Nick & Zak’s Excellent Adventure: How Nick Sleep & Qais Zakaria Built Their Partnership

1. 0:00 – 4:24

   Nick Sleep's Unusual Path and the Nomad Experiment

   1. DSDavid Senra0:00

      Nick Sleep wanted to stay in Edinburgh, so he looked around to see what Edinburgh was good at, and he learned that Edinburgh had a reputation for fund management. So he read an obscure book titled Investment Trust Explained to help him figure out what the investing business was all about. He came away intrigued. He said, "I like the sense of it being an intellectual investigation." So Sleep landed a job as a trainee investment analyst at a small Scottish fund company. He was not abundantly qualified for the job. At college, he had studied geology and then switched to geography. His employment history offered no evidence that he was gonna be good for a career in finance. He had worked in a department store, at an IT firm, and had been a sponsored windsurfer. Still, he had stumbled into a field that perfectly suited his idiosyncratic mind. Like all of the best investors, Sleep views the world from an unusual angle. Sleep commented on this, saying all the way back in high school, he says, "I got comfortable with being different from everyone else early on. I was happy being outside the group." When Sleep was about 20, he read the book Zen and the Art of Motorcycle Maintenance: An Inquiry into Values. It was a strange but brilliant meditation on what it means to lead a life dedicated to quality. The book exalts people who care so intensely about the quality of their actions and decisions that even the most mundane work becomes a spiritual exercise. For the author, motorcycle maintenance provides an ideal metaphor for how to live and work in a transcendent way. The wheel cycle you're working on is a cycle called yourself. The book's approach to life resonated deeply with Sleep and shaped the type of investor he would become. This is how Nick Sleep described the book's enduring impact on him: "You really wanna do everything with quality, as that is where the satisfaction and peace is." But what does this mean when it comes to investing? In 2001, Sleep and his friend Qais Zakaria created a fund called the Nomad Investment Partnership, which they viewed as a laboratory test for how to invest, think, and behave in the most high-quality way. Sleep wrote eloquent and amusing letters to shareholders, which have been sent to me many times over the years, and people have asked, requested that I do an episode on them, which will be the next episode after this one. And there was a stunning outcome of this high-minded experiment. So over about 14 years, they wind up 10X-ing the money. In 2014, Sleep and Zak returned their shareholder money and retired as fund managers at the ripe old age of 45. Since then, they've managed their own money with equally striking success, approximately tripling their wealth in the first five years of retirement. Sleep, with characteristic indifference to conventional opinion, invested almost all of his fortune in just three stocks. At times, he and Zak had as much as 70% of their money in a single stock. And then it lists a few of the traits that other investors admire about them: uh, their complete independence, the clarity of their thinking, the very deep research, and the very high concentration that they have. And then, of course, their mystique. Nick and Zak have always flown under the radar. They had minimal interest in marketing their fund and even less in self-promotion. As a result, their story has never been told. But over the last few years, I've interviewed Nick Sleep on multiple occasions. I spent an afternoon with him and Zak at their office in London. It was there that they reflected on what they called their adventures in capitalism. That was an excerpt of the book I'm gonna talk to you about today, which is Richer, Wiser, Happier: How the World's Greatest Investors Win in Markets and Life, and it is written by William Green. And actually, I'm gonna focus on a single chapter, chapter six, in this excellent book. And as a matter of fact, well, the, the chapter is called Nick & Zak’s Excellent Adventure: A Radically Unconventional Investment Partnership Reveals That the Richest Rewards Go to Those Who Resist the Lure of Instant Gratification. In fact, at the very end of Nick Sleep's shareholder letters, or I guess partnership letters is more accurate, he recommends reading this book. He says, "To those who wish to read more, you can do so in William Green's book, Richer, Wiser, Happier. William has written the kind of book that we would've loved to written. We are sure you will enjoy the read." And I definitely agree. I think William Green does this fantastic job of giving us an overview of exactly how they built this investment partnership, and I think covering this first and then next week you and I discussing the ideas that are actually Nick Sleep's partnership letters is the perfect sequence. So let's go ahead and jump into a little background on both Nick and

