Links

A great 15-minute video interview with Charlie Munger the day after the annual meeting (LINK)

CNBC Excerpts: Billionaire Investor Warren Buffett on CNBC's "Squawk Box" (LINK) [If you haven't watched them yet, the list of video clips are in Monday's links.]

Spring 2017 issue of Graham & Doddsville (LINK)

Expectations - by Ian Cassel (LINK)

JAMIE DIMON: There is a 'national catastrophe' and 'we should be ringing the alarm bells' [H/T @pcordway] (LINK)

Selling our Telecom position - by John Hempton (LINK)

The dark side of platform monopoly (LINK)

The Making of a Friendly Microbe - by Ed Yong (LINK)

Now That We Can Read Genomes, Can We Write Them? - by Ed Yong (LINK)

Book of the day [H/T @morganhousel]: The Great Influenza: The Story of the Deadliest Pandemic in History

Links

East Coast Asset Management 2015 Letter - Twin Lights (LINK) [Chris Begg's letters are always one of my favorite reads, and this particular letter even more so, as I think the insights discussed relating to business culture are both important and enduring models of how the world works.]

The foundational understanding where we are looking to arrive at is to determine the compounding merit of the investment–superior returns, asymmetric risk, and ideally a long-duration.  We value the important truth that almost any advantage can be copied away eventually and  that  the  only  truly sustainable  long-term  competitive  advantage lies  in  the culture of  a business. 

... 

The more businesses we study, the more we find that these insights apply perfectly to what determines an outlier organization. The common thread that connects our greatest investments over the longest durations has been one of greater structural organization leading to the ability to scale those businesses whereby greater and greater amounts of work are attracted to that system. Intuition might suggest that the great investments came from being early to a revolutionary product or an early entrant into a huge market opportunity. This has not proven to be the case. What we have found is that an evolved system that values persistent incremental progress eternally repeated (PIPER mindset) has delivered the greatest return, while taking the least amount of risk over the longest duration.

A Dozen Things you can Learn from the Anti-Models that are Bernard Madoff and his Victims (LINK)

FPA Crescent Fund's Q4 2015 Webcast Replay and Transcript (LINK)

Heed the threats to globalization - By Edward Chancellor [H/T @ChrisPavese] (LINK)

Opalesque.TV talks to Michael Lewitt, whose new book, The Committee to Destroy the World: Inside the Plot to Unleash a Super Crash on the Global Economy, comes out next month (video) [H/T ValueWalk] (LINK)

Mohammed El-Erian on the Masters in Business podcast (LINK)

Sebastian Thrun on Charlie Rose (from December) (video) (LINK)

One friend and blogger's list of books read in 2015 is a good place to start if you're looking for your next read (LINK)

George Washington, the Whiskey Baron of Mount Vernon (LINK)

Related book: Washington: A Life

PBS Nova: Memory Hackers (video) [H/T Linc] (LINK)

How Jaguars Survived the Ice Age (LINK)

East Coast Asset Management's Q1 2015 Investment Letter - Mr. Market Revisited

Link to: Mr. Market Revisited

Thinking backward is quite intuitive.   Backward thinking involves  looking  for patterns, making links  between  unconnected  events  and forming  theories to influence forward-looking decision-making.  Backward thinking has a gravitational pull toward the experiential emotion in our past as well as giving more proportion to recent events.  

In  my  opinion,  the  biggest  error  in  looking  backward is  not  going back far enough to solve to laws and principles that are invariable, or unchanging through time.  The three largest data sets, which I have previously written and credited Peter Kaufman for first enlightening me about, are: 

1. The inorganic systems around us, which are 13.7 billion years in age and contain all the laws of physics and mathematics,
2. Organic systems, or all the biology on earth, which are 3.5 billion years in age and,
3. 20,000 years of recorded human history. 

We can use these invariable laws and principles for intelligent decision-making. 

East Coast Asset Management's Q3 2014 Investment Letter: Grove of Titans

Link to: Grove of Titans

In our third quarter letter you will find our portfolio update and general market observations. Each quarter we highlight one component of our investment process. This quarter, in the section titled Grove of Titans, I will discuss the attributes of what we think constitutes an enduring business.

.....

