5 Investment Lessons Can Be Learned From

Nick Sleep is a co-founder of, and portfolio manager for, the Nomad Investment Partnership, which he managed between 2001 and 2013. While successfully avoiding mainstream media attention during his working life, Nick Sleep has recently become inextricably linked with controversy after the leakage to the public of his investors letters.

While his investment record is impressive in its own right, perhaps it was more the writing style that ensured his investor letters received such widespread attention.

Before we reflect on the lessons Sleep teaches in his investor letters, it will be helpful to examine his remarkable investment record.

The annual return for the investors in Nomad Partnership from 2001 to 2013 was 18.4%, approximately three times the World Index return during the same period.

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. This raises two questions: What are the sources of success? Second, if these are so readily recognized upfront, why are they not discounted in prices already?”

Much of the investment success Sleep did over the years was due to much more than having a variant view on some undiscovered stock but rather because he had a better understanding of what, in his view, really drives excellent businesses. Indeed, this was most evident in his investment in Costco.

Costco certainly wasn’t a discovery when Nomad first established its position—far from it. Costco Century traded at 25 times earnings when Nomad first took its position. But Sleep realized that Costco was investing its excess capital into lower prices for the customer, and thus, he believed earnings could grow faster for longer.

2. Search for “Scale Economies Shared” Businesses

“Scale economics shared operations are quite different. As the firm grows, scale savings are returned to the customer in the form of lower prices. The customer then pays this forward with more purchases, creating greater scale for the retailer, who, in turn, also passes along the new savings. Yippee. This is why sales per foot of retailing space for companies like Costco are four times more than just ordinary supermarkets. Shared scale economics encourages customer reciprocation, a super-factor in business performance.”

This is now Nick Sleep’s best-known framework, which he writes about throughout his letters. The idea that companies that share their benefits with customers will have a more enduring earnings stream 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 almost axiomatic information: it is, in our opinion, the most valuable information.”

It is easy to spend too much time on a firm’s latest earnings report. That’s typically the most current information investors have. However, Nomad Partners won in part by focusing less on the most current information and instead on the most influential information.

4. The worst error you can make is to sell wins too soon

“The biggest mistake an investor can make is the sale of a Wal-Mart or a Microsoft in the early phases of the company’s growth. Mathematically, this blunder is much greater than a comparable investment in a bankrupt firm. The industry glosses over this fact perhaps because opportunity costs are not recorded in any performance record.”

It is easy for a great business to go through cycles of what might seem like overvaluation when you own one that’s just happening to be in the early growth stage. But selling during those cycles, says Sleep, is the most severe mistake investors ever commit.

After closing Nomad Partners, Nick Sleep continued to hold and encouraged his investors to continue holding Amazon, Costco, and Berkshire. While that approach was perhaps “overvalued” in appearance, it probably did Sleep and his investors a world of good.

5. Focus on a company’s destination

“If we had our time over again, we’d hope not to be lured by their apparent mathematical cheapness but weigh more heavily their DNA, if you like. We have learned over the last few years that most of our most profitable insights have come from recognizing the deep reality of some businesses, not from being more contrarian than everybody else.”

In the early years of the Nomad Partnership, Sleep and Zakaria invested in several smaller, less-covered companies that traded at what appeared 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.