Chapter 152 - Nick and Zak's Adventures in Capitalism: Words of Wisdom from the Nomad Partnership Letters
What I learned from Nick Sleep
Today’s Chapter is based on the book “Nick and Zak’s Adventures in Capitalism: Words of Wisdom from the Nomad Partnership Letters” by The Rational Cloner.
Nick Sleep started Nomad in 2001 with Qais Zakaria after careers as value analysts, and together they compounded partner capital at roughly 20–21% annually over about 13 years, vastly outperforming the MSCI World Index. Their philosophy focused on owning a small number of exceptional “scale-economics-shared” businesses such as Amazon and Costco for very long periods, with an unusual emphasis on patience, alignment with investors, and minimal portfolio turnover.
Here’s what I learned:
Patience
“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
At the heart of the Nomad Partnership’s investment philosophy was a simple, yet radical idea: their primary competitive advantage was the collective patience of their investors. In a market that focused on quarterly results and daily price fluctuations, Nick Sleep and Qais Zakaria deliberately positioned themselves as long-term thinkers and attracted investors that believed and behaved similarly.
They understood that the most significant business outcomes are the result of capital allocations decisions whose fruits may not be visible for years, and that only by looking further out than the crowd could they hope to outperform them. As such, it was primordial for them to invest in companies whose management are also thinking long-term. In fact, this approach was the bedrock of their investment strategy. As Sleep explains, “One of Nomad’s key advantages will be the aggregate patience of its investor base. We are genuinely investing for the long term (few are!), in modestly valued firms run by management teams who may be making decisions the fruits of which may not be apparent for several years to come. The near term results are likely to be as bad as they may be good, but we are confident that in the long run they will prove satisfactory.”
For example, Sleep and Zakaria were heavily invested in Amazon as they believed that Bezos was exceptional at making decisions with a longer time horizon which aligned with their philosophy at Nomad. As Bezos once said, “Our first shareholder letter, in 1997, was entitled, “It’s all about the long-term”. If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you are willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavours that you could never otherwise pursue. At Amazon we like things to work in five to seven years. We’re willing to plant seeds, let them grow–and we’re very stubborn. We say we are stubborn on the vision and flexible on the details”.
“We are investing for the long term in modestly valued firms run by management teams who may be making decisions the fruits of which may not be apparent for several years to come. The near term results are likely to be as bad as they may be good, but we are confident that in the long run they will prove satisfactory. Nomad’s competitive advantage over its peers will come from the capital allocation skills of your manager (if any) and the patience of our investor base. Only by looking further out than the short term crowd can we expect to beat them. It is for this reason we named Nomad an Investment Partnership and not a fund. The relationship we seek is quite different. One of Nomad’s key advantages will be the aggregate patience of its investor base.”
— Nick Sleep
This long-term perspective fundamentally changed their relationship with volatility and underperformance. They knew that stock prices bounce around all over the place after the release of any quarterly results, but that this was irrelevant if the ultimate destination was secure. Sleep famously told his investors that he was aiming to turn one dollar into sixteen over twenty years and, as such, he was never bothered by the short-term results of his fund.
Similarly, he did not care how his fund performed compared to the indexes on a yearly basis. He was confident that in the long run, the returns from indexes would be insignificant compared to his. As a matter of fact, just like Warren Buffett, Sleep believed a business’ outcomes (assuming the business economics are well understood) are much more predictable on a long-term basis compared to the short-term, as demonstrated by the equity yield curve. As he mentions, “It is interesting to us that Nomad’s performance by vintage bears evidence of the equity yield curve. Take the current portfolio: stocks held for over four years have superior annualized returns compared to those held for between three and four years, which have higher annualized returns compared to those held for two to three years and so on down to stocks purchased last year, which are a pretty mixed affair and contain several losses!“
As such, it is not surprising that, in average, Nomad held shares in companies for over 10 years! As Sleep once said, “Whilst we may only write twice a year, we own shares for such long periods (if the current rate of portfolio activity should persist) that we write around twenty letters during the life of the average investment–that’s a huge amount!”
“Our preference is for results to be measured over a five-year time frame, and even this may be a little short compared to the average holding period of the underlying investments which is presently around ten years (inflated by a dearth of sales). In this context the short-term results remain just that, short-term, and you should be as indifferent toward results so far as the annual sequence in which they have occurred. A stoical disposition to short-term results is both the right way to think (never mark emotions to market) but it also prepares one for results that may be reasonable, but are unlikely to be an extrapolation of the last two years.”
— Nick Sleep
By consequence, Nick Sleep built the partnership under strict operational rules in order to preserve patience such as closing the fund when ideas are scarce and avoiding features that incentive short-term asset gathering. On this, he explains that “Job one, two and three for your manager is investment performance, not asset gathering. Few practice this approach. We work under the assumption that if performance is reasonable then the level of interest in what we are doing will increase and, if appropriate, the Partnership will grow in time.”
