#364 Nick & Zak's Excellent Adventure: How Nick Sleep and Qais Zaharia Built Their Investment Partnership

Nick Sleep and Zak Zakaria's investment journey, highlighted in a podcast episode, showcases their dedication to quality and long-term thinking. They founded the Nomad Investment Partnership, emphasizing concentrated investments in high-quality businesses like Amazon, Costco, and Berkshire Hathaway, which follow a "scale economies shared" model. This approach, inspired by historical examples and visionary founders, led to substantial returns and a unique, minimalist investment philosophy. Their story underscores the importance of deep research, independent thinking, and the benefits of focusing on enduring business models over ephemeral market trends.

• Nick Sleep and Zach Zakaria built their investment partnership on the principle of caring intensely about the quality of their actions and decisions.
• They made very few, but heavily concentrated bets on high-quality businesses run by high-quality founders.
• Their philosophy resonated with historical figures like Andrew Carnegie, who emphasized the importance of cost control.

"Nick and Zach's organizing principle was around caring intensely about the quality of your actions and decisions."

• Emphasizes the central philosophy of Sleep and Zakaria's investment approach.

"They made very few, but heavily concentrated bets on what they thought were the highest quality businesses run by the highest quality founders."

• Highlights their strategy of focusing on a small number of high-quality investments.

"Andrew Carnegie said... costs, however, could be strictly controlled. And in Andrew Carnegie's view, any savings achieved in the costs were permanent."

• Shows the historical basis for their emphasis on cost control.

• Nick Sleep had a non-traditional path to finance, studying geology and geography in college.
• He worked in various unrelated fields before landing a job as a trainee investment analyst.
• Sleep's unique perspective and comfort with being different shaped his investment style.

"He had worked in a department store, at an IT firm, and had been a sponsored windsurfer."

• Illustrates Sleep's diverse background before entering finance.

"All the way back in high school... I got comfortable with being different from everyone else."

• Demonstrates his early acceptance of being different, which influenced his investment philosophy.

"You really want to do everything with quality, as that is where the satisfaction and peace is."

• Reflects Sleep's dedication to quality in all aspects of life and investing.

• In 2001, Sleep and Zakaria created the Nomad Investment Partnership as a laboratory for high-quality investing.
• They wrote detailed and humorous letters to shareholders, which became highly regarded.
• Over 14 years, they achieved a tenfold increase in their investors' money.

"In 2001, Sleep and his friend Kais Zak Zakaria created a fund called the Nomad Investment Partnership."

• Marks the beginning of their high-quality investment experiment.

"Over about 14 years, they wind up ten x ing the money."

• Highlights their impressive investment performance.

"Sleep wrote eloquent and amusing letters to shareholders, which have been sent to me many times over the years."

• Indicates the popularity and influence of their shareholder letters.

• After retiring in 2014, Sleep and Zakaria continued to manage their own money with remarkable success.
• They tripled their wealth in the first five years of retirement.
• They maintained a high concentration in a few stocks, sometimes having 70% of their money in a single stock.

"In 2014, Sleep and Zach returned their shareholder money and retired as fund managers at the ripe old age of 45."

• Marks their transition from managing a fund to managing their own money.

"Since then, they've managed their own money with equally striking success, approximately tripling their wealth."

• Demonstrates their continued investment success post-retirement.

"At times, he and Zach had as much as 70% of their money in a single stock."

• Shows their high-concentration investment strategy.

• Sleep and Zakaria are admired for their independence, clarity of thinking, deep research, and high concentration.
• They have a mystique due to their minimal interest in marketing and self-promotion.
• Their story has rarely been told, adding to their enigmatic reputation.

"Their complete independence, the clarity of their thinking, the very deep research, and the very high concentration that they have."

• Lists the traits that make them respected among investors.

"Nick and Zach have always flown under the radar. They had minimal interest in marketing their fund, and even less in self-promotion."

• Highlights their preference for staying out of the spotlight.

"As a result, their story has never been told."

• Indicates the rarity of their story being shared publicly.

• The book "Richer, Wiser, Happier" by William Green provides an overview of how Sleep and Zakaria built their investment partnership.
• Chapter six, titled "Nick and Zach's Excellent Adventure," focuses on their unconventional investment approach.
• Sleep recommends reading this book for those interested in their story.

"William has written the kind of book that we would have loved to written. We are sure you will enjoy the read."

• Reflects Sleep's endorsement of Green's book.

"Chapter six in this excellent book... reveals that the richest rewards go to those who resist the lure of instant gratification."

• Summarizes the central theme of the chapter on Sleep and Zakaria.

• Born in Iraq in 1969, Zakaria's family fled to the UK after being purged.
• His father rebuilt the family through a successful business but later went bankrupt due to stock market speculation.
• Zakaria studied mathematics at Cambridge and started his career as an equity analyst in Hong Kong.