2. 4:24 – 6:41

   Zak's Background and the Path to Marathon

   1. DSDavid Senra4:24

      Zak. So Zak was born in Iraq in 1969. He says he was born into a relatively privileged family. His father worked at the Iraqi Central Bank, and his mother lectured at the University of Baghdad. Three years later, Zak describes them having to flee the country by saying, "We were purged". They had to flee Iraq, leave everything behind, and take refuge in the United Kingdom. His dad builds the family back up by starting a successful business that exports machinery back to, into Iraq. By the time Zak is leaving home to go to school, he goes to Ca- he's gonna go to Cambridge to study mathematics, his dad goes bankrupt, and he goes bankrupt not through his main business. He actually goes bankrupt because he was speculating in the stock market with borrowed money. This is the way Zak describes it, I think is really important: "My father had made his money on things he understood and lost them on things he didn't understand". And so on every single episode before I sit down to talk to you, I go over my notes and highlights multiple, multiple, multiple times. And the last time I went over them, because now I'm rereading notes and highlights, I know how the story ends, and this part becomes even more important because he says, you know, "My father l- made his money on things he understood and lost it on things he didn't understand". Nick and Zak, a cornerstone to their partnership, I would say, is the fact that Nick and Zak develop a deep understanding. They make their money on things they understand deeply. So after graduating from Cambridge, Zak heads to Hong Kong. He gets a job as an equity analyst. This doesn't last long because it turns out his boss was crooked. His boss winds up being fired and then fined millions of dollars, and then as a result, Zak was laid off. And so Zak was telling William Green about, like, how desperate this part of his life was, that he would call all his friends, apply to any job, say he would literally do anything. And there's a reoccurring theme when you read a lot of biographies. Uh, the way I would summarize this is that opportunity is a strange beast. It frequently appears after a loss. The only job he can get is a job he doesn't want, and that job is as a sell-side analyst specializing Asian stocks at Deutsche Bank. Zak describes this part of his life as absolute hell. He said, "I did it for four years, and it was absolute hell. I was not being someone who was easily sold to. I couldn't sell to anyone." But there was one consolation, is because of this job that he meets Nick Sleep. Opportunity's a strange beast. It frequently appears after a loss or what is perceived as a loss, a temporary loss.

3. 6:41 – 11:15

   The Asian Financial Crisis and Starting Nomad

   1. DSDavid Senra6:41

      So it's during the same time that Nick left that small Scottish fund. He went and, uh, got a job at Sun Life of Canada, which was this gigantic financial services firm, had tens of thousands of employees. That's ... Nick could never work in a big company. He says, he goes, "I was almost allergic to working there. Once you've worked for a feisty company, it's quite difficult to go work for something that's big, dull, and boring." So he quits and then gets a job at the place. This actually winds up being the last job he'll ever have. And in 1995, he goes and works, starts working at Marathon Asset Management. He's gonna wind up staying there for more than a decade and then wind up spinning out Nomad Investment Partnership from Marathon Asset Management. This is the way he described the company he's working for. It was hap- it was a scrappy, high-flying investment firm in London that was trying to outbox the big guys. Nick's mentor there was one of Marathon's co-founders, this guy named Jeremy Hosking. He, and this is how Nick describes him, "He's naturally iconoclastic. His bias is to buy about the most despised thing he can find. He likes the controversy. He likes the difficulty." So the reason I was thinking about, um, reading this now is because I just spent two weeks studying Li Lu, and there's a lot of similarities in the way they think. In fact, the, the collection of Nomad investment partnership letters, it starts with a letter from Nick Sleep to Warren Buffett, and then the response by Buffett. And just like last week, we saw the, the huge influence that Buffett and Munger had on Li Lu. It's the exact same thing for Nick and Zak. And one of the things that jumped out to me is Li Lu talked about, you know, he started his fund right when the Asian financial crisis was happening in '97, and we see that exact same event is what brings Nick, uh, Nick and Zak together. So Nick is describing his mentor and one of the co-founders of Marathon Asset Management. You know, he's like, "Hey, this guy's iconoclastic. He likes controversy. He likes difficulty. Uh, just sell me everything that other people won't buy." And so it says the Asian financial crisis struck in 1997. And so Nick and his mentor go scavenging for cheap stocks in the smoldering markets of Southeast Asia. Everybody else at the time is running for cover, and they're, like, running in. And it is through this process that they find this unlikely ally, which is this Asian-based broker who wasn't like everyone else. That is Zak. And so Nick is at Marathon Asset Management. Zak is at Deutsche Bank. They're talking regularly about all these crazy bargains that they're unearthing in places like Singapore, Hong Kong, the Philippines. And so Jeremy Hosking tells Zak, "Hey, when you can't sell a stock to anyone else, call us." And so this is what Nick means about Jeremy Hosking being naturally iconoclastic. In less than a year, Marathon invested about $500 million in Southeast Asia and made a killing as the region rebounded. So pre-Asian financial crisis, stocks were trading at, like, three times the replacement cost of their assets. During the crisis, they were buying those exact same stocks for one quarter of the replacement cost of their assets. And so it's after this when they recruit Zak to Marathon. So he moves from, uh, Hong Kong to London in 2000, and it says Zak escaped from Deutsche Bank to work with Nick as an analyst at Marathon's office in London. Together, they traveled to Omaha for Berkshire Hathaway's annual meeting. "It was wonderful," Zak said. Warren Buffett and Charlie Munger spoke about companies they expected to own for decades. "Oh my God," thought Zak. "This is nothing to do with a casino. This is about real businesses." Nick kept nagging his bosses to let him launch a concentrated fund within Marathon, with Buffett serving as his model. Buffett struck him as the embodiment of quality. And so all throughout the margins, all through these notes, I'm constantly writing there. When they mention things like this, I just keep writing Li Lu. This is just like Li Lu. In the interviews that you and I talked about last week, you know, Li Lu's like, "Hey, I, I learned, I stumbled into this, did this random talk at Columbia from this Buffett guy. Turns out I wind up learning from the very best. I don't need anything else besides that." And so when you have somebody like Nick that was fundamentally changed by this book that says, "Hey, dedicate your life to the quality, the quality of your craft," and then he goes to Omaha and he listens to the philosophy and the perspective of Buffett, and he realizes, "Oh, this is the embo- Buffett. In my business, Buffett is the embodiment of quality." So in 2001, Nick's bosses give him the green light to start Nomad Investment Partnership, and then he asks Zak to join him as a co-manager of the fund. And then go back to what Nick said about, "Hey, I was real comfortable. I like being an outsider from a very young age." And so he says, "It was obvious that we were always going to do something a little bit odd. From the start, they regarded Nomad as an act of rebellion."