This obviously reminds me of Jeff Bezos at Amazon, who believed that he can correctly align the interests of the customers with the interests of the shareholders by taking a long-term approach. In fact, long-term thinking shareholders can allow the company to make constant innovations, despite having failures from time to time. As such, Bezos was not timid in making investment decisions where he had an opportunity in gaining market leadership advantages even when he knew that some of his investments would not pay off.
“We like to invent and do new things, and I know for sure that long-term orientation is essential for invention because you’re going to have a lot of failures along the way.”
— Jeff Bezos
As a pioneer in the technology industry, it is in the company’s DNA to be committed to constant improvement, experimentation and innovation. This can be done by investing into new businesses. However, Bezos mentions that it is also his responsibility to make sure that any opportunities they invest in must generate the same return on capital that investors expected when they invested in Amazon. This can only be done by taking a long-term and true ownership approach.
“Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.”
— Jeff Bezos
Inactivity
“All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
— Blaise Pascal
Charlie Munger is famous for saying, “Investing is where you find a few great companies and then sit on your ass.” In my opinion, Nick Sleep’s record at Nomad is a perfect example of sit-on-your-ass investing done properly. For Sleep, a successful year was often one in which they made no new investments and sold very little. This inactivity was not laziness; it was the deliberate outcome of a highly rigorous process. They believed that once you had identified a handful of exceptional businesses trading at a reasonable price, the best course of action was usually to do nothing and let those businesses compound value over many years.
Similarly to Munger, Sleep embraced a highly concentrated portfolio. This was a logical extension of his belief that truly exceptional investment opportunities are rare and that deep conviction should be rewarded with significant allocation. If one genuinely understands a business and its long-term prospects, then owning more of it, rather than less, makes eminent sense. Sleep argued that conventional diversification often comes from a lack of conviction or a fear of being wrong, rather than an abundance of insights.
“In our opinion, just a few big things in life are knowable. And it is because just a few things are knowable that Nomad has just a few investments. The church of diversification, in whose pews the professional fund management industry sits, proposes many holdings. They do this not because managers have so many insights, but so few! Diversity, in this context, is seen as insurance against any one idea being wrong. Like Darwin, we find ourselves disagreeing with the theocracy. We would propose that if knowledge is a source of value added, and few things can be known for sure, then it logically follows that owning more stocks does not lower risk but raises it! Real diversification is offered by index funds at a fraction of the price of active management. Sam Walton did not make his money through diversifying his holdings. Nor did Gates, Carnegie, McMurtry, Rockefeller, Slim, Li Ka-shing or Buffett. Great businesses are not built that way. Indeed, the portfolios of these men were, more or less, one hundred percent in one company and they did not consider it risky!”
— Nick Sleep
However, it is important to mention that inactivity is not easy as it requires immense psychological fortitude. Each day, the decision to not sell a stock in the face of market fluctuations or tempting alternatives was an active, rational choice, even if accountants didn’t record it. Sleep highlighted that this inaction was a series of daily decisions not to sell, a discipline that few possess. In fact, Sleep mentions that “Our portfolio inaction continues and we are delighted to report that purchase and sale transactions have all but ground to a halt. Our expectation is that this is a considerable source of value added!”
Similarly, Sleep explains that “Regardless of how it may appear, Zak and I are drifting toward inactivity, at least as judged by our industry. As we have set out in earlier letters, in part this is because we realise through vicarious, and not so vicarious (!), experience that we do not know that much. We certainly do not have an opinion on many hundred shares, at least, not an opinion in which we would invest money.“
By consequence, Sleep understood that it was his responsibility for his partners at Nomad to build a “terminal” portfolio of wonderful companies that he could own for decades. As he humbly said, “Even though it may be tempting to flatter oneself, it is the businesses we invest in that do almost all the heavy lifting in the wealth creating process. If Zak and I bring something to the investment party, and I may be stretching things a little here, it is to be more rational than other investors.” To do so, Sleep studied various business models in order to identify the best ones which he wrote down on a white board in his office. Notably, we can think of “Scale Economics Shared”, “Super High Quality Thinkers” and “Deep discount to replacement cost”.
“The “super high quality thinkers” are our best guess of those firms whose shareholders could abdicate their right to trade stock (allocate capital themselves) sure in the knowledge that their capital will be well allocated for years to come within the businesses. This list is a group of wonderful, honestly run compounding machines. We call this the “terminal portfolio”.”
