“The strongest of all warriors are these two - time and patience.” - Leo Tolstoy, War and Peace
Nicholas Sleep (Nick) and Qais Zakaria (Zak) don’t have the same name recognition as investors like Bill Miller, Charlie Munger, or Warren Buffet. That’s a shame. The duo ran Nomad Investment Partnership, generating annualized returns of over 20% between September 2001 and December 2013. Over the same period, the MSCI World Index returned 6.5% annually.
Nomad’s biannual investment letters were released in December. Over the next few weeks I’ll be highlighting key themes from the letters, starting with Nomad’s investment process and philosophy.
Flexibility: Scoring a Date on Saturday Night
Nick and Zak were generalists with a wide mandate and a long time horizon. Nomad’s portfolio reflected this broad, flexible approach. Over the years, investments included British bus companies (Stagecoach), Filipino cement makers (Union Cement), Scandinavian newspapers (Schibsted), and South African casinos (Kersaf) as well as American stalwarts like Amazon and Costco.
Pragmatism drove Nomad’s approach. The partnership wrote in its 2006 annual letter:
Woody Allen once quipped that being bisexual doubled the chances of a date on Saturday night, curiously that principle also applies to investing.
Good opportunities were rare. Wide range helped to find them. The partnership’s 2001 annual letter noted:
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. Finding all three is rare, and that is why we think Nomad has a material advantage in being a global fund.
The duo worked across sectors, geographies, and to a lesser extent asset classes. Their wide mandate provided perspective. It helps to be outside the bubble to see the bubble.
Nomad’s range and flexibility is a stark contrast to many investment managers who are constrained by sector, style, or geography. Not doing what everyone else is doing was Nomad’s MO. Nick and Zak saw this as the best way to achieve above-average returns. A less crowded playing field meant a better shot at winning. Their philosophy was similar to Amazon’s. In its 2011 annual letter, Nomad quotes Amazon’s founder and CEO Jeff Bezos:
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 endeavors that you could never otherwise pursue.
Like Bezos, Nomad looked for competitive advantage by doing things that others couldn’t do or wouldn’t do. Not surprisingly, Amazon was often a regular component of Nomad’s portfolio and quotes from Bezos are peppered throughout the letters.
Data versus Darwin
In their 2012 mid-year letter, Nomad highlights that Charles Darwin, one of the greatest naturalists that ever lived, spent four years traveling and the rest of his time thinking. It’s a self serving story:
We [Nomad] try to take Charles Darwin’s approach: deemphasize the data collection and think. When we study truly great businesses we find that very often it has been simple human attributes that have lead to their success: you feel differently drinking a Coke than a no brand cola or, you may feel differently towards a business that consistently undercuts the competition in price…The reason you have these feelings, and the stimuli that produce them, have hardly changed in millennia.
Nomad’s research focused on finding quality businesses run by able capital allocators. To accomplish this, they had to understand a company’s DNA, distilling a business down to the engine of its success. Like Darwin, this required lots of thinking.
The type of information that Nick and Zak valued had a long shelf life. The opposite of thinking was endless data collection. As they write in their 2002 annual letter:
Investment time frames are very compressed, and few investors it seems bother to assess the real value of a business but instead respond to the latest data point to determine share price direction.
Long-term thinking permeates every piece of Nomad’s research process. Instead of nailing next quarter’s results, Nick and Zak aimed to assess where a business would be in five or ten years. This is another example of the partnership playing on a less crowded field.
Destination & Probability: Real Risks Aren’t in Newspapers
To Nomad, the destination was paramount. The path there didn’t matter.
Nick and Zak viewed the world as a probability distribution. Understanding a company’s DNA helped handicap the probability of it reaching a good destination. Survival being a precondition of success, a component of Nomad’s research process was gaining confidence in the long-term viability of a business. Doing so narrowed the distribution of outcomes, tilting the odds in Nomad’s favor.
Risk wasn’t something that showed up in newspapers. Instead of coups or currency devaluations, Nick and Zak worried about a business losing its competitive advantage. According to Nomad’s 2011 annual letter:
The long-term risks our companies face are not those that dominate the newspapers and headlines today (credit crises, housing crises, budget crises, Euro crises and so on) but those events that could prevent them from reaching their potential.
One way of reducing risk was finding positive feedback loops. An example of this would be scaled economics shared, the operating model employed by Amazon and Costco where savings from scale are shared with customers via price reductions. To Nomad, going down one favorable branch (sharing economies of scale with customers), could increase the likelihood for future favorable outcomes (customers buying more from you).
The 2010 mid-year letter uses Air Asia, the world’s lowest cost airline, as an example of this thought process:
Branch 1: Air Asia is the lowest cost airline in the world.
Branch 2: Employees take pride in the firm and are able to suggest and implement cost saving measures.
Branch 3: Savings are shared with customers in the form of lower prices.
Branch 4: Customers reciprocate by flying more, increasing revenue.
Branch 5: Further scale advantages lead to more saving per seat flown.
Branch 6: Further customer reciprocation.
The company’s odds of success improve as the company travels from branch to branch. This translates into a narrower probability distribution and less risk, allowing Nomad to gain confidence in the outlook.
To be continued. Next week we’ll dig into two more hallmarks of Nomad’s process: concentration and patience. To receive that in your inbox, you can subscribe below👇
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