I recently invited Peter D. Kaufman, CEO of Glenair, Board Member of the Daily Journal, and Editor of Poor Charlie’s Almanac, to come speak to the Security Analysis class I teach at Columbia Business School. Peter Kaufman is an exceptional business operator and is also one of the great multidisciplinary thinkers of our time. On the topic of multidisciplinary learning and rational decision-making, Peter shared the approach he uses, which he refers to as his “three-bucket” framework, to arrive at universal principles that have high utility. Peter shared:

Every statistician knows that a large, relevant sample size is their best friend. What are the three largest, most relevant sample sizes for identifying universal principals? Bucket number one is inorganic systems, which are 13.7 billion years in size. It's all the laws of math and physics, the entire physical universe. Bucket number two is organic systems, 3.5 billion years of biology on Earth. And bucket number three is human history, you can pick your own number, I picked 20,000 years of recorded human behavior. Those are the three largest sample sizes we can access and the most relevant.

Peter then walked the class through how compounding and the law of reciprocity can be applied to these data sets and therefore applied to reason. A light immediately went on. Applying questions to these three large data sets simplified and strengthened how I was organizing and applying mental models. Kaufman’s approach provides a framework of general laws that have stood the test of time – invariant, unchanging lenses that we can use to focus and arrive at workable answers. A multidisciplinary framework helps shift the human paradigm to one of an empathetic perspective, as if we were looking from the outside in. Just as I began this letter with the three foundational insights of Dialectical Materialism, we want to be constantly searching for these types of invariant strategies that can serve us in rational decision-making.

...

Seeing the Forest and the Trees:

One of the most limiting biases for individuals attempting to make sense of complex systems is that they are a part of the systems. When you are part of the system it becomes increasingly difficult to see the forest for the trees. Each individual tree’s uniqueness and complexity can lead to confusion and ambiguity. The key is to attempt to step outside of the system and see the forest and trees for the essence of what they are. How can we find these groves or islands of simplicity in an infinitely complex world?

Jason Zweig of the Wall Street Journal asked Charlie Munger to describe a key attribute of Berkshire Hathaway’s evolution over the years. His response: “There isn’t one novel thought in all of how Berkshire is run. It’s all about what [Mr. Munger’s friend] Peter [Kaufman] calls ‘exploiting unrecognized simplicities.” Peter Kaufman was sitting with Charlie during this interview after the recent Daily Journal annual meeting. The entire quote that Charlie was referencing was one that Peter attributes to a 28 year old writer for Sports Illustrated named Andy Benoit, who wrote these words to describe the essence of a particular quarterback’s genius: “Most geniuses—especially those who lead others—prosper not by deconstructing intricate complexities but by exploiting unrecognized simplicities.” This quote captures the essence of genius and can serve as a roadmap to the Grove of Titans.

Finding unrecognized simplicities requires one to step outside the forest, outside of the human system to see and measure holistically without biases

East Coast Asset Management Q2 2014 Investment Letter - Horse in Motion

Link to: Horse in Motion

In our second quarter letter you will find our portfolio update and general market observations. Each quarter we highlight one component of our investment process. This quarter, in the section titled Horse in Motion, I will discuss the value of an ownership mindset and how it plays an integral part in a compounding triumvirate with a good business and an effective operator. 

East Coast Asset Management's Q1 2014 Letter - The Economy of Evolution

I always enjoy Christopher Begg's letters, but this one I thought was especially good.

Link to: The Economy of Evolution

In our first quarter letter you will find our portfolio update and general market observations. Each quarter we highlight one component of our investment process. This quarter, in the section titled The Economy of Evolution, I will discuss business evolution and how some businesses are more fit for adaptation than others. I will illustrate a theme and new position in the portfolio that serves as a tangible example of the discussed concepts.

.....

Darwin’s Wedge: 

In an 1856 manuscript of On the Origin of Species, Darwin compared nature "to a surface covered with ten thousand sharp wedges . . . representing different species, all packed closely together and all driven in by incessant blows." Sometimes a wedge, a new species, driven deeply into this imaginary surface, would force out others, affecting species across "many lines of direction." This metaphor is an effective way to describe the interconnectivity of species and the importance of external impacts. Charles Darwin was influenced by his reading of Malthus’ prediction on population growth and how limited resources would lead to an eventual catastrophe. He used the hammering of wedges image as a metaphor to emphasize that there was limited space for organisms to adapt, and that their ability to do so depended not upon absolutes but upon niches. 

Just like with species, businesses and investors face “Darwinian wedges.” These wedges can be subtly hammered in over time, or they can be more extreme, forcing immediate extinction of certain businesses. Wedges come in all forms: government regulation, a disruptive competitor, or environmental impact, to name a few. 

