September 16, 2024 • 55min
#365 Nick Sleep's Letters: The Full Collection of the Nomad Investment Partnership Letters to Partners
Founders
Key Takeaways
- The best investors are not investors at all - they're entrepreneurs who never sold. This insight from Nick Sleep highlights the importance of long-term thinking and conviction.
- Understanding the "engine of success" of a business is crucial for long-term investing. This means looking beyond surface-level metrics to grasp the fundamental drivers of a company's competitive advantage.
- Scale economies shared is a powerful business model where companies pass on efficiency gains to customers, driving growth and loyalty. Costco and Amazon are prime examples.
- Concentration in a small number of high-conviction ideas can lead to superior returns, contrary to conventional wisdom about diversification. Sleep and his partner Zak focused heavily on just a few companies like Costco and Amazon.
- Long-term thinking and patience are key competitive advantages in investing. Most market participants focus on short-term results, creating opportunities for those willing to look years ahead.
- Great businesses are often built on simple, timeless principles that tap into fundamental human needs and behaviors. The business models that worked for Ford and Walmart still work for companies like Amazon today.
- Intellectual honesty and rational capital allocation are hallmarks of the best business leaders and investors. Sleep sought out "honestly run compounding machines" led by disciplined capital allocators.
Introduction
This episode explores the investment philosophy and insights of Nick Sleep, co-founder of the highly successful Nomad Investment Partnership. From 2001 to 2014, Sleep and his partner Zak Zakaria generated exceptional returns by developing a deep understanding of "honestly run compounding machines" like Costco and Amazon years before most investors.
The episode draws on Sleep's partnership letters, which offer a masterclass in understanding the underlying reality of great businesses. Sleep's ability to identify and stick with transformative companies over the long-term led to returns of over $2 billion for Nomad's investors.
Topics Discussed
The Importance of Understanding a Business's "Engine of Success" (00:00)
- Sleep emphasizes looking beyond surface-level metrics to grasp the fundamental drivers of a company's competitive advantage
- This deep understanding allows investors to hold onto great companies for the long-term, avoiding the common mistake of selling too early
- "One must see an investment not as a static balance sheet, but as an evolving compounding machine." - Nick Sleep
Scale Economies Shared as a Powerful Business Model (24:02)
- Companies like Costco and Amazon pass on efficiency gains to customers, driving growth and loyalty
- This model creates a virtuous cycle of lower prices, increased volume, and further efficiency gains
- Sleep identified this as a key driver of long-term value creation
- Example: Costco's commitment to low markups and passing savings to customers, even when they could take higher profits
The Value of Concentration in Investing (44:07)
- Sleep argues that owning fewer stocks in high-conviction ideas can lead to superior returns
- This goes against conventional wisdom about diversification
- Nomad focused heavily on just a few companies like Costco and Amazon
- "Sam Walton did not make his money through diversifying his holdings, nor did Bill Gates, Andrew Carnegie or John D. Rockefeller." - Nick Sleep
Long-Term Thinking as a Competitive Advantage (36:06)
- Most market participants focus on short-term results, creating opportunities for patient investors
- Sleep quotes Jeff Bezos on the inability to quantify long-term benefits of consistently lowering prices
- Emphasizes the importance of judgment-based decisions that may be controversial in the short-term
Identifying "Honestly Run Compounding Machines" (18:23)
- Sleep sought businesses with disciplined, customer-centric management
- Looked for companies reinvesting for long-term competitive advantage
- Valued intellectual honesty and rational capital allocation
- Examples: Costco's Jim Sinegal, Amazon's Jeff Bezos
The Power of Simple, Timeless Business Principles (50:08)
- Great businesses often built on fundamental human needs and behaviors
- Sleep notes similarities between Ford, Walmart, Southwest Airlines, and Amazon
- Emphasizes that these models will continue to build empires in the future
Lessons from Costco's Business Model (10:01)
- Commitment to everyday low prices (EDLP) as a core strategy
- Passing scale benefits to customers to drive growth and loyalty
- Disciplined cost control and supplier negotiations
- "The contract with the customer, which is very low prices, must not be broken." - Jim Sinegal, Costco founder
Amazon's Potential Recognized Early (37:04)
- Sleep identified Amazon as following a similar model to Costco, but with even greater potential due to the internet
- Recognized the power of Amazon's customer-centric approach and willingness to defer profits for long-term growth
- Made a significant, concentrated investment in Amazon that drove much of Nomad's returns
The Difficulty of Holding Great Companies Long-Term (38:06)
- Sleep discusses the challenge of not selling too early, even after significant gains
- Cites examples of fund managers who sold IBM and Walmart, missing out on enormous future gains
- Emphasizes the need to truly understand a business to have the conviction to hold through volatility
Insights on Capital Allocation and Business Strategy (12:01)
- Discusses Charlie Munger's "cancer surgery" approach to simplifying conglomerate businesses
- Highlights the importance of focusing on a company's core competitive advantages
- Praises leaders who are willing to shrink or say no to growth when returns would be poor
The Psychology of Investing and Decision Making (46:07)
- References Charlie Munger's talk on the psychology of human misjudgment as crucial for investors
- Discusses the challenge of going against conventional wisdom and being "willing to be misunderstood"
- Emphasizes the importance of having an internal compass focused on long-term value creation
Conclusion
Nick Sleep's investment approach, as revealed through his partnership letters, offers valuable lessons for both investors and business leaders. His focus on understanding the fundamental drivers of great businesses, patience in holding onto compounding machines, and willingness to concentrate on high-conviction ideas led to exceptional returns.
The insights on scale economies shared, the power of customer-centric business models, and the importance of long-term thinking remain highly relevant today. Sleep's ability to identify and stick with transformative companies like Costco and Amazon demonstrates the value of deep research and conviction in one's investment thesis.
Ultimately, Sleep's philosophy aligns closely with that of the great business builders he studied - emphasizing the creation of long-term value through serving customers, rational capital allocation, and a willingness to defer short-term profits for sustainable competitive advantages. These timeless principles continue to drive the success of great companies and investors alike.