Founders PodcastNick Sleep's Letters: The Full Collection of the Nomad Investment Partnership Letters
CHAPTERS
- 0:00 – 4:09
Nick Sleep's Farewell Letter to Buffett and the Case for Patience
David Senra opens by reading Nick Sleep's closing letter to Warren Buffett and Buffett's reply. He then introduces the homemade book of the Nomad letters and the patience Nick asked of investors. He frames the episode around Nick's willingness to trust his own judgment and build the partnership around an earned secret.
- •Nick's letter thanks Buffett and says Nomad made around $2 billion for mostly charities and educational endowments
- •Buffett replies that Nick and Zach made the right choice and that life is just beginning
- •Nick says the patience of the investor base is a key competitive advantage, which is why Nomad is a partnership and not a fund
- •Senra read all 110,000 words across 219 pages of the letters from 2001 to 2014
- •Nick and Zach did not copy their peers and built their business around their own thinking
- 4:09 – 6:33
The Cancer Surgery Approach and Cutting the Crap
Senra covers Nick's description of Munger's cancer surgery approach, with Stagecoach and Coca-Cola as examples. He links it to Steve Jobs's advice to Nike and says the letters show Nick's thinking evolving over time.
- •A jewel at the heart of a company gets diluted by less successful projects
- •Coca-Cola's shares rose over tenfold after poor businesses like a shrimp farm, winery and film studio were cut away
- •Steve Jobs told Nike's Mark Parker to get rid of the crappy stuff and focus on the good stuff
- •Reading the letters chronologically shows Nick slowly figuring out his main idea
- 6:33 – 12:37
Costco, Everyday Low Pricing and the Sinegal Jeans Story
In the 2002 letter Nick studies Costco's Everyday Low Pricing and first touches on scale economies shared. Senra recounts Jim Sinegal refusing to raise the markup on designer jeans and compares it to Walt Disney insisting on leather straps for the Disneyland stagecoaches.
- •Costco commits to everyday low prices every day, a point tied to Bob Kierlin and Fastenal
- •Sinegal insisted on the standard markup on cheap designer jeans because breaking the customer contract once means doing it again
- •Great founders do what is better for the customer, which pays off for the company over the long term
- •Walt Disney gave a similar lecture to John Hench over leather straps on the stagecoaches
- •Sol Price's rule was to focus on the lowest possible price to the customer always
- 12:37 – 14:09
Focus: Job One, Two and Three
Senra shows Nick applying Costco's lessons to Nomad's own approach, with investment performance as job one, two and three. He argues that the single best idea should dominate everything and quotes a Palantir co-founder on not dividing attention.
- •Nick says investment performance is job one, two and three for the manager
- •The principle mirrors Costco's focus on price, with growth following from it
- •If it's the single best thought you have, it needs to dominate everything
- •A Palantir co-founder's post on what he learned from Peter Thiel argues that focus yields increasing returns and that opportunity costs of new projects are high
- 14:09 – 20:40
Concentration and the Super High Quality Thinkers List
In the 2004 letters Nick weighs portfolio concentration through the Kelly Criterion, noting Nomad's concentration has been too low. He then describes his list of super high quality thinkers, honestly run compounding machines that make up a terminal portfolio.
- •In 2004 Nomad's holdings ranged from 7% of the portfolio down to 0.3%
- •The Kelly Criterion implies investing everything in an idea one is certain about
- •The list of super high quality thinkers runs to 15 businesses and requires intellectual honesty and economic rationality
- •Companies like National Indemnity and Stagecoach show good capital allocation can mean shrinking or not growing
- •The question is why the list differs from the current Nomad portfolio, and the answer is to do the work now and be patient
- 20:40 – 22:42
Why Investors Sell Winners Too Early
Senra covers Nick's view that investing is a minority sport and that not seeing success is a perennial mistake. The chapter turns on the Baltimore fund that sold IBM and then Walmart, and on understanding the underlying engine of a business.
- •Nick says the best talk on investing was Munger's Psychology of Human Misjudgment
- •A Baltimore fund sold IBM in the 1950s and an equally big Walmart stake in the 1970s
- •One must see an investment as an evolving compounding machine, not a static balance sheet
- •The way to avoid the mistake is to study the underlying engine of success
- 22:42 – 25:20
Scale Efficiencies Shared: The Costco Engine
Nick breaks down Costco's engine: very low operating costs, competitive wholesale prices, and high revenue passed back to customers. He calls scale efficiencies shared one of the few models he can understand and says Amazon may be following it.
