Podcast Summary: The Compound and Friends

Episode: How to Earn Stock Market Returns With Half the Risk
Date: September 26, 2025
Hosts: Josh Brown, Michael Batnick
Special Guest: Steve Romick (FPA Crescent Fund)

Main Theme & Purpose

This episode dives deep with legendary investor Steve Romick, lead portfolio manager for the FPA Crescent Fund, about his three decades of value-focused, risk-managed investing. The conversation covers Romick’s approach to asset allocation, risk management versus upside capture, navigating market manias and crashes, adapting strategies over time, and why his flexible “go anywhere” mandate enables him to earn equity-like returns with much less risk and volatility than the market.

Key Topics & Insights

1. Opening Stories & Romick’s Background

[00:00–09:59]

• The episode starts with personal stories about Malibu wildfires and their impact, segueing into Josh introducing Steve Romick.
• Romick’s investing journey: He started FPA Crescent in 1996 to fill a gap for a fund with flexibility to invest across the entire capital structure—stocks, bonds, cash, alternatives—rather than being siloed by asset class or style.

Notable Quote (Romick):

“There really wasn’t anybody that could kind of look across the landscape and the capital structure to kind of create that, look at a breadth of opportunity. And so why don’t I just create that?” [10:00]

2. The “Go Anywhere” Discipline: Opportunity Drives Allocation

[10:00–13:45]

• Unlike traditional funds tied to fixed allocations (e.g., 60/40 stocks/bonds), Crescent’s allocation is a byproduct of bottom-up opportunity, not a top-down decision.
• When they see few opportunities, cash builds; when bargains abound, risk assets rise.
• Romick emphasizes risk management ("risk first") but notes that upside capture is equally important for long-term compounding—not just defense.

Notable Quote (Romick):

“It's the security selection... the allocation is a byproduct of what we’re finding as opportunity. If we see things that are attractive … we’re going to put capital [to work] regardless of the environment.” [11:21]

3. Surviving Bubbles, Performance Cycles, and Investor Behavior

[13:46–20:59]

• Josh Brown highlights Romick’s long-term outperformance—even through periods where his style was out of favor like the late 1990s tech bubble.
• Romick recalls being on the cover of Money magazine in 1998, then underperforming the mania, losing most of his assets under management, but preserving capital and ultimately outpacing the market post-crash.
• Cites Jean-Marie Eveillard’s mantra: “I would rather lose half my clients than half my clients’ money.”
• Importance of avoiding “binary disasters” (zeroes like eToys) and “valuation disasters” (overpaying for great companies, e.g., Cisco at 120x earnings).

Notable Quote (Romick):

“Returns are driven not just by what you own, but what you don’t own. If you’re able to avoid some of these big disasters... you can see them coming. Didn’t know when, but you knew it didn’t make sense.” [20:18]

4. Value Investing: Evolving Beyond Classic Metrics

[21:00–32:00]

• Value investing is not just about low P/Es or asset discounts anymore, but about finding great businesses at reasonable prices and adapting as the world changes.
• Example: Avoided dot-coms in the ‘90s for valuation reasons, but later bought Microsoft, Google, Meta, and Netflix when they got cheap amid controversy or cyclical fear.
• Emphasis on understanding the future earnings/cash flow stream and “not being dogmatic” about value.

Notable Quotes:

• Romick: “We tend to lean into businesses when people don’t like them ... we make a lot of money if they end up being something better.” [25:53]
• “Protection is still a B—it's just not the balance sheet, it’s the business.” [29:21]

5. Position Sizing, Catalysts and Conviction

[38:00–41:20]

• Cheapness alone isn’t enough; conviction comes from understanding the business, management, and potential catalysts.
• Larger portfolio positions go to businesses with strong fundamentals, capable management, and evident or plausible turnaround triggers.

Notable Quote (Romick):

“If you have the right management team allocating capital well, good things happen to cheap stocks.” [38:23]

6. The Dangers of Value Traps, Defiance, and Egos

[41:28–44:27]

• Some value investors doggedly defend their picks (“the market’s wrong!”) and ride failures to zero.
• Romick notes the importance of being able to admit mistakes, avoid ego traps, and move on from mistakes quickly.
• He credits his personal and professional environment for teaching him humility and learning from error, not public stubbornness.

7. Asset Allocation and Opportunistic Shifts

[45:14–47:09]

• FPA Crescent shifts between stocks, cash, bonds, and sometimes shorts, based on the attractiveness of opportunities.
• Prefers credit risk over interest rate risk in bonds, but finds current high-yield unattractive due to low spreads and weak covenants.
• Noted that “private credit” has shifted some risk away from public high-yield.

8. The Perils and Speed of Today’s Markets

[47:38–49:45]

• Markets move faster now—one must do the work in advance and be ready to deploy capital quickly when selloffs occur, as the window to act shortens.

9. Gold, Digital Assets, and “Alternative Diversifiers”

[49:49–50:37] [66:25–67:36]

• Romick doesn’t hold gold or digital assets—he can’t determine intrinsic value or see sufficient additive value in his approach for gold.
• On digital assets like Bitcoin: Acknowledges their reality but will not own what he can’t value with conviction.

10. “Half the Risk”: Track Record, Volatility, and Skill vs. Luck

[50:37–53:24]

• Chart review: Crescent has matched the S&P 500 in annualized returns since inception, with only half the maximum drawdown (28% vs. 55%) and a third less volatility.
• Romick stresses that this lower volatility and reduced drawdowns flow from process (risk management and security selection), not market timing.

