He classifies three types of investments:
- Compounders: high IRRs for a long period of time;
- Transformation: may be interesting for time arbitrageurs;
- 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?
- 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.