Three Darwinian wedges we are following today are: 

1. The Amazon Effect: Amazon is one of the greatest predators to brick and mortar retail commerce. The incessant hammering blow of a market share focus versus profit is, and continues to prove, a virtuous cycle. Just like the Wal-Mart effect on many small businesses, extinction is inevitable for those that cannot adapt to their changing food source.  

2. Climate Change: The science seems overwhelmingly in support of a need to reduce the world’s global carbon footprint. There are many businesses and industries that will continue to help this effort toward emissions reduction, and there are emitting industries whose extinction seems inevitable.  

3. Gas Evolution: Through advances in technology (horizontal and deep water drilling) the world has found a relatively clean energy source that can help significantly reduce carbon emissions and meet a growing world energy demand. To move natural gas we will need to re-plumb the world’s gas and oil supply chain – liquefaction, gasification, transportation, storage, as well as adapt geographically to where it makes economic sense to refine and store these energy assets. 

Descent of Business: 

An investor I respect shared a conversation with me that he had with Charlie Munger, who asked him, “What percent of businesses will be better ten years from now than they are today?” This investor’s answer was 15%. Charlie replied, “I would have said 20%, but you are right.” 

The invaluable lesson is that most businesses fail to adapt. What made most businesses successful is likely not the exact same system that will drive their success into the future. While altruistic principles are forever static, systems often get crushed under the weight of change. For some large businesses, they also may face the law of large numbers, where it becomes increasingly more difficult to drive the level of change to have compounding benefits.

East Coast Asset Management's Q4 Letter

Link to: Navigating Beyond the Pillars

In our fourth quarter letter you will find our portfolio update and general market observations. Each quarter we highlight one component of our investment process. This quarter, in the section titled Navigating Beyond the Pillars, I will discuss some lessons we have borrowed from navigation and how we apply them to our process and the current investment environment. I will also continue the discussion from last quarter’s letter on the investment checklist we employ.

East Coast Asset Management's Q3 Letter

Found via Market Folly.

In our third quarter letter you will find an update on our portfolio and general market observations. Each quarter we highlight one component of our investment process. This quarter, in the section titled The Architecture of Reason, I will discuss a framework of rational decision-making and how we attempt to apply it using our seventy-two-point investment checklist.

East Coast Asset Management's Q2 Letter

Via Market Folly. You can also sign up to receive ECAM’s future investor letters via email HERE.

Link to: Second Quarter 2013 Update – Yielding to the Still Point

East Coast Asset Management: First Quarter 2013 Update – The Art of Fugue

Via Market Folly. You can also sign up to receive ECAM’s future investor letters via email HERE.

Link to: First Quarter 2013 Update – The Art of Fugue

East Coast Asset Management's Q4 Letter

Found via Market Folly.

In our Q4 letter you will find an update on our portfolio and general market observations. Each quarter we highlight one component of our investment process – this quarter in the section titled Seek Knowledge of Causes we highlight our transformation investment category.

East Coast Asset Management's Q3 Letter

Found via Market Folly.

Valuation is the primary driver that informs our investment strategy. Over time the market is meritocratic and rewards investors when they have purchased a stream of future cash flows at a discount. Conversely, the market will tend to punish market participants who have overpaid. Every investment has an expected rate of return from its quoted price over a given time horizon, it is our primary objective to determine what that expected return is and allocate capital accordingly.

Since early 2009, there has been a secondary driver informing our investment strategy – the developed world’s central bank monetary policy. As noted in earlier letters, central banks have three exit strategies to mitigate their debt burdens: increase taxes, reduce spending, and print money. We expect them to employ a combination of all three strategies but history shows that the printing of money will be the most politically and economically viable. These actions potentially have critical implications for accumulated wealth, future interest rates, and inflation.

East Coast Asset Management's Q2 Letter

Found via Market Folly.

In our Q2 letter you will find an update on our portfolio and general market observations. Each quarter we highlight one component of our investment process - this quarter we discuss the “compounder” category, and specifically how we differentiate a great business from those of lesser quality. Included in this section is a representative example of a compounder business we recently added to our portfolio.

...................

Excerpt:

The hierarchy of thinking can be broken down into four levels. The first level is data—simple facts and figures. The second is information. Information is data that has been gathered and organized and can be used as a reference tool. The third level is knowledge. This can be described as information that we have digested and now understand. The mind has collected information and put it into context and has arrived at the know-how.

The fourth and final level is wisdom. Wisdom is often indistinguishable from knowledge. Wisdom is the proper use of knowledge - the know-why. Wisdom is a deep understanding of universal truths – the realization of people, things, events or situations, resulting in the ability to apply perceptions, judgments and actions in keeping with this understanding. Wisdom is the comprehension of what is true, coupled with the optimum judgment as to action. Knowledge can be described as doing things right, where wisdom is doing the right things.