4. 11:15 – 15:33

   Never Mind the Bollocks: Ignoring Ephemeral Information

   1. DSDavid Senra11:15

      And then this part just sings to my soul because they decide to concentrate on what to ignore. This section is called Never Mind the Bollocks. I need to translate that to American for you. Never mind the bullshit is the way I would put it. And so they start out with a very simple ambition. Their target is a tenfold increase in Nomad's net asset value. And this is the part which I absolutely love. There's a great line, a great maxim from The History of Entrepreneurship that comes up over and over again. It says, "Genius has the fewest moving parts." I think about that often as a reminder to myself to keep things simple. So what do they do? They have a one-line description of actually what they wanna do. They wanna 10X their, their assets. And to do so, they work backwards from figuring out what to ignore. So Nick is going to quote the philosopher William James about their thinking. It's gonna sound a lot like Buffett and Munger too. Uh, Nick cites a line from the philosopher William James, "The art of being wise is the art of knowing what to overlook." We just got rid of all the things we didn't like. They disregarded, this is one of my favorite parts, and this is why I say it, th- this part sings to my soul. They disregarded all ephemeral information. Ephemeral information distracts investors or entrepreneurs, or really anybody, from what matters. Nick notes that information, like food, has a sell-by date. Some information is especially perishable, while some information has a long shelf life. This concept of shelf life became a valuable filter. And they're talking about the trap that most investors, and I would say now most people, everybody's stuck in the, stuck in the never-ending now, as my friend David calls it. But specifically Nick and Zak are calling out what other, most other investors do. Uh, they pay attention to fleeting news coverage and the daily soap opera. That's what they call it. Nick dismissively refers to these people as junkies who crave information which will be worthless in 12 weeks. As he sees it, this short-term crowd responds constantly to fake stimuli. And this is what he says about this, "You need to be wired not to believe the bullshit, to not be listening. We became very happy not hearing it." Nick and Zak told stockbrokers that it was pointless calling them with sales pitches since they relied on their own research to reach independent conclusions. My favorite story of this, and an inspiration for me, I just finished reading, uh, for the second time, another biography on Sam Walton. This is episode 354. Uh, the book is called Sam Walton: The Inside Story of America's Richest Man, and it was actually published before Sam wrote his own autobiography. And there's a line in this that I love, where it says, uh, "On that day, the market dropped and knocked a billion dollars off the value of Sam Walton's stock holdings in Walmart. When reporters asked his reaction to the disaster on Wall Street, he hadn't heard about it." [laughs] I absolutely love that. When I went to dinner at Charlie Munger's house, I asked him, 'cause I was obsessed with Costco and Jim Sinegal. One of my favorite forewords of any s- book I've ever read is the fact that Jim Sinegal wrote the foreword for Sol Price's, his hero and mentor's, biography, and I, and I knew Charlie knew Jim, and I was dying to find a book or some way to do an episode on Jim Sinegal, and I was like, "Why isn't there information?" Like, "Why is he so low-key?" And Charlie, in his wisdom, summarized it perfectly. He's like, "That's 'cause he was busy working." [laughs] And so this idea of just, I have to go back to this, 'cause this is ... I spend my time in a very similar way because, I never called it ephemer- ephemeral information like they did, but I think that's a great line. They disregard all ephemeral information. If you look at how I spend my time. In the mornings I read books, usually old books about entrepreneurs. In the afternoons I re-read highlights from these old books about entrepreneurs. And then I talk to founders and other smart people. I spend time with my family. I take care of my health, and that's it. Nick and Zak call this practice a practice of intentional disconnection. This is the, the important part, because they knew, they discovered, that if they do deep research and find great businesses at fair prices, and they keep them for a long period of time, they don't have to do anything else. And so let's go to this description of this practice of intentional disconnection. They wanted to think in peace, undisturbed by popular obsession. This requires uncommon conviction to disregard what most of your peers consider significant.

