East Coast 3Q 2012 Letter – Investment Process

East Coast’s last piece tangles investment process. Christopher Begg believes that one should have a differentiated investment process in order to achieve superior compounded returns over time. When analyzing outstanding track records, the best ones were produced by firms where process, skill, intelligence and control were coupled with a value philosophy. It is interesting to notice they use an “inverted checklist” in which he seeks to respond to questions like why this opportunity is NOT mispriced instead of why it is indeed mispriced since they found out this inversion helps reduce some biases.

He classifies three types of investments:

  1. Compounders: high IRRs for a long period of time;
  2. Transformation: may be interesting for time arbitrageurs;
  3. Work-out: discounted investments which will eventually close the gap between price and intrinsic value.
The summary of their framing can be translated in:
  • what is the range of expected IRRs?
  • do we have enough margin of safety?
  • do we understand the investment’s key issues?
  • do we understand why Mr. Market is mispricing this asset?
Where do they search for opportunities?
  • Sell-offs;
  • Post-barnkrupctcy reorganizations;
  • Spin-offs and demutualizations;
  • Industry transformations;
  • Political and economic cloud;
  • Other intelligent and talented investors.
Common questions asked to management:
  • Competitive landscape;
  • Strongest competitor;
  • Market share evolution;
  • Pricing power/pressure trends;
  • Capital allocation going forward.

“I don’t think a discussion on investment process would be well served without sharing what I think is the secret to any successful sustainable compounding endeavor: creating a culture of learning and improvement. As the world evolves, so must your intelligence.” (Source: East Coast Asset Management 3Q 2012 Letter) 

 Full letter can be found here.
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