The world is in the early innings of a tectonic paradigm shift toward a knowledge-based economy. Just as the developed world has transitioned in the past from an agricultural economy to an industrial economy to post-industrial/mass production economy, this transition will produce an irreversible shift in the global state of mind. With this change, some businesses will lead, evolve, and prosper and others will cease to exist. “In times of change, learners inherit the earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists.” [Eric Hoffer quote]

East Coast Asset Management's Q1 Letter

Found via Market Folly.

We believe there are two general kinds of mispricings - structural and psychological.

Structural mispricings exist when an event occurs that forces a large population of owners to sell without any change in the investment’s intrinsic value. Examples of structurally induced selling would include: when an investment is deselected from an index, when a company is spun off from a larger parent company, or perhaps when a company’s credit rating is reduced. These scenarios are just a few examples that produce a good flow of ideas into our workout category which we can then use to apply an appropriate lens.

Psychological mispricings are driven from collective investor psychology which induces broad selling or a lack of buying in an investment, asset class or group of securities. Psychological mispricings have produced some of our most compelling compounding opportunities. The study of how human beings perceive the world is a helpful tool to understand the psychological biases that produce mispricings.

More than half of our brain is used for processing sensory information with the majority of that processing being vision. Evolutionary psychologists have said that animals from fiddler crabs to humans use eyesight for collision avoidance, suggesting that vision is for directing action not providing knowledge. We want to focus and apply a lens in the direction where there is a gap between the directed action of the marketplace and that of knowledge (truth).

Two universal visual impairments are myopia and hyperopia. Individuals, who suffer from myopia, or myopes, have difficulty seeing distant objects; hyperopes have difficulty focusing on near objects. These impairments can be used to describe the optical challenges that affect investors.

East Coast Asset Management's Q4 Letter

Found via Market Folly.

On behalf of our entire team at East Coast, I want to extend to you and your family our sincere wishes for health and prosperity in the new year. Although we would love to start the year reporting that the equity market turbulence is behind us, we are expecting volatility to persist. Continued deleveraging of the global economic system coupled with heightened political inputs will fuel fear of the unknown. Our best absolute performance years have rarely been born out of a cheery consensus, thus this prognosis may not result in anemic returns. While an emotional “all clear” sign remains elusive for investors, we are finding the environment attractive for purchasing equity of competitively entrenched businesses.

We observe a general misclassification between uncertainty and risk. Looking forward, we also anticipate the general perception of “risk” versus” risk-free” assets will change. Central bank intervention to mitigate the effects of the inevitable deleveraging cycle will raise the cost of capital and compromise the value of paper currency. We expect this could be a disappointing realization for those seeking long-term shelter in cash and bonds. We will share some insight on these observations in this year-end letter.

East Coast Asset Management's Q3 Letter

Found via Market Folly.

We live in a post credit bubble world. When the bubble popped in 2008, a meaningful percentage of the excess debt was transferred through bailouts and bankruptcies from over-leveraged businesses and individuals to government balance sheets. These sovereign central banks have further expanded their debt burdens through stimulus actions to help mitigate the inevitable slowdown as the world recalibrates to normal spending levels. We are in Phase 2 of this cycle where these sovereigns now must figure out how they can afford to pay off these debts. There are only three solutions to deal with this new reality: tax more, spend less, and/or “inflate away” debt.

…..

The inevitable “inflate away” central bank strategy being followed presents us with the long-term risk of purchasing power loss. The best way to counterbalance that offensive action on the GO board is by owning a healthy allocation of global, competitively entrenched businesses that have pricing power. Ownership of these businesses today at free cash flow yields ranging between 7 – 20% strikes us as a very common sense approach that maximizes our options. We do not view the outcome of our decision to own equities at these levels as potential for victory or defeat. We view the decision as an essential move which gives us the ability to gain strategic progress and a relative advantage over many of the large risks that exist in today’s investment environment, both seen and unseen.

…..

Not only are investors being herded by the predator of global macro fear and uncertainty but they are also being curtained by the fear of bubbles. Just as bubble net feeding is an effective technique for humpback whales to scare school fish into a herd, it is also particularly effective for corralling investors away from common sense and truth. The tech bubble of 2000 and the credit bubble of 2008 are open wounds for many investors. Investors remark “I cannot live through another episode like that” and thus frenetically seek the center of the bait ball. Bubble net feeding continues to plague investors in a major way. Fear and uncertainty that it could happen again have paralyzed the vast majority of investors. We observe a complete disregard for what an investment is worth based on its own merit.