5. 15:33 – 18:11

   Destination Analysis and Quality Over Money

   1. DSDavid Senra15:33

      So how do they spend their time? We just read annual reports until we're blue in the face and visited every company we possibly could until we were sick of it. When they analyzed companies and interviewed CEOs, Nick and Zak probed for insights with a long shelf life. Let's go back to that idea. This concept of shelf life became a valuable filter. They sought to answer such questions, and here are some questions they would ask. Number one, what is the intended destination for this business in 10 or 20 years? Number two, what must management be doing today to raise the probability of arriving at that destination? Number three, and what could prevent this company from reaching such a favorable destination? They referred to this way of thinking as destination analysis. Nick and Zak focused instead on the inputs required for a business to fulfill its potential. This actually works for people too. It's worth noting that destination analysis is an equally handy tool in other areas of life. So, for example, if your goal is to be healthy, you analyze the actions that you need to take now which will increase the odds of reaching that destination. Or if you wanna be remembered lovingly by friends and families, what are the a- what are the actions you have to take now to make sure that happens? And they talk about, you know, when you look back, very much in like a Jeff Bezos mind frame, uh, Nick says a few times, like, look, when you look back at your life, like when you're 80 years old and you're looking back at your life, what do you want the life of that 80-year-old to be? And so that is your destination, then you analyze backwards, working from that part, uh, work backwards from that destination. Back to the way they built and structured their firm. As perennial outsiders, they questioned everything, and their organizing principle was this just sof- very sophisticated simplicity. This attitude was influenced by Zen, by the book Zen and the Art of Motorcycle Maintenance. The book reinforced their determination to resist any low-quality behavior that they deemed self-serving or deceitful. This complete dedication to quality made life very straightforward. It was all about quality. Money was secondary. Remember a few pages ago, they talked about the founding of their firm as an act of rebellion. This, this is, this re- this reminded me, this paragraph reminded me of that. "There was something provocative about the whole thing," Zak said. "Could you set up an investment firm which is not about the money? It's about doing everything right." And so they deliberately eliminate everything, and they ignore everything outside of their insane focus, which is, this is what they were insanely focused on. We just concentrated on picking good stocks and thought everything else was peripheral. They also do something that's smart that reminded me of David Ogilvy. They have a no asshole rule, rule. They don't call it this, but it says they took delight in turning away investors who seemed irritating, regardless of how rich they were.

6. 18:11 – 21:11

   Staying in the Driver's Seat: Ogilvy and Li Lu

   1. DSDavid Senra18:11

      So there's a great line in one of Ogilvy's books- Where, you know, he, he's has advertising clients. He's running, he's building this, you know, massively successful advertising agency. And Ogilvy says, "Personal dislike made me resign many accounts. If I don't like having to deal with the son of a bitch, why should I?" We... And then his summary of this is fantastic. "If I don't like having to deal with the son of a bitch, why should I? We pass this way only once. We pass this way only once." I think what David Ogilvy has in common, what Nick and Zak have in common, and what Li Lu have in common, is this desire to live an authentic life. If you listen to last week's episode where the very end Li Lu writes this reflection of turning 50, and he says something that I think speaks to the main motivator. A lot of people think, uh, uh, in my opinion, a lot of people that are not entrepreneurs think the main motivator for entrepreneurs are, is money, and I would argue it's control. It's control of what you work on, how you spend your time, who's around you. And it is the belief of the entrepreneur that if they have con- the control, the money will come with that anyways. But Li Lu said something that was fascinating. He says, "I kept going through life," he's talking about, "while all the time insisting on sitting in the driver's seat. It is my life and my journey after all." That is the exact same mindset that Nick and Zak had, and you could see it in their actions. I'm in the driver's seat. I'm going to set up my company the way I see fit, not the way other people in my industry think I should. It's the exact same mindset that Ogilvy's expressing and saying, "Hey, you know, if I don't like having to deal with this guy, I'm going to fire the client. I only live once. I'm gonna stay in the driver's seat." In fact, there's a hilarious story in one of Ogilvy's biographies. You know, I've read, I don't know, four or five books on him, and they were talking about the fact that, uh, there was this association, like a manufacturer's association, and they wanted to hire a new ad agency, and they told all the people like, "Okay. Well, you know, you have to come in and you pitch us, and you're gonna be one of maybe, like, 10 different firms, and you have 15 minutes to make your pitch. And as soon as the 15 minutes is up, we're gonna ring this bell." They had this giant, like, conference room. "And you're gonna ring the bell, and no matter where you are, it's over." And so they lay out the ground rules at the very beginning of the pitch. It's Ogilvy sitting across from, like, 12 people, and so they're telling him this, you know, "You have fi- you're, you're one of many people pitching us, and then you have 15 minutes. We're gonna ring the bell." And Ogilvy just asked, he was like, "Well, out of you 12 people, who's gonna be involved in making the decision to, on which agency you picked?" And they go, "Well, all of us, of course." Remember, Ogilvy hated committees. [chuckles] He famously said, "Search all your parks... Search a park in every single city, and you'll never find a statue dedicated to committees." [chuckles] Okay? So he hated committees, and he's, like, sitting in front of a committee. Like, okay, well 12 of us are gonna pick the, the agency. Like, who gets this account? And then he asked them, "Okay. Well, how many of you are gonna approve, like, be involved in actually approving the advertising that the agency creates?" And they go, "All 12 of us, of course." And so Ogilvy goes, "Okay. Ring the bell," stands up and leaves. [chuckles] That is living life on your terms. That is staying in the driver's seat. And so let's go back