- •Costs are measured in basis points and SKUs are fixed at about 4,000
- •Vendors who do not quote their lowest price are permanently discontinued
- •Costco shares scale savings with customers, who reciprocate
- •Most companies pursue scale efficiencies but few share them
- •Nick writes in 2004 that Amazon may be following this path too
- 25:20 – 28:58
Mispricing, eBay and the Missed Answer of Amazon
Nick asks why Costco is mispriced and what the most valuable possible business would look like, and he wrongly points to eBay. Senra notes the answer was Amazon on the previous page, and adds context on Amazon's market cap against eBay's in 2004 and Nick's summary of Costco.
- •Low margins were the criticism of Costco, but Nick says deferring profits extends the franchise's life
- •The most valuable business would have a huge market, high barriers to entry and low capital employed
- •Nick suggests eBay, but Senra says Amazon was the answer he hadn't yet seen
- •In 2004 Amazon's market cap was $18 billion against eBay's $77 billion
- •Nick calls Costco an intellectually honest perpetual motion machine trading below value
- 28:58 – 30:56
Entrepreneurs Who Never Sold
Senra highlights Nick's observation that the best investors are entrepreneurs who never sold. Nick says his biggest mistake was selling Apple, and Senra connects the idea to a founder's love for what he is building.
- •The best investors aren't investors at all, they're entrepreneurs who never sold
- •Selling a stock that goes on to rise tenfold costs more than owning a bankruptcy, as selling Apple cost Nomad
- •Nick doesn't mock the Baltimore firm; it's arrogant to think you can't repeat the mistake
- •Sam Walton focused on building something great for others over a long time, not maximizing his stock return
- 30:56 – 35:59
Bezos's Long-Term Judgment and Price Give-Backs
In the 2006 letters Nick critiques economics for treating cause and effect as simultaneous, then quotes Bezos on lowering prices against the math. Nick responds 'Amen' and says good investing and good business decisions are synonymous.
- •Nick says economics research looks at short periods as if cause and effect sit on top of each other
- •Bezos writes that lowering prices goes against the math but creates a virtuous cycle of more free cash flow over time
- •Free Super Saver Shipping and Prime are expensive short term and valuable long term
- •Nick says traders have many small ideas and Nomad has one big idea
- •Judgment-based decisions are controversial but drive innovation and long-term value
- 35:59 – 39:01
Amazon as Mouse to Elephant and Inverting Portfolio Construction
The 2007 letters explain why Amazon could grow from mouse to elephant, citing self-funded growth, rising barriers to entry, the internet's power law and a customer-centric founder. Nick then proposes inverting portfolio construction by starting at 100% and working down, as founders do.
- •A business should self-fund growth and have barriers to entry that rise with size
- •E-commerce was only 3.1% of US retail in 2006
- •After Amazon doubled, Nick asks whether selling would be the equivalent of selling Walmart in 1980
- •Inverting means starting at 100% weighting, as founders such as Sam Walton did
- •The Exxon oil story shows how easy it is to miss what's in front of you
- 39:01 – 44:00
Amazon in the 2008 Financial Crisis and the Case Against Diversification
During the 2008 crisis Nick calls it the best possible time to be an investor and shows Amazon's strength against high street retailers. He argues that few things are knowable, so owning more stocks raises risk, citing Walton, Gates, Carnegie and Rockefeller.
- •Amazon's busiest pre-Christmas order volumes rose 16% while retail overall fell 10%
- •High street rivals couldn't match Amazon's prices even at net income breakeven
- •Senra compares this to Sam Walton choosing not to participate in a recession
- •Nick says few things are knowable, so Nomad has few investments and more stocks raise risk
- •The IBM and Walmart sale story is retold to show the cost of missing the central engine of success
- 44:00 – 46:36
Effort, Opportunity Cost and Doing Nothing as a Decision
Nick and Zach describe reading 1,000 annual reports and meeting 300 companies, and preferring their existing holdings. Senra ties this to Seth Klarman's point that not acting is a decision and to Li Lu ignoring what other investors do.
- •Nomad's choices were to add to holdings, buy new businesses, growth businesses or cigar butts
- •They overwhelmingly preferred existing businesses and asked what if Amazon is the next Walmart
- •Klarman said each day Buffett chose not to act was a decision too
- •Li Lu spends his time studying great companies, not worrying about other investors
- 46:36 – 50:56
Sol Price's Memo and Timeless Business Principles
Senra closes with a founder who says you must be willing to be misunderstood, and with the 1967 Sol Price memo Sinegal showed Nick and Zach. He ends on the point that the human-centered model behind great businesses is timeless, then points listeners to the letters and William Green's book.
- •A founder (Senra guesses Bezos) says you have to be willing to be misunderstood and start with the customer and work backwards
- •The 1967 Sol Price memo says margin must never come at the expense of the philosophy
- •Nick calls it the best summary of the case for scale economics shared
- •Cultures that care about the little things are very hard to create unless put in place at genesis
- •The model that built Ford, Walton, Kelleher and Bezos will build future empires, and the letters are free on Nick's charity website
