East Coast's Q2 Letter: What Defines A Great Business & A Look At IBM ~ market folly

Thursday, July 19, 2012

East Coast's Q2 Letter: What Defines A Great Business & A Look At IBM

Christopher Begg's is out with East Coast Asset Management's Q2 letter entitled, "The Beekeepers" where he makes an excellent analogy to investing.  In it, he also delves into what defines a great business and discusses IBM (IBM) as one of their new holdings in context of a larger theme.

Before diving into the IBM idea, we wanted to highlight a few of his salient points from the letter.  He makes a great analogy in the letter writing, "Bees also suffer from the biggest problem of most investors - the inability to sit in a room and do nothing."  Indeed, many great investors have extolled the virtues of patience in investing.

And on the topic of crowded trades, Begg writes,

"We observe that many investors appear to share similar behavior.  Too much demand chasing too little supply will eventually drive prices to extremes, diminishing the resources or future returns for a particular asset class.  We are witnessing this today with money markets and fixed-income securities where yields hover near all-time lows and the crowded hive has to swarm to find more resources."

Why East Coast Likes IBM

Begg highlights that Warren Buffett's Berkshire has become the largest shareholder of IBM (over $13 billion).  East Coast added the name to their books in the quarter and here's some of the rationale as to why:

- IBM has averaged unlevered returns on net tangible assets over the last five years of greater than 20%.

- Their durable competitive advantage exists in the sheer depth of their proprietary intellectual knowledge with which they can solve their customer's complex problems.

- They've targeted four key areas of market opportunity: developing markets, cloud and smarter computing, business analytics and optimization, and smarter planets/smarter cities.

- Perhaps one of the most important: pricing power.  As we all know, Buffett loves pricing power.

- Effective management.

Read their full thoughts in East Coast's Q2 letter embedded below:

For more from this firm, be sure to also check out their Q1 letter on mispricings as well as their thoughts on competitive advantage.

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