7. 21:11 – 23:13

   A Long, Simple Game: From Cigar Butts to Quality

   1. DSDavid Senra21:11

      to more unique ways in how they built their investment partnership. Nomad never used leverage, never shorted a stock, never speculated with options or futures, never made a macroeconomic bet, never traded hyperactively in response to the latest news, never dabbled in exotic financial instruments. Instead, Nick and Zak played what they viewed as a long, simple game, which involved buying a few intensely researched stocks and holding them for years. And Nick has two great lines on this that I think are related. He says, "You want to build something that has permanence." And then this is one of my favorite sentences in the entire section. "I believe that good things grow." And so if you are like Nick Sleep and you believe that good things grow, then of course you would focus on quality. The choosing of the investment partnership's name was intentional. They named the fund Nomad because they were willing to roam anywhere in search of value. They were gunning for outstanding absolute returns, unconstrained by reference to what anyone else was doing. And the fund begins to trade on September 10th, 2001, one day before the attacks on the Twin Towers. They start out buying cigar butts. Their story is going to reflect just like Buffett and just like Li Lu. Eventually, all three of them, or all four of them, are going to come around to Charlie Munger's point of view on this. But at the very beginning, they start to find things that are, they can buy at one quarter the replacement cost of the assets. They're buying assets in Thailand and United States and Zimbabwe. These are not great businesses. They're just fantastically cheap. And then within a few years of doing this, they realize, "Oh, this is, this strategy doesn't scale." This is exactly what Munger figured out. This strategy had a big drawback. When stocks like these rebounded and were no longer cheap, you had to sell them and then hunt for new bargains. And so they come around to Charlie Munger, the architect's point of view. Remember, Buffett called Munger the architect of, uh, Berkshire. An obvious solution to this was to buy and hold higher quality businesses that were most likely to continue compounding for many years. This grew out of a costly mistake.

8. 23:13 – 28:14

   Scale Economies Shared and the Costco Investment

   1. DSDavid Senra23:13

      So in 2002, they find this business that they're gonna invest in called Stagecoach. The stock had crashed from $2.84 down to 14 cents. But Nick and Zak figured that it was easily worth 60 cents. So Stagecoach is going through a turnaround led by the founder. So the founder was a former bus conductor. I gotta see if this guy has a biography. Sounds fascinating. He's a former bus conductor who'd run the firm so well in the past that he'd become one of Britain's richest people. He comes out of retirement to try to fix this bus operation, this United, United Kingdom bus operation, and his strategy worked. Now, here's the problem. Nick and Zak buy at 14 cents. They cash out when the, when the stock rebounds to 90 cents, and they're like, "Wow, we got a 6X return." But Stagecoach winds up being a way better business than they realized, and the stock shoots up to almost four bucks. And Nick says that this made him and Zak feel like horses' asses. And so their realization is, "Hey, we need to forget this cigar butt business. We need to find wonderful businesses and hold those businesses for the long term." And the way they describe this is very fascinating. And so Nick says If you're thinking rationally and thinking about the long term, you can subcontract the capital allocation decisions to them, meaning these one, these people, these phenomenal managers, in many cases founders, larger sh- largest shareholders of the businesses, the ones that are actually running and care deeply about these, these wonderful businesses that they're, they're building. So he says, "If you're thinking rationally and thinking about the long term, you can subcontract the capital allocation decisions to them. You don't have to be buying and selling shares." So once they realize, "Okay, we wanna buy wonderful businesses," then they have to first, the first step is they have to begin thinking about, what are the characteristics that account for the success of companies that have unusually long shelf lives? And it's through this research and study that they wind up coming to the conclusion that there's one business model that is more powerful than all the rest, and their term for this is scale economies shared. This business model is well known now. I think at the time they were the first ones to actually coin that. And the first company that introduced them to this model was Costco. They first invest in Costco in 2002. At the time, the stock, the Costco stock had gone from $55 all the way down to 30, so they start buying at 30. It had tumbled because peop- Wall Street did not like the company's low profit margins. So that was the surface level understanding or misunderstanding of Costco, okay? But Nick and Zak saw underappreciated strength in Costco's fanatical focus on delivering value to shoppers. One of the things that Nick and Zak realized is the low profit margins is actually an asset, not a liability. Costco marked up its goods by no more than 15% above cost, while a typical supermarket might mark up prices up to 30%. To the skeptics on Wall Street, this generosity seems soft and uncompetitive, the corporate equivalent of collectivism. That's hilarious. But Nick and Zak saw the long-term logic of Costco's strategy. Satisfied customers, and this is the flywheel that they describe, satisfied customers kept returning and spending more money in its stores, thereby generating enormous revenues. As the company grew, it negotiated better deals with suppliers and then kept driving down its famously low costs. Costco then shared these economies of scale with consumers by lowering its prices even further. Nick and Zak estimated that the Costco members saved $5 for every dollar that Costco kept for itself. This policy of self-restraint was a virtuous cycle that Nick sums up like this: increased revenues begets scale savings, begets lower costs, begets lower prices, begets increased revenues. And this is another great thought right here. Most big successful corporations eventually lapse into mediocrity, but Costco's re- readiness to share the benefits of its scale with customers meant that size became an advantage, not a burden. Costco kept growing by giving back instead of grabbing all the spoils for itself. Its low margins reflected patience, not weakness in the, in the view of Nick and Zak. Nick explained, "The firm is deferring profits today in order to extend the life of the franchise. This giving back makes Costco's customers unbelievably loyal." I said this before, I didn't even know what Costco was until I was introduced to it by my wife's family. My wife's family have been members at Costco for over 25 years. It, it's probably close, I think it's closer to 30 years by now, and they're still shopping there all the time. Almost 30 years of loyalty to Costco. So Nick and Zak kept adding to their investment as their reference for Costco grew. At the time they're telling this story, they'd owned Costco for 18 years, and over that time period it rose from $30 a share to $380 a share, all while also paying rich dividends. And so this new strategy is also in line with how Nick and Zak wanna spend their time. They don't wanna be trading all the time. They wanna be reading the news. They wanna be sitting, reading, thinking, and talking to each other.