Notable Quotes:

• “Our goal is to deliver equity rates of return and avoid permanent impairment of capital. ... Volatility is just things going up and down.” [51:23]
• Michael Batnick: “This is evidence that this is skill. Because being able to keep track with the S&P with a third less volatility, that’s not luck. You’ve done this for three decades.” [52:58]

11. Current Market Conditions, Macro, and the Future

[54:02–58:50]

• Net equity exposure has trended lower over the past couple years due to unattractive risk/reward in most equities, not a macro forecast.
• Process is driven by bottom-up, case-by-case analysis, not forecasts about the Fed or economic cycles.
• Macro is accounted for in scenario modeling but isn’t the driver of portfolio decisions.

Notable Quote (Romick):

“We build a low, base, high [model] looking out over the next two, three years or longer... trying to say, OK, what can happen if the company really executes?” [56:33]

12. AI, Technology, and Structural Change

[58:17–62:45]

• AI’s effect on margins will be industry-specific; some margin gains may be competed away, others (like in biotech, with cheaper/faster new drugs) may persist.
• “AI is a real benefit for IT services...But a lot of these phone centers...are going to be disintermediated because of that. Everybody’s going to migrate in that direction.” [61:43]
• The broader (second-order) productivity gains from AI have not yet been felt; if they aren’t, the immense investment in AI infrastructure could look ill-advised.

13. Passive Investing, ETFs, and Hope for the Future

[67:40–69:32]

• FPA offers an active ETF with a subset of Crescent’s large cap holdings (“FPA Global”—ticker FPAG), recognizing ETF size limits with small caps.
• Romick is optimistic: As more money flows to passive and quant, more opportunities emerge for active managers willing to do deep work and wait patiently.

“I’m actually more excited today than I was 10 years ago. ... It gives people like us a greater potential opportunity.” [69:18]

Notable Quotes

• On risk first, upside second:
  “Value investors who are no longer in business, sadly, because they were risk protection first, downside management, but they forgot about the upside.” – Steve Romick [13:45]
• On why opportunity, not allocation rules:
  “Cash becomes a residual byproduct of our, of our investment process. So we’ll pull down from that cash repository when we see lots to do, and when we don’t, cash builds.” – Steve Romick [12:04]
• On avoiding dogma:
  “Being able to keep pace with the S&P for the last three and five years despite having a cash allocation, a bond allocation, and a value discipline...How did you survive? Because nobody else did.” – Michael Batnick [25:49]
• On selling losers & humility:
  “You have to have the intellectual integrity to question yourself. ... Defiance doesn’t get you anywhere.” – Steve Romick [43:16]

Important Timestamps

| Segment | Timestamps | Summary | |-------------------------------------------|---------------|-----------------------------------------------------------------------| | Malibu wildfire stories, intro | [00:00–09:59] | Personal stories lead into investing philosophy and guest background. | | The “gap” in funds, flexible mandate | [10:00–13:45] | Why Romick started FPA Crescent; go-anywhere principles. | | Surviving bubbles & bear markets | [13:46–20:59] | How Romick managed fund redemptions and style-drift pressure. | | Value investing’s evolution | [21:00–32:00] | Why valuation is necessary but not sufficient; adapting over decades. | | Catalysts, conviction, position sizing | [38:00–41:20] | Sizing based on business & catalyst, not cheapness alone. | | Value traps & intellectual honesty | [41:28–44:27] | Avoiding ego and public stubbornness. | | Asset allocation, bonds, and shorts | [45:14–47:09] | How Crescent manages risk with flexible allocations. | | Speed of opportunity today | [47:38–49:45] | Need to do work in advance; V-shaped recoveries. | | Gold, digital assets, and their limits | [49:49–50:37], [66:25–67:36] | Why Crescent shuns gold/crypto. | | Returns, volatility, “half the risk” | [50:37–53:24] | Crescent has equity-like returns with less drawdown and vol. | | Macro & process | [54:02–58:50] | Macro is scenario input, not the driver of decisions. | | AI, productivity & industry effects | [58:17–62:45] | Where and how AI could pay off (or not) for broader markets. | | ETFs, passives, hope for active | [67:40–69:32] | New ETF offering; hope for future active outperformance. |

Memorable Moments

• Josh Brown comparing Romick’s drawdown chart to “a string of hit movies.” [14:53]
• Mutual ribbing about the Money magazine cover: “I really think the reason we had any money left was because people either felt sorry for me, or forgot they had money with me.” – Romick [17:28]

Takeaways for Listeners

• Romick’s “go-anywhere” discipline and risk-first mindset allowed his fund to sidestep major blowups, withstand periods out of favor, and compound wealth over time.
• Flexibility, critical thinking, and willingness to evolve are essential for long-term survival in investing.
• True value investing in 2025 means being business analysts, not just screeners of low P/E stocks.
• Conviction should be paired with humility and a readiness to question assumptions.
• Passive flows and market shifts may actually create more inefficiency and opportunity for active managers focused on analysis and downside protection.

Closing Thought:

“Our goal is to deliver equity rates of return and avoid permanent impairment of capital. ... Volatility is just things going up and down the road.” – Steve Romick [51:23]

Listeners will come away with a clear picture of why disciplined, risk-aware investing that remains flexible and open-minded can deliver competitive returns over the long haul—even as markets, narratives, and technologies change.