"We were purged. They had to flee Iraq, leave everything behind, and take refuge in the United Kingdom."

• Describes the family's forced migration and rebuilding efforts.

"My father had made his money on things he understood and lost them on things he didn't understand."

• Highlights the importance of understanding investments deeply, a lesson Zakaria carried forward.

"The only job he can get is a job he doesn't want... as a sell-side analyst specializing in Asian stocks at Deutsche Bank."

• Illustrates the challenges Zakaria faced early in his career.

• Zakaria met Sleep while working at Deutsche Bank, marking the beginning of their partnership.
• Sleep also had a challenging start, working at Sun Life of Canada before joining Marathon Asset Management.
• Their shared experiences and philosophies led to the creation of the Nomad Investment Partnership.

"But there was one consolation is because of this job that he meets Nick Sleep."

• Indicates how an undesirable job led to a pivotal meeting.

"Nick's mentor there was one of Marathon's co-founders, this guy named Jeremy Hosking."

• Mentions a key influence on Sleep's investment approach.

"It was hap, it was a scrappy, high flying investment firm in London that was trying to outbox the big guys."

• Describes the environment at Marathon Asset Management, where Sleep honed his skills.

• Nick Sleep and Zack's investment philosophies were heavily influenced by Warren Buffett and Charlie Munger.
• Both were inspired by Buffett's dedication to quality in investments and long-term business ownership.

"Warren Buffett and Charlie Munger spoke about companies they expected to own for decades. Oh, my God, thought Zach. This is nothing to do with a casino. This is about real businesses."

• Zack realized the importance of focusing on real businesses rather than treating the stock market like a casino.

"Buffett struck him as the embodiment of quality."

• Nick saw Buffett as a model of quality in investment practices.

• The Asian financial crisis of 1997 was pivotal in bringing Nick and Zack together.
• Both were involved in scavenging for undervalued stocks during the crisis.

"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."

• Nick and his mentor took advantage of the crisis to find undervalued stocks in Southeast Asia.

"In less than a year, marathon invested about $500 million in Southeast Asia and made a killing as the region rebounded."

• Marathon Asset Management capitalized on the crisis, making significant profits as the market rebounded.

• Nick's desire to launch a concentrated fund led to the creation of Nomad Investment Partnership.
• He recruited Zack as a co-manager, emphasizing a rebellious and unconventional approach.

"Nick kept nagging his bosses to let him launch a concentrated fund within Marathon, with Buffett serving as his model."

• Nick's persistence led to the establishment of a focused investment fund inspired by Buffett's principles.

"From the start, they regarded Nomad as an act of rebellion."

• Nomad was seen as a rebellious venture, focusing on quality and long-term investments.

• Nick and Zack emphasized ignoring short-term, perishable information.
• They focused on long-term, valuable insights and avoided the daily noise of the market.

"They disregarded all ephemeral information. Ephemeral information distracts investors or entrepreneurs, or really anybody from what matters."

• Ignoring fleeting information helped them concentrate on what truly mattered in their investments.

"Nick dismissively refers to these people as junkies who crave information which will be worthless in twelve weeks."

• Nick criticized those who focused on short-term information, likening them to junkies addicted to worthless data.

• Nick and Zack practiced intentional disconnection to focus on deep research and long-term investments.
• They avoided distractions and concentrated on understanding businesses thoroughly.

"Nick and Zach call this practice a practice of intentional disconnection."

• Intentional disconnection allowed them to think in peace and focus on significant matters.

"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."

• Their rigorous research involved extensive reading and company visits.

• Nick and Zack used destination analysis to evaluate businesses based on long-term goals.
• They asked critical questions to understand the future potential of companies.

"What is the intended destination for this business in ten or 20 years? What must management be doing today to raise the probability of arriving at that destination? And what could prevent this company from reaching such a favorable destination?"

• These questions helped them focus on long-term success factors for businesses.

• Their investment philosophy was rooted in a commitment to quality and authenticity.
• They prioritized doing things right over making money.

"There was something provocative about the whole thing. Zach said, could you set up an investment firm which is not about the money. It's about doing everything right."

• Their firm was built on the principle of prioritizing quality over financial gain.

"We just concentrated on picking good stocks and thought everything else was peripheral."

• Their focus was solely on selecting quality stocks, ignoring other distractions.

• They had a strict policy of not working with people they found irritating, regardless of their wealth.
• This approach was similar to David Ogilvy's philosophy of only working with agreeable clients.

"They took delight in turning away investors who seemed irritating, regardless of how rich they were."

• They maintained a pleasant working environment by avoiding difficult clients.

"If I don't like having to deal with the son of a bitch, why should I? We pass this way only once."

• This quote from David Ogilvy encapsulates their approach to client selection.

• Nick, Zack, and other successful investors like Li Lu shared a desire to live authentically.
• They valued control over their work and life, rather than just financial success.