For me the most important ten investment words ever uttered came from Warren Buffett when he said “investing is most intelligent when it is most business-like.” Today, business-like investing is looked upon as an ancient practice with very little merit. Even some of the most astute investors have joined the global macro circus looking for innovative ways to speculate on various macroeconomic outcomes. Beyond looking for tail-winds and tail-risks, we really don’t think devoting a lot of our daily resources to macro-economic hunches is going to reward our investors over the long-term and we feel it would greatly limit our success. We are however putting our efforts into overdrive on uncovering some of the finest businesses in the world that given today’s prices will deliver attractive compounding opportunities.

East Coast Asset Management's Q2 Letter

Found via Market Folly.

Headlines related to unemployment and pending stimulus expirations have unnerved investors this quarter. As a consequence, equity markets proved volatile with fears that the recovery has been held together by government fiscal and monetary stimulus and when removed the economy will once again spiral into a deep recession. While we have considered this outcome, the weight of the evidence continues to point to a more inflationary scenario. Binary outcomes, such as this, can often be solved through analyzing the source of the greatest incentives.

When Charlie Munger spoke about the Psychology of Human Misjudgment to Harvard Law School students he stated “I think I have been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it.” We conclude that it is not economically or politically feasible to do anything but print money. A “do not fight the Fed” mantra is very instructive right now and it could even be expanded to “do not fight a Fed backed into a corner with no way out.” The Fed’s incentives lie squarely on preventing further job losses, leading this administration into the best chances of re-election, and resetting the bar through debt debasement of post credit bubble developed world liabilities.

We believe that the Fed’s planned wealth effect is truly a wealth illusion effect. While asset prices may climb they will only rise alongside inflation. Printing money moves in a direction of solving the critical incentives that are “front of mind” with central banks. We do not see a strong incentive bias to the contrary that would lead us to believe we are going down a path of austerity measures. In this regard we have been and continue to operate with extreme care in protecting the purchasing power of our clients’ wealth. Accumulated wealth is at greater risk of purchasing power loss than the principal loss of owning a high-quality, competitively entrenched, reasonably priced businesses.

Portfolio construction continues to be a balancing act. Weekly, we ask where the consensus is today and observe that most do not share our viewpoint. Winning by not losing in a world of heightened inflation is a completely different paradigm for investors with thirty years of reinforced biases to the contrary.

East Coast Asset Management's Quarterly Letter

Found via Market Folly.

Our primary investment objective is to strive to achieve superior long-term capital growth with minimized risk of loss. We conclude the attribution of our success historically has been and we feel will continue to be through studying and sourcing undervalued or mispriced investments.

We have also learned that a global macro perspective is a necessary overlay to limit tail risks and help expose the portfolio to secular tailwinds. In this light, we have given further thought into the polarity of forces at work in the macro environment. In the following section we share how our thoughts on this subject have evolved.

…..

At East Coast we are keenly focused on what businesses earn the right to sell goods and services as demand patterns evolve globally. We believe our biggest opportunity will come from the consumer force that will change over the years and decades to come. Simply put, we want to own global businesses that have a localized advantage. In the following section of the letter I describe what it means to be a local champion – a Nuthatch Concept™.

Below is a list of outcomes where we see reason to mitigate risk and position for opportunity:

1) Developed countries continue to exercise “force majeure” and print money to debase the value of their debts. Unemployment continues to be a focal point of the developed world. Quantitative easing appears to be the medicine to quell further job losses. A US election cycle will incent the Federal Reserve and our Administration to err on the side of more stimulus action.

2) Emerging countries play their hand deliberately and allow for their consumer populations to grow and rebalance mismatches versus sudden shocks that could drive social unrest.

3) Inflation will be heightened globally and accumulated wealth is at risk of losing purchasing power. Limit fixed-dollar investments.

4) We believe global equities will perform better than expected as investors seek an alternative reserve currency as paper currencies and bonds lose value.

5) High quality businesses that can raise prices and whose products have localized advantages with a growing emerging market consumer will thrive. We conclude that high quality businesses also represent the most attractive valuations from today’s prices.

6) Interest rates continue to move higher to calibrate for real purchasing power erosion. Rates have already moved 100 basis points and upward pressure will continue.

7) We expect weakness in the developed world currencies (USD, Euro, and Yen) versus emerging country currencies which serves to increase attractiveness of developed world exports and helps bridge imbalances.