicago,” Romick said. “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.’ ... 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.”
Romick joined FPA in 1996. The rest, as they say, is history.