— Nick Sleep
As a matter of fact, Sleep is famous for coining the so-called “Scale Economics Shared” model. In short, he explains that “Scale economics shared operations are quite different. As the firm grows in size, scale savings are given back to the customer in the form of lower prices. The customer then reciprocates by purchasing more goods, which provides greater scale for the retailer who passes on the new savings as well.”
The perfect example of a company following this model is Costco. In one of his shareholders letter, Sleep writes, “Take Costco Wholesale: Costco’s advantage is its very low-cost base, but where does that come from? Not from low-cost land, or cheap wages or any one big thing but from a thousand daily decisions to save money where it need not be spent. This saving is then returned to customers in the form of lower prices, the customer reciprocates and purchases more goods and so begins a virtuous feedback loop.”
Another great example of how powerful this model of “Scale Economics Shared is Wal-Mart. As we have previously learned, Sam Walton understood the principle of frugality. In fact, he believed that to succeed in the retail industry, it was essential to offer customers the best possible value. As he once said, “If we can save a little money here and there, we can pass those savings on to our customers.”
Frugality was rooted in his own life experiences which instilled in him a deep appreciation for every dollar. This belief in frugality was not simply a cost-cutting measure; it was a core aspect of Wal-Mart’s identity. Walton demonstrated that maintaining a lean operation could lead to significant savings for both the company and its customers. He encouraged everyone in the organization to think creatively about cost reductions, whether through operational efficiencies or strategic negotiations with suppliers.
Walton’s commitment to low prices became legendary, and he frequently reminded his team that every small saving counted. He explains that “We made a rule that if we were going to spend a dollar, we better have a good reason for it. Every penny was important.” He truly believed that every penny saved was a penny that could be passed on to the customer, reinforcing the value proposition that became synonymous with the Walmart brand. He even cautioned future generations against extravagant spending, emphasizing the importance of maintaining this core value.
This philosophy created a culture of accountability and resourcefulness among employees at Wal-Mart. Walton’s emphasis on frugality was further reflected in his personal lifestyle; despite his immense wealth, he remained humble and lived a lifestyle that aligned with his principles. He often drove an old pickup truck and was known for seeking out the best deals, which resonated with the company values he instilled.
“Our customers are always looking for bargains, and if we can find a way to save money, we owe it to them to do just that.”
— Sam Walton
Through Walton’s leadership, Wal-Mart established a reputation for offering low prices without compromising quality. This approach to value not only attracted customers but also fostered loyalty. The company’s ability to deliver consistent savings set it apart from competitors, amplifying its growth and expansion across the nation and beyond.
As a matter of fact, despite Wal-Mart’s exponential growth and success, Sam Walton remained steadfast in his commitment to frugality and providing value for money for his customers. He believed in the importance of saving every dollar, not just for the company’s benefit but also for the customers. As he once said, “Sometimes I’m asked why today, when Wal-Mart has been so successful, when we’re a $50 billion-plus company, should we stay so cheap? That’s simple: because we believe in the value of the dollar.” This commitment to frugality wasn’t about being cheap; it was about respecting the value of money and recognizing that every dollar spent by the company ultimately came from the customer’s pocket. It was a principle that guided his decisions and shaped the culture of Walmart.
Human Misjudgment
“I am very interested in the subject of human misjudgment, and Lord knows I’ve created a good bit of it. I don’t think I’ve created my full statistical share, and I think that one of the reasons was I tried to do something about this terrible ignorance I left the Harvard Law School with. When I saw this patterned irrationality, which was so extreme, and I had no theory or anything to deal with it, but I could see that it was extreme, and I could see that it was patterned, I just started to create my own system of psychology, partly by casual reading, but largely from personal experience, and I used that pattern to help me get through life.”
— Charlie Munger
Nick Sleep understood that the greatest barriers to investment success were inside our own heads. In fact, by reading his shareholders letters, it is clear that he was a devoted student of Charlie Munger’s Psychology of Misjudgement. He knew that our brains are wired with biases like denial, anchoring and social proof, that systematically lead us toward making poor decisions. This is especially true when under stress. In fact, he believes that there are three major recurring psychological pitfalls that leads to people making mistakes. He says, “What follows are three mistakes that, in our opinion, contribute to more unhappy outcomes than most. These are: denial, that is the reinvention of reality in the mind because the truth is too painful to bear; anchoring, that is a static, historic vision of a problem; and drift, that is how small, incremental changes in thinking build into a big mistake.”
As such, a key part of Sleep’s process was to develop tools to combat these tendencies. One of his tool was the concept of inversion. As we have mentioned previously, Sleep believed in destination analysis. For example, he was able to avoid being concerned by short-term stock price fluctuation and short-term performance by structuring his goal into transforming 1 dollar into 16 dollars without setting himself a timeline or the need to outperform an index.
