Notes: Nomad Fund’s letter to Partners 2001-2014

Why is it important to learn from the Nomad Investment Partnership and Nick Sleep you may ask? The fund generated an absolute return of 921.1% over a 13 year period compared to the MSCI world index return of 116.9%. An annualised return of 20.8% over 6.5% of the MSCI. It’s mind-boggling and unheard of.

$1 invested with nomad would have become $10.21 at the end of the 13 years while the same in MSCI would have been $2.17. Nick closed the fund in 2013 to move on to more “meaningful” pursuits in his life. The fund’s letter to its partners has infinite wisdom on how to keep things simple. I have tried the meaningless job of summarising some key learnings.

Published in IGY by Nick Sleep and Qais Zakaria

💡 Investment Advice I: Identify good business

When we evaluate potential investments, we are looking for businesses trading at around half of their real business value, companies run by owner-oriented management and employing capital allocation strategies consistent with long term shareholder wealth creation.

Quotes a “Little wonderful advice” from Fred Schwed’s book “Where are the customer’s yachts?” [And Nick also recommends reading the book]

“When there is a stock-market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them. Take the proceeds and buy conservative bonds. No doubt the stocks you sold will go higher. Pay no attention to this – just wait for the depression which will come sooner or later. When this depression – or panic – becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back the stocks. No doubt the stocks will go lower still. Again, pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you’ll have the pleasure of dying rich”

  • The operative phrase here is “pay no attention”. This is easier said than done. Many investors are professionally required to “pay attention” to the latest trend for fear of missing out

💡 Investment Advice II: Cheap Mistakes

Make mistakes that are cheap, that don’t cost you a lot, but which have enough upside built into them. Almost all the bad decisions were supported by the prices at which they were bought. Buying businesses when they are 50 cents to a dollar limits the downside.

  1. Spend time being patient about the right price
  2. Study the long term sustainability of the business model and the quality of management.

💡 Investment Advice III: Concentration

A concentrated portfolio is much better than an overly diversified one. As you buy more # of stocks, the amount of attention and love for each one of them drastically goes down. Also, there are only a few ideas where you can gain a lot of conviction. E.g. If you were to start a business, listed your best ideas in descending order, which idea will you spend more time and energy on? The 1st or the 30th? Obviously to go anywhere beyond 3-4 would be insane. And so the concentration of the portfolio in the top 5 convictions much more sense with a small tail rather than having an equiweighted diverse portfolio

  • Stock markets are auction markets and so are very volatile. Businesses and their values, however, are much more stable and continuous. What this leads to is good values being meaningfully mispriced

On Growth vs Value Investing

Investing is making a probabilistic guess of future free cash flows a business generates between now and the day it or the world perishes, which then needs to be discounted at a reasonable rate to get to current fair valuations. Businesses which have higher terminal value and after discounting appear to be substantially mispriced will give you “GROWTH” stock returns. Every time, investing in value stocks will work. Some of which will be too undervalued to give growth-esque returns.

Lollapalooza Moat

“There is not a prior reason why a comparative advantage should be one big thing, any more than many smaller things. Indeed an interlocking, self-reinforcing network of small actions may be more successful than one big thing… Firms that have a process to do many things a little better than their rivals may be less risky than firms that do one thing right [e.g. develop/own a patent] because their future success is more predictable. They are simply harder to beat. And if they’re harder to beat then they may be very valuable businesses indeed.”

💡 Investment Advice IV: Inaction

Do Nothing. A lot of times, and this is a result of our evolution, doing nothing often feels like a loss. We are always itching to take action on our investments. That’s not always helpful or useful. Businesses don’t change overnight, but markets do. Hence it’s important to look at the terminal value and your rationals for going in, in the first place rather than continuously continuing to take action. Money not lost, is also money made for better investments. Portfolio managers are specially paid to make changes, and so a lot of them (respectfully) don’t beat the index. Add new companies to your existing portfolio only if they are superior to something you own.

💡 Investment Advice V: Information is Not Important

This one really hit home. In the kind of surroundings we live in, there is much information to chew. We are eating so much information for breakfast, lunch and dinner. What this takes away from is time spent in understanding the business. Reading about each and every part of the well-oiled machine that will churn multitudes of profits in the coming years is much more critical than understanding macros of the economy, short-lived trends, VC and Fund Managers crystal ball gazing insights.

Information like food has an expiration date. Businesses and their processes have a much longer shelf life.

“The investment industry, as well as many economic commentators, spend so much time shouting. So much commentary espouses certainty on a multitude of issues, and so little of what is said is, at least in our opinion, knowable. The absolute certainty in the voice of the proponent so often seeks to mask the weakness of the argument. If I spot this, I metaphorically tune out. 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.”

💡 Investment Advice VI: Aggregation of marginal gains, Mental Model

The premise is simple. If a business has a knack for trying to do things just a little better and consistently than the rest in various different things, not exceptionally better or the best, but just a little better, the chances of it being successful in the future are much more than a business who just does one thing nicely. The latter is prone to substitution and is generally a more risky bet.

For example, a drug company may specialise in making a complex chemical formula. Not marketing, not Supply chain management. Just R&D. Someday someone can create a better formula which is needed at the time and displace it completely.

I believe this is the reason why a company like TESLA doesn’t receive a generic car company multiple. It is a cloud AI services company, an original equipment manufacturer, an insurer, a supply chain specialist, a marketing agency and a research lab for futuristic AI, a driver-less ride hailing company all in one. It is 6-7 or more companies under one umbrella with one customer facing product and thus gives a feel of an automotive company.

There is so much wisdom in the letters that it would be a disservice to call this a good summary of everything there. Will probably write about the case studies in a separate blog. I would like to include a section from the letters that spelt out housekeeping rules for its partners. The rules are truly drool worthy.

Housekeeping Section from the letters

“One of Nomad’s key competitive advantages will be the aggregate patience of its Partners. We are genuinely investing for the long-term, in undervalued firms run by management teams who may be making decisions, the fruits of which may not be apparent for several years to come. In the near term our results are as likely to be bad as good, but we are confident that in the long run they will prove satisfactory. If Nomad is to have a sustainable comparative advantage this will come from the capital allocation skills of your manager and the patience of our Partners. In the latter we have started well, with no Partner turnover since we began and almost no enquires into performance despite the swings in general market prices. This is very unusual and a huge credit to our Partners and implies a similar long-term outlook. 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 (and certainly not a hedge fund!). The relationship we seek is quite different.”

“Nick Sleep didn’t rely on complex models, non-public information or business relationships to deliver his returns. Like Munger, he reached into other disciplines for mental models he could apply to his thinking. Asking questions, thinking things through, turning ideas upside down and challenging conventional wisdom led to insights other investors couldn’t see. Sticking within his core competency, keeping it simple, and recognising the basic nature of the businesses he owned accorded him the patience to remain invested in compounding machines. Despite Nomad’s closure, Sleep remains invested in Amazon and Costco to this day.” – From Masterinvest

Link to the letters can be found here

Cover Image courtesy, Pintrest


SST View All →

A graduate from BITS Pilani, class of 2019, I am currently working as a Product Manager at Flipkart. I like to write about things that get stuck in my head. By writing I make sure everyone knows what absurd thoughts I have :P Thanks for visiting.

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