Episode summary
How to Earn Stock Market Returns With Half the Risk | TCAF 210
Ask The Compound
· · Hosts: Michael Batnick, Josh Brown · Guests: Steve Romick
Summary
Steve Romick argues that long-term investing should start with risk management, not return chasing. He says FPA Crescent was built as a flexible “go anywhere” fund, able to move across stocks, bonds, cash, and shorts depending on where the best risk-reward sits, rather than forcing a fixed allocation. That approach, he says, helped the fund survive big market cycles and keep volatility and drawdowns well below the S&P 500 over time.
A large part of the conversation centers on the dot-com bubble, where Romick says the firm avoided internet stocks because valuations were detached from business reality. He describes losing clients and lagging badly in 1998 and 1999, but making it back by sticking to price discipline and buying businesses such as Microsoft later, when fear and lower valuations created a better setup. He frames value investing as owning better businesses at good prices, not just buying low P/E stocks.
Romick also argues that today’s market still contains opportunities beneath the surface, even if the major indexes look expensive and momentum remains strong. He says prices in parts of the market are elevated, but small caps, certain healthcare names, and some international businesses still offer better risk-reward. The key, he says, is to stay intellectually flexible, watch for catalysts, and be willing to admit when a thesis has changed.
Key takeaways
- Steve Romick says his process is built around protecting capital first and letting cash, bonds, and shorts be a byproduct of opportunity rather than a target allocation.
- He says the fund survived the dot-com era by avoiding businesses whose valuations made no economic sense, even when that meant lagging badly in the short run.
- Romick says value investing today is about buying stronger businesses at reasonable prices, not just screening for low P/E or low price-to-book ratios.
- He says current market conditions still look attractive in pockets outside large-cap growth, especially in smaller caps, some healthcare names, and some non-U.S. holdings.
- Romick says the hardest part is staying intellectually honest and abandoning a thesis when the business or industry no longer supports it.
Notable quotes
“The one thing you shouldn't be surprised by is surprises. Nothing's ever certain”
“risk first has been paramount for what we do”
“Price matters. Price matters”
“we really wanted to say we really sat back and said all right we have to really consider what the value of the business of the enterprise is”
How the episode opens
So, I was just in uh I was just in LA and I drove for the first time through um — Thank you.
Drove through Malibu like on the PCH and you know on the way to LAX. So, you got to go through um I was in I was in the I was in like the uh Thousand Oaks area, Westlake Village. So, you had to drive through um the canyon down Malibu and I hadn't seen it yet cuz this happened when?
January. Okay. I could not believe the destruction.
Like a thousand It seemed like a thousand lots were just empty.
I I drove it for my first time myself this last weekend. — Oh, okay. — Cuz I have such PTSD. — We might have been on the same road at the same time — Going the other direction. — Um you know, for a wedding, but it was I went through the Palisades and and I've just not been able to bring myself to to drive through.
I have never seen anything like this. I I mean
Dozens of of friends have lost their homes. Yeah, it looked it's hard to describe, but like the lots where the homes used to be are separated by like fences or some they used to be. So, it's just lot after lot and it's I think it's thousands of them that were on the beach where these things were burned down to the foundation like you just see like concrete and wreckage and it go it feels like it goes on for 10 miles.
I don't know.
No. Yeah. From Santa Monica all the way up to Malibu. So 10 miles is exactly right. I — I would guess and I don't know this for sure.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- risk management
- value investing
- dot-com bubble
- valuations
- macroeconomy
Watch the episode
Watch “How to Earn Stock Market Returns With Half the Risk | TCAF 210” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
More from Ask The Compound
Ask The Compound, this episode and its artwork belong to The Compound. Octagon is not affiliated with the show; this page is an independent summary.