9. 28:14 – 32:05

   The Earned Secret and the Historical Pattern

   1. DSDavid Senra28:14

      And it says, one of the benefit of this inactivity, the fact that they're just gonna hold this forever, they're not gonna trade all the time, is that Nick and Zak had time to read, think, and talk at length about what they were learning. And this is a fascinating part because this talks about what emerged from the discussions they're having is that, hey, scaled economy shared model is actually the greatest business model because it fosters corporate longevity. This is going to be Nick and Zak's earned secret. One of my favorite tweets of all time comes from this guy named Cedric Chin, and he said, "I'm starting to think that one type of remarkable career, and certainly the most interesting type, comes from finding an earned secret and then exploiting the hell out of it for a good part of two to three decades." So he was describing Mark Leonard of Constellation realizing that, hey, vertical market software companies are kind of terrible for venture, the business he used to be in, but they're great to own long term. So this idea that a one type of remarkable career comes from finding an earned secret and then exploiting the hell out of it for a good part of two to three decades. That is what is occurring where we are in this story. Because Nick and Zak start asking themselves, again, they go, "Hey, what characteristics account for the success of companies that have these unusually long shelf lives, and how can we find this out?" Well, it turns out history has answers. And so they go back and they're studying all these businesses in history. And so it says, they studied Walmart's annual reports from the 1970s. They realized it had much in common with Costco. Likewise, durable winners such as Dell Computer, Southwest Airlines, Tesco all followed a similar path. These formidably efficient firms kept costs low and passed most of their savings back to consumers who've reciprocated by doing more business with them. My wife's family has been reciprocating for almost 30 years. What is the value of that single customer, and how many people have they recruited to the cult of Costco in three decades? More examples from history. This time they're st- they're like, "Hey, let's take a look at what Buffett's investing in." In the same vein, Geico and Nebraska Furniture Mart, two of Buffett's favorite businesses, continued to drive down costs as they grew, enabling them to save their customers so much money that it became increasingly difficult for rivals to compete. Let's go even further back in history. Henry Ford. He harnessed the benefits of the assembly line production to drop the price of the Model T. I've done like, what? Six podcasts on Henry Ford. I'll probably do one every, you know, two years going forward. But he used this increased benefits, tech- and technology and, and efficiency to drive down the price from Model T from $850 to less than $300. And so Nick says, "This is not a new business model, but it does need to be pursued with eva- evangelical zeal." That is a great line. It does need to be pursued with evangelical zeal. This culture of such companies is typically molded by visionary founders. They tend to be f- they're-- So they're talking about the characteristics of great businesses, characteristics of great business models. Now they've moved into the kind of people that can actually do this for decades. The characteristic of the founder or the, the leader in this case. They tend to be passionate about the smallest details. They tend to be passionate about improving the customer experience, cutting costs even in good times, and investing for the distant future despite external pressures to report strong numbers now. They have to be almost high on being iconoclastic, Nick said. So he's talking about Sam Walton. He mentions all these people in the book. Sam Walton, Jim Sinegal, Herb Keller, Rose Blumkin. Done podcasts, multiple podcasts on all of them. And it... So it's through all this research, through all this learning, through all this studying, through all this thinking that they discover, that Nick and Zak discover their earned secret. Once Nick and Zak understood the magic of this one business model, they made it the focus of their fund. They knew they had uncovered a deep truth, and this is what they said. This is Nick talking. "That is the single best thought you may have, have ever had in your life. It needs to dominate everything, because you're not going to get many insights like that."

