Christopher Begg's East Coast Asset Management is out with their first quarter letter for 2012. Entitled "The Art of Fugue," the letter details how an opportunity goes through their investment process and they also provide an update on their portfolio.



Investment process is always a work in progress, so it's interesting to hear how other investors refine this and what they incorporate into their approach. On East Coast's process, Begg writes,



"Once an investment idea is sourced, the idea is put through an initial checklist and if it has merit it will ultimately be categorized as a compounder, a transformation, or a workout. Next, the investment idea will go through two stages of due diligence – two individual fugues, both in six parts. In each six-part stage we always begin and resolve with our subject, or royal theme, which is a perspective on compounding."



We've highlighted East Coast's investment process before, but their latest letter breaks down the six things they look at (in search of quality of the business):



- Competitive advantage

- Pricing power

- Market opportunity

- Capital itensity

- Economics

- Management



Then eventually they look to answer 4 questions:



1. Does the investment have an attractive expected rate of return? (IRR)

2. Does the investment have a sufficient margin of safety?

3. Do we understand the critical data points that will drive the success and intrinsic value of the business?

4. Do we understand first cause, or why the investment may be mispriced?



Begg then applies the above to a new holding they initiated in the quarter so you can follow along with their investment process to see how they think about everything. It's certainly a useful exercise and some of you may be able to guess the position. Embedded below is East Coast's Q1 letter:









For more on investment process, be sure to head to East Coast's letter on transformation investments.