"A lot of people think. 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."

• The primary motivator for entrepreneurs is often control over their work and life, not just money.

• Entrepreneurs often believe that maintaining control over their ventures will naturally lead to financial success.
• The mindset of being in the "driver's seat" is essential for entrepreneurs, allowing them to build their companies according to their vision, rather than conforming to industry norms.

"It is my life and my journey, after all, that is the exact same mindset that Nick and Zach had, and you could see it in their actions."

• This quote illustrates the importance of personal control and vision in entrepreneurial success.

"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."

• Entrepreneurs prioritize their own strategies and decisions over external expectations.

"If I don't like having a deal with this guy, I'm going to fire the client. I only live once. I'm going to stay in the driver's seat."

• Staying true to one's principles and maintaining control is more important than compromising for business deals.

• David Ogilvy's disdain for committees and bureaucratic decision-making processes highlights his preference for individual control and decision-making.
• Ogilvy's approach was to reject business practices that did not align with his values and vision.

"Search all your parks, search a park in every single city, and you'll never find a statue dedicated to committees."

• Ogilvy's famous quote underscores his belief in individual leadership over collective decision-making.

"Ring the bell, stands up, and leaves. That is living life on your terms, that is staying in the driver's seat."

• Ogilvy's actions during the pitch meeting exemplify his commitment to his principles and control over his business dealings.

• Nick and Zach's investment strategy was characterized by simplicity and long-term thinking.
• They avoided leverage, shorting stocks, options, futures, macroeconomic bets, and hyperactive trading.

"Played what they viewed as a long, simple game, which involved buying a few intensely researched stocks and holding them for years."

• Their strategy focused on deeply researched investments held for extended periods.

"You want to build something that has permanence. I believe that good things grow."

• The emphasis on quality and long-term growth was central to their investment philosophy.

• The name "Nomad" reflected their willingness to explore and invest in diverse opportunities globally.
• Their initial strategy involved buying undervalued assets, but they eventually shifted to investing in high-quality businesses for long-term compounding.

"They were gunning for outstanding, absolute returns, unconstrained by reference to what anyone else was doing."

• Their investment approach was independent and focused on absolute returns.

"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."

• The limitations of their initial strategy led them to adopt a more sustainable approach.

• Inspired by Charlie Munger, Nick and Zach transitioned to investing in high-quality businesses with long-term growth potential.
• Their realization came from a costly mistake, leading them to focus on businesses with strong management and sustainable competitive advantages.

"We need to find wonderful businesses and hold those businesses for the long term."

• The shift in strategy aimed at identifying and holding exceptional businesses for extended periods.

"You can subcontract the capital allocation decisions to them, meaning these people, these phenomenal managers."

• Trusting capable managers to allocate capital effectively was a key part of their revised strategy.

• Nick and Zach identified the "scale economies shared" model as the most powerful business model, exemplified by companies like Costco.
• This model involves sharing the benefits of scale with customers, leading to increased customer loyalty and sustainable growth.

"Satisfied customers kept returning and spending more money in its stores, thereby generating enormous revenues."

• The focus on customer satisfaction and low prices drove Costco's success.

"Increase revenues, begets scale. Savings, begets lower costs, begets lower prices, begets increased revenues."

• The virtuous cycle of growth and cost reduction was central to Costco's strategy.

• Nick and Zach's long-term investment in Costco demonstrated the success of their revised strategy.
• They recognized the value in Costco's low-margin, high-volume business model and its ability to generate long-term returns.

"At the time, they're telling the story. They'd owned Costco for 18 years, and over that time period rose from $30 a share to $380 a share, all while also paying rich dividends."

• The significant appreciation in Costco's stock price validated their investment approach.

"Costco kept growing by giving back instead of grabbing all the spoils for itself. Its low margins reflected patience, not weakness."

• Costco's strategy of reinvesting in customer value rather than maximizing short-term profits contributed to its enduring success.

• Nick and Zach's strategy involved extensive research and historical analysis to identify successful business models.
• They studied companies like Walmart, Dell, Southwest Airlines, and others to understand the characteristics of businesses with long-term success.

"As they studied Walmart's annual reports from the 1970s, they realized it had much in common with Costco."

• Historical analysis helped them identify common traits among successful businesses.

"Geico and Nebraska furniture mark, two of Buffett's favorite businesses, continued to drive down costs as they grew."

• Examining Buffett's investments provided additional insights into successful long-term business strategies.

• Henry Ford utilized assembly line production to significantly reduce the cost of the Model T.
• The price of the Model T dropped from $850 to less than $300 due to increased efficiency and technology.

"He used this increased benefits, tech and technology and efficiency, to drive down the price from Model T from $850 to less than $300."

• Ford's approach is an example of a business model that requires relentless dedication.

"It doesn't need to be pursued with evangelical zeal."

• Visionary founders are passionate about details, customer experience