10. 32:05 – 34:35

    Amazon: Finding a Corporate Soulmate

    1. DSDavid Senra32:05

       And so now that they have the focus of their fund, we're going to focus on businesses that are using scale economy shared. You can go out and look for more, and this is when they discover Amazon. Amazon gets, at, I think at one point, what they say is like 70% of, of their net worth. So it says, when Nick first encountered Amazon in 1997, it was an upstart bookseller trying to go public. Jeff Bezos gave a presentation in London explaining how he would offer an almost infinite selection of books, how he would gain a cost advantage by avoiding the expensive physical stores, and how he would reinvest in cash flow, the cash flow it makes in other businesses. Nick raced back to his office at Marathon and told his boss, "This is absolutely fantastic. It could be huge." But his boss said, "Yeah, but okay, but what are they doing that no one else can do?" It took years for Nick and Zak to grasp the nature of Amazon's competitive advantage. Jeff Bezos was following in the hallowed footsteps of Henry Ford, Sam Walton, Jim Sinegal, and the internet would enable him to turbocharge their classic strategy. Like them, Bezos was ruthlessly efficient about controlling costs. This is a new story for me. I don't remember reading it, and I've read, you know, everything I can find on Jeff and Amazon. Amazon went so far as to save $20,000 a year by removing the light bulbs from the vending machines in its offices. Bezos was obsessed with saving money and time for his customers, and he invested patiently for the future, seeding new business initiatives that he didn't expect to bear fruit for years. Each year, he invested hundreds of millions in the form of discounted prices and shipping subsidies. Wall Street grumbled about Amazon's lack of recorded, uh, reported profits. A lot of people forget that Amazon at one time, the, the stock price I think went, fell from $181 all the way down to six, if I'm not mistaken. So it says Wall Street failed to appreciate that Bezos was patiently laying the groundwork for mind-blowing growth. This is what Bezos wrote to Amazon shareholders in 2005. He says, "Relentlessly returning efficiency improvements and scale economies to customers in the form of lower prices creates a virtuous cycle that leads over the long term to much larger dollar amount of free cash flow, and thereby to a much more valuable Amazon." Nick and Zak had found their corporate soulmate. When Bezos unveiled Amazon Prime, Nick and Zak recognized instantly that this was the Amazonian equivalent of Costco's annual membership fee. "Oh my God, I know exactly what game they're playing," Nick thought. And so they start buying Amazon aggressively in 2005 at around $30 per share.

11. 34:35 – 37:48

    Slow, Then Fast: Encyclopedic Knowledge

    1. DSDavid Senra34:35

       Okay, so I need to stop here because I think this is really important. There's a bunch of notes I left to myself. There's this idea of slow then fast, and it has to do with the importance of building this, like, encyclopedic base of knowledge. So let me give you a story from a founder first, and then I think Warren Buffett's an example of this, and Li Lu i- is as well. This is why it's top of mind given what I've been reading the past few weeks. But Sam Walton, th- most remarkable thing is, you know, he's the greatest retailer to ever live. He had one store. For the first five years of his career, he focused on one store. And so over the decades, he winds up building up this encycloba- encyclopedic base of knowledge of retailing. And so when he sees another opportunity, in a sense, when he sees the, the, the, the Costco opportunity, the Sam's Club opportunity, it's an opportunity he's been preparing his whole life for. And because he has this encyclopedic base of knowledge that has compounded over the years, he's able to move... He goes from moving very slow to very fast. One store in five years is very slow. Decades into his career, he opens up, I, I, I can't remember the number. I think it goes from zero Sam's Clubs to let's say 100 Sam's Clubs, from zero revenue to like $5 billion a year, I think in five to seven years. Li Lu talked about this when he was chastising the Columbia MBA students, because he's like, "Listen, when I was your age or when I was in this class, I got this giant book, this value line book," you know, that you can see in the video. Looks like you could work out with it. It's probably, you know, I don't know, 800 pages, something like that. And he goes, "I read it cover to cover multiple times." And that's the way to do it because you build up this encyclopedic base of knowledge. And then after you do that, he says you can look at a page in value line, and in seconds you can see if there's something more you need to look into. That is example of going slow so you can go faster later on. There is this AMA, this ask me anything that, uh, that Alice Schroeder did on Reddit. Alice Schroeder is the woman that wrote, the author that wrote The Snowball like 20-something years ago. And she talks about observing Warren Buffett's reading process now. You know, at that point he was what? Let's call it 40 years into his career, 50 years, something like that. And so because he's been reading annual reports for 50 years or longer, and that knowledge is compounded, he can actually read an annual report faster. That compounding base of knowledge acts like a filter to separate the important from the unimportant. And so think about how this relates to what Nick and Zak are experiencing. They're four years into their fund, but they're, you know, 15 years into their career. They know what they like, what they don't like. They've done intense amounts of reading, studying, talking to each other about what they learned, identifying the earned secret. All the years and years of work now allows them to go fast where they're like, "Wait a minute." This is exactly what Li Lu said, 'cause he was like, uh, he talks about some things you're not gonna learn in your career, you're gonna learn today that you won't use for 15 years. He's like, "I was studying an American company 15 years ago. It took me 15 years to find its Asian counterpart, but then I- as soon as I saw it, I knew it." It's exactly what's taking place. They did all this work to get this earned secret, to understand the importance and the power of this business model, of the b- of the businesses that use the business model of scale economy shared. That when they see what Bezos is doing at Amazon Prime, they're like, "Oh my God, this is Costco, but on the internet." The encyclopedic base of knowledge you cannot shortcut because the encyclopedic base of knowledge is what helps you move quicker in the future. Slow and then fast.

12. 37:48 – 39:21

    Surviving 2008 and Closing the Partnership

    1. DSDavid Senra37:48

       In 2006, Nick and Zak resigned from Marathon and made Nomad a fully independent fund, giving themselves even more latitude to follow their idiosyncratic convictions. A quarter of their clients yanked their money from Nomad, fearful of its overexposure to one stock. A year or two later, Amazon lost half of its market value in 2008, and Nomad fell 45.3%. In the margin I wrote, "Li Lu happens to everyone." What am I referencing? Last week, Li Lu said, Berkshire... Listen to this. Amazon lo- loses half of its market value in 2008. Nomad goes, falls down by 45.3%. Li Lu said last week, or on last week's episode, "Berkshire had at least three times when its stock went down 50%. It happened to Carnegie, too. It happened to Rockefeller. This happens e- to even mighty companies." He was talking about the importance of temperament, 'cause when this happens, people start freaking out. They panic. Nick and Zak did not. They did not crack. While others panicked, they exploited the market mayhem to upgrade. Listen, this is... This blew my mind. Everybody else is panicking. They're like, "Okay, cool. Opportunity here. We're gonna upgrade our portfolio, concentrating even more heavily on its highest quality companies, including Amazon, Costco, and Berkshire." When the rebound came, the rewards were breathtaking. Over the next four years, Nomad returned 404%. In early 2014, Nick and Zak dissolved the Nomad Investment Partnership. By then, it had grown to about $3 billion in assets. I think it made $2 billion for its investors. This is

13. 39:21 – 41:32

    Life After Nomad and Closing Thoughts

    1. DSDavid Senra39:21

       what Nick said about this. "Many funds start with lots of cake as their goal," lots of money, s- uh, Nick wrote. "It's not the cake that gratifies us. What we found gratifying was the process of solving the investment problem, learning along the way, and doing as good a job as we knew how. Those were all internal personal goals. The cake was then a happy byproduct." After they closed the partnership, Nick wrote a letter to Buffett thanking him for his role in Nomad's success. Buffett replied, "You and Zak have made the right choice. I predict you will find life is just beginning." In retirement, Zak kept half a dozen or so of his favorite stocks from Nomad's portfolio. Zak, who had never sold a share of Amazon in his personal portfolio, has about 70% of the, of his money riding on that one stock. Nick invested almost all of his money in just three stocks, Amazon, Costco, and Berkshire. And this is what he said about that. "There are very few businesses that are investing in the future the way they are. They don't care about Wall Street. They don't care about trends. They don't care about fads. They're just doing the right thing long term." So they closed the partnership in 2014. By 2018, Amazon had risen so much that it accounted for more than 70% of Nick's net worth. Nick began to worry. Could Amazon's market value grow to $3 or $4 trillion, or were there limits even to Amazon's greatness? He wasn't sure. So after 13 years, he sold half of his stake in a single day for $1,500 a share. How did it feel? "I hated it," he says. "I felt horribly conflicted, and I'm not sure it was a good decision." And that is where I'll leave it for the full story. Highly recommend buying the book. This is a no-brainer. I mean, Nick Sleep is telling you, "Hey, you should read William Green's book. It's excellent. We're sure you're gonna enjoy it." I definitely agree with Nick. There's wonderful profiles on other investors in the book, other traits that other investors have. It's just wonderfully written. So for the full story, if you wanna buy the book using the link that's in the show notes on your podcast player, are available at founderspodcast.com. You'll be supporting the podcast at the same time. I printed out all of Nick Sleep's partnership letters, and so that is what I'm reading this week. That'll be the next episode. But for now, that is 364 books down, 1,000 to go, and I'll talk to you again soon.

Episode duration: 41:32