Similarly, he often used probability-based thinking, which he learned by studying how world-champion bridge player Richard Zeckhauser approached the game. This involved thinking in decision trees, attaching probabilities to various outcomes, and updating those probabilities as new information emerged, rather than latching onto a single, static narrative.
“In one of Charlie Munger’s talks he makes the statement “the right way to think is the way Zeckhauser plays bridge, it’s just that simple”. Well, to a young man in London that is a very infuriating statement as it took me about a year to track down Richard Zeckhauser. He was world bridge champion in ’66 and, amongst other things, now runs a brilliant Behavioural Finance course at the Kennedy School of Government at Harvard. So, how does he play bridge? He thinks via decision trees and attaches probabilities to the various branches. And as the facts change, change the probabilities. And when you are comfortable dealing with probabilities, and the vast expanse of opportunities such as the global stock and bond markets, you don’t have to be too conservative with your bets.”
— Nick Sleep
Another way to avoid human misjudgement was the importance of having the time and mental space to think deeply. As such, Sleep warns us against busy schedule that doesn’t allow us to think. For Nomad and Nick Sleep, a patient approach to investing wasn’t just about great return, it was also about allowing time for him and Zakaria to think! As he once said, “All this busy behaviour looks short term efficient (ten meetings a day!) but, in our opinion, the cost is that things are not being thought through; the end result of a thousand small steps in the current direction not assessed and long-term bad habits creep in.”
This reminds me of the concept of labour of thinking by Harvey Firestone, who believed that it is quite difficult in business to have some time to yourself to think as numerous things come up every day that will need your attention. However, Firestone mentions that thinking is primordial in making good decisions and to run a successful business in the long run. In his book, he provides the example of Henry Ford, the founder of Ford Motor Corporation. While Ford is known for making business decisions quickly, but in reality, “He reaches his decisions slowly and alone; he does not jump at anything, and so, when the time comes for execution, everything moves with marvelous rapidity because everything has been previously thought through and planned.“
As a matter of fact, Ford was a master of delegating executive duties to others and made sure to have enough time on his own to think, and to plan and to watch. He would make sure to never assign any executive duties to himself and to have no social obligations.
“He has had the time to do this thinking and planning because he has used his time himself instead of permitting others to use it for him. And he is certain that plans will be executed for him, because he knows how to let men go when they grow too rich and lazy to execute.”
— Harvey Firestone
This reminds me of the importance of saying no. It is often mentioned that the difference between average results and exceptional results is what you avoid. In fact, there is an exact amount of hours per week and saying yes consumes time while saying no saves time. The famous Daniel Kahneman has a rule that he never says yes on the phone and will only reply later by email after thinking about it, which he rarely does. By saying no, you are able to save more time to spend thinking or to focus on better opportunities.
“People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying ‘no’ to 1,000 things.”
— Steve Jobs
Furthermore, Firestone hated working with people that made quick decisions without having a long train of thought behind them. He once said, “I do not want to have around me the kind of man who can give me an instant decision on anything I may bring up, for, if he has not had the opportunity to give the question serious thought, then he is only guessing. And I can do my own guessing!” In fact, unless he was under an emergency, Firestone much preferred taking his time and to only make decisions after serious thinking and he was known for taking things one at a time. He once said, “One thing at a time is a pretty good rule—a rule that I never break.”
Similarly, he always made sure that his companies had enough money on the balance sheet. This would avoid being forced to make quick decisions due to financial pressure. This lesson was taught to him by his father who would often tell him “Never rush in on a deal. Let it come to you.”
“That is the course he followed, and by the time he was ready to trade, he knew the whole market. If his survey convinced him that the market was not a good one either to buy or to sell in, he simply went home again. He often held his stock a year to get better prices, and he was so good a judge of conditions that I do not recall that he ever made a mistake by holding. If the market were high and seemed to be going higher, he would seldom wait long to sell, and he never held back in the hope that the prices would soar to some impossible figure. Although he probably had never heard of Baron Rothschild’s advice never to buy at the top or sell at the bottom, he literally followed it. He never wanted to get more than his stock was worth or to buy stock for less than it was worth, which is probably the reason why everyone in the market respected him and dealt with him fairly.”
— Harvey Firestone
Beyond the Book
Read "The Full Collection of the Nomad Partnership Letters" by the Igy Foundation
Read "The Surprising Power of The Long Game" by Farnam Street
Read "The Art and Science of Doing Nothing" by Farnam Street
Read "Sit On Your Ass" by Investment Masters Class
Read "Learning from Nick Sleep" by Investment Masters Class
Read "The Psychology of Human Misjudgment, by Charlie Munger" by Farnam Street
Read "The Focus to Say No" by Farnam Street
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