market folly

Christopher Begg is out with East Coast Asset Management's Q3 letter to investors entitled "Architecture of Reason."  In it, they outline some of their thoughts on the current market, as well as dive into aspects of their investment checklists. 

Begg writes,

"As many of the businesses we own now trade at higher valuations, we now find ourselves in a middling period of fair value.  We are not finding as many new businesses to purchase at a discount yet we remain content with the harmony of our portfolio in absolute terms and in proportion and perspective to other investment considerations, including the octave of cash and the extremely dissonant harmony of bonds."

In the letter, Begg also outlines their economics and competitive advantage checklists:

Economics - Owner Mindset

1. Owner Earnings - cash flow is the lifeblood of the business
2. Wealth creation engine - what is the number? the operating metric
3. Number vector - what is the vector of the number?
4. Economic 'goodwill' - the only goodwill that counts
5. Real vs. nominal profitability - the inflation test
6. Metrics - custom economic score card
7. Intangibles and the vanishing point - demystify all intangible assets
8. Non-economic accounting maneuvers - testing for disease
9. Debt - proportion: is debt proportional to operating income?
10. Statement of cashflows: management's "statement" - initial capital allocation test
11. Equitiy - proportionality: E=MC2 - is equity used in proportionality with its value?
12. Total other obligations: ideal city - harmony - company specific / community


Competitive Advantage

1. Novice test - explain what the business does to a novice
2. TAM - total addressable market by business unit
3. H4 industry - longitude/critical data points of the industry
4. ABC's - diagrams - an actual unit sold, the business model and competitive landscape
5. Degree of Timelessness - is it eternal?
6. Variant viewpoints - CEO parachute test - company and competitor
7. Advantaged moat - the give external senses
8. Nuthatch concept - test 1 - locality: are they a local champion?
9. Test 2 - inversion: can they do something their competitors cannot do?
10. Aggregation of owner earnings - ten years out: confidence of whole vs the parts
11. Gating factors: for industry and company success
12. Elasticity of demand and supply - pricing power - it (is) not but only a tiny knowledge of the eye


Embedded below is East Coast's Q3 letter:




For more investor letters from this quarter, head to:

- Dan Loeb's Q3 letter

- David Einhorn's Q3 letter

- Corsair Capital's Q3 letter

- Cobalt Capital's Q3 letter