Expect More Volatility

Mike Breen: I found it interesting, and I don't know if these holdings are still in there, it looked like you actually owned Amgen (AMGN) and eBay (EBAY) as well. Which were a little bit, I don't want to say anomalous, but sort of a value-tilting firm and sort of very conservative. And if you still have those, what are the theses on those stocks?

Steve Romick: We do have, both of those positions have been reduced somewhat. We took a lot of money out of retail. Because the leverage in retail doesn't all show up on the balance sheet. They have all the off-balance-sheet leverage from their operating leases. So we wanted to--we were so concerned about the consumer, and yet we felt that we weren't sure how bad things were going to get. We felt eBay relative to a number of other bricks-and-mortar retailers who've got the rents they've got to pay, would be a much better position. It actually, from our purchase, has done relatively well.

And so that's been the reason, that's why we owned eBay. In terms of Amgen, Amgen was a value investment when we purchased it. We actually bought it in I guess it was June or so of '08, and we've made money in it versus the market being down.

And we did that, we were successful in that investment so far because we felt at the time that the market was not paying for the true earnings stream. It was like they had discounted too many concerns with respect to many other drugs going off-patents, with respect to what are called biosimilars. They don't actually have generics in the biotech space.

Breen: OK. Any distinct challenges in this market over the last six months or year in terms of getting a handle on companies' future cash flows or earnings? We've had other managers who aren't 100% sure what's quote normal. So they're looking and saying the last 10 years, maybe that industry was earning above its normal rate and so that might not be going back far enough. Anything you've had to change in the approach?

Romick: No more so than normal. You mentioned that we had some foresight analyzing the issues in the subprime space and other levered companies like the investment banks. And we discussed this at length in shareholder letters. And we look back over long periods of time and so we've always felt, or felt in the recent years, that margins were way above normal. Corporate, non-financial operating margins were way above normal. So we've been using normal levers that were well below the Street, which is one of the things that led us to have as much cash as we did have, where at one point it approached 50%. So we expected the margins to be lower prospectively.

Breen: Where is the cash at today approximately?

Romick: It's about 24% or so liquidity. We look at liquidity. We do have some shorts in the portfolio, so you can't just look at cash in our fund. Because the stocks that we sell short, cash ends up being held as collateral.

Breen: And I know you can't talk in detail about the shorts. It used to be, about a few months back, it seemed to be in the financials area. Is that still the case?

Romick: Less, a little less exposure to financials than we've had in the past. Some of those have worked out. Most of those have worked out, and we recovered a lot. There's a number of different shorts, smattered across different areas.

Breen: OK. Anything else in general you're seeing in the market? Or what do you expect in the next couple of years? A rough ride?

Romick: I expect a lot of volatility. I think that we're going to have, you know, the market be going up and down a fair amount. I mean, it's unbelievable the volatility we've seen. And I think we're in for more of that. And I think that if somebody's going to invest individually, you really have to have a 5-7 year time horizon. And if you don't, you shouldn't invest. And just accept the fact that the world is volatile and put, this isn't a sales pitch for our fund because we don't have that much international exposure. But I think to have more international exposure would be important.

Breen: And on that international exposure, a lot of your funds are with energy or any of the commodity things. I mean, a lot of them you can have a company domiciled in one place and their operations are sort of contingent upon the global economy. Is that something you're looking at a little more now?

Romick: Very, very closely. We probably have about 8% of the portfolio, 7%, 8% of the portfolio that is domiciled overseas. But some of those companies do have sales in the U.S. We have about 25% of the portfolio that has operations overseas.

Breen: OK. Fantastic. We were joking before the interview that you're not a big fan of the saying "green shoots." So do you think that the common press has had an influence in the volatility in the market one way or the other? Making things worse when they're down and then the first sign of life talking it up?

Romick: I think that the press in general, especially the television media, adds to the volatility without question.

Breen: All right. Well, that could be an opportunity for you.

Romick: That's always an opportunity.

Breen: OK. Well, I thank you for your time.

Romick: Thank you, Mike.