market folly

Today we present the fourth quarter letter from Christopher Begg and East Coast Asset Management. Readers will be familiar with East Coast from their insightful past commentary on consensus versus variant perception in the markets. Their 2010 year-end letter begins with a macro assessment but the meat of the letter focuses on developing a definable edge in investing.

Unified Theory of Investing

Begg says that the Unified Theory of Investing, like Newton's law of gravity, appears self evident once identified. He writes, "in the case of investing, it is both the complexity of the market place and the emotions associated with allocating financial resources that serve to obscure this law."

In short, East Coast proposes that the Unified Theory of Investing is Internal Rate of Return (IRR). The firm then offers the equation that JoC = IRR, where JoC stands for "Joys of Compounding." We previously detailed East Coast's letter on the joys of compounding. They are merely using IRR as a metric for comparing and contrasting investment options. What is the potential IRR of the investment?

To illustrate this, Begg presents a simple analogy: "Just like a shopper walking the aisles of a grocery store, the investor shops for opportunities by the IRR that is intrinsic to the potential investment at the price quoted."

It should come as no surprise that David Einhorn's hedge fund Greenlight Capital evaluates their investments on an IRR basis. As you'll note in Greenlight's year-end letter, there is a section of closed positions where the fund identifies their IRR on each previous investment.

Gaining an Investment Edge

Begg's letter then goes on to discuss a conversation he had with Seth Klarman of the Baupost Group. They focused on how successful investors and firms need to have a definable edge. East Coast identifies a three-pronged approach in their investing edge:

1. Process of Infinite Refinement - Passing through knowledge to arrive at simplicity

2. Perspective - The lens with which you see the world

3. Synthesis - Aggregating, sorting, and curating the right information which can then be viewed critically

These concepts are all discussed in-depth and we highly recommend reading East Coast Asset Management's fourth quarter letter in its entirety, embedded below:



You can download a .pdf copy here.

Yet another great piece from East Coast illustrating a framework for investing. More great market commentary can be found in David Einhorn and Greenlight Capital's year-end letter that we posted yesterday as well as Dan Arbess and Xerion fund's 2011 strategy.