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#59 - Time and Patience - Part 2
Nomad Investment Partnership: Process & Philosophy
“The strongest of all warriors are these two - time and patience.” - Leo Tolstoy, War and Peace
Patience - The Joy of Doing Nothing
French philosopher Blaise Pascal observed that most of humanity's problems stem from man’s inability to sit quietly in a room alone. Reading Nomad’s letters, you get the sense that Nick and Zak would be perfectly comfortable, alone and quiet, so long as a stack of annual reports accompanied them.
Patience was a defining characteristic of Nomad's style. Always on the lookout for a less crowded playing field, Nick and Zak were patient because other investors weren’t. According to their 2006 annual letter:
Good investing is a minority sport, which means that in order to earn returns better than everyone else we need to be doing things different to the crowd. And one of the things the crowd is not, is patient.
Patience came in two forms: long holding periods and long stretches of inactivity.
Nomad’s desired holding period was five years versus an industry average of less than one year. The duo believed that patience is rewarded and that equity returns increase over time, a concept they called the equity yield curve. Short holding periods meant intense competition at the short end of the curve. Going further out meant a less crowded field. Once again, Nomad sought advantage by doing things that others struggled to do.
Nomad believed that if their analysis was correct, long-term risk was lower than short-term risk, justifying lengthy holding periods. Nomad’s research centered on understanding a company’s competitive advantage. The greater the advantage, the higher probability of long-term success. While guessing where a stock would trade in a year was a crapshoot, over time, it should reflect business value. Returning to the 2006 annual letter:
In our opinion business outcomes can be more predictable several years out than they are in the near term. For example we have no idea where the market will end this year but, given corporate strategies, capital allocation and starting valuations, I think we have some idea of how our companies will evolve over the next few years. In other words (at this point economics students may wish to cover their ears) the return from investing in shares can be both increased and de-risked by time.
Contrary to Pascal’s observation, Nomad preferred inactivity. Indeed, they saw it as a source of value-add. This meant little trading and portfolio stasis. Nick and Zak approached investing like a selective lion, happy to lay in wait for the fattest gazelle. Nomad notes in its 2013 mid-year letter 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!
Opportunity cost was another justification for their patience. The duo believed that there were good odds that high-quality businesses would be priced at fifty-cents on the dollar in the stock market at some point in the coming decade. Time created opportunities, so they waited and kept some dry powder. In the meantime, they read thousands of annual reports, interviewed hundreds of managers, and harvested honey on their office rooftop (see 2011 mid-year letter for details).
When a good opportunity arrived, Nomad swung hard. If the partnership were operating in the spring of 2020, Nick and Zak likely would have had a field day buying stocks during the Covid-19 inspired market panic.
Not all fund managers have the luxury of patience. Nick and Zak were selective in the investors they let into the partnership and screened for patience. Nomad’s 2013 annual letter explicitly states that the partnership was not suitable for investors with time horizons less than five years. Additionally, many letters conclude by saying that the patience of Nomad’s investors is one of its greatest competitive advantages. This alignment contributed to its success.
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Concentration - Stocks Aren’t Like Children
High concentration was another attribute of Nomad’s style. The partnership’s top ten holdings typically accounted for sixty to eighty percent of its portfolio. Similarly, themes like e-commerce or scale economics shared could dominate the portfolio. At any given time, Nomad’s portfolio would have approximately twenty to thirty holdings. In contrast, a mutual fund could own hundreds of stocks.
Scarcity of ideas and opportunities drove concentration. Nick and Zak believed that few things were knowable, good ideas were rare, and high conviction ideas were the rarest of all. When Nomad developed confidence in a business, it bought aggressively when opportunity arose. Higher confidence ideas were given larger weightings.
High concentration broke from investment orthodoxy. In contrast to the don’t-put-all-your-eggs-in-one-basket advice, Nomad believed that concentration could be safer than diversification, writing in their 2009 mid-year letter that:
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!
In addition to reducing risk, concentration sharpened focus. When a big chunk of your net worth is tied up in a few companies - all of Nick and Zak’s investments were in Nomad - you’re going to spend a lot of time thinking about them. Nomad writes in its 2004 mid-year letter that:
Parents will understand when I say that when children are born, they seem to bring their own love with them. However, stocks are not like children. The more stocks you own the less you care about each one individually. Attention paid to corporate governance, capital allocation, incentive compensation, accounting, and strategy has to be diluted as the number of stocks rises.
Concentration also provided heft in policing corporate governance. Nomad wanted to own enough of a company to influence outcomes. If needed, Nick and Zak would call management and advocate for change. Activism was a tool in Nomad’s tool kit, but not its desired path. The partnership's aim was to invest alongside competent managers, letting them do the heavy lifting while patiently compounding returns.
Playing on Less Crowded Fields
Like eating brussels sprouts, Nomad’s investment process was simple, but not easy.
Nomad looked for quality businesses, run by talented capital allocators, trading at fifty cents on the dollar of assessed value. These opportunities were rare, so Nick and Zak searched across industries and geographies to find them. They were also patient, willing to wait years for the right buying opportunity while ruminating on business to pass the time. With beehives to tend to, there was no need to trade. When opportunity arose, they acted aggressively. Once a good business was purchased, Nomad nurtured it for years.
Many of the hallmarks of Nomad’s investing philosophy - concentration, patience, range - were the opposite of investment industry common practice. Finding uncrowded playing fields was part of their genius.
Here’s the first part of this series on Nomad’s investing process and philosophy.
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