Nick Sleep: One of the Best Investors of the 21st Century

Nick Sleep was a co-founder and portfolio manager of the Nomad Investment Partnership from 2001 to 2013. Despite attempting to keep a low-profile throughout his career, Sleep has gained significant fame in recent years after his investor letters were leaked to the public.

While his investment track record is noteworthy in its own right, it was perhaps his writing style more so that helped garner the attention of so many investors.

Before we dive into the lessons Sleep espouses in his investor letters, it's worth examining his remarkable track record.

From 2001 to 2013, the Nomad Partnership earned 18.4% annual returns for investors. That was roughly 3x the return of the World Index during the same time period.

Here are 5 lessons that Nick Sleep offers throughout his letters:

1.) Find a firm’s true DNA

“The trick, it seems to us, if one is to be a successful long-term investor, is to recognize the sources of enduring business success, get in early and own enough to make a difference. Which raises two questions: what are the sources of success and second, if these are so readily recognized up front why are they not discounted in prices already?”

Much of Sleep's investment success over the years was driven not by having a variant view on some undiscovered stock, but instead by having a deeper understanding of the true drivers of great businesses. This was perhaps most evident in his Costco investment.

Costco was not some hidden gem when Nomad first opened their position. In fact, quite the opposite. Costco traded at 25x earnings when Nomad took their initial stake. However, thanks to Sleep's recognition that Costco was reinvesting their excess capital into lower prices for customers, they were able to correctly assume that earnings could grow faster for longer.

2.) Search for “Scale Economies Shared” Businesses

“Scale economics shared operations are quite different. As the firm grows in size, scale savings are given back to the customer in the form of lower prices. The customer then reciprocates by purchasing more goods, which provides greater scale for the retailer who passes on the new savings as well. Yippee. This is why firms such as Costco enjoy sales per foot of retailing space four times greater than run-of-the-mill supermarkets. Scale economics shared incentivises customer reciprocation, and customer reciprocation is a super-factor in business performance.”

This is now Nick Sleep's most famous framework he discusses throughout his letters. The idea that the companies who share their benefits with the customers will have a more durable earnings stream is what helped Sleep identify several life-changing investments like Amazon and Costco.

3.) Ignore the noise

“Information, like food, has a sell by date, after all, next quarter’s earnings are worthless after next quarter. And it is for this reason that the information that Zak and I weigh most heavily in thinking about a firm is that which has the longest shelf life, with the highest weighting going to information that is almost axiomatic: it is, in our opinion, the most valuable information.”

It's easy to give too much thought to a company's latest earnings report. After all, that's commonly the most recent information that investors have access to. But Nomad Partners succeeded in part by focusing less on the most recent information and instead prioritizing the most impactful information.

4.) Selling winners too early is the biggest mistake you can make

“The biggest error an investor can make is the sale of a Wal-Mart or a Microsoft in the early stages of the company’s growth. Mathematically this error is far greater than the equivalent sum invested in a firm that goes bankrupt. The industry tends to gloss over this fact, perhaps because opportunity costs go unrecorded in performance records.”

When you own a wonderful business that's in the early stages of growth, it's easy for that company to go through periods of what seem like overvaluation. However, according to Sleep, selling during those periods can be the most detrimental mistake investors make.

After closing down Nomad Partners, Nick Sleep continued to hold and encouraged his investors to continue holding Amazon, Costco, and Berkshire. Despite seeming "overvalued" at times, that approach likely served Sleep and his investors very well.

5.) Focus on a company’s destination

“If we had our time again, we would hope not to be seduced by their (apparent) mathematical cheapness but weigh more heavily their DNA, if you like. One of the things we have learnt over the last few years is the most of our most profitable insight have come from recognizing the deep reality of some businesses, not from being more contrarian than everyone else.”

In the early years of the Nomad Partnership Sleep and Zakaria invested in a number of smaller, less covered companies that traded at what seemed to be large discounts to intrinsic value. This served them well for a time but as the partnership progressed, they began to emphasize companies where they believed the true power of their business model (or as they like to say, "the deep realities") were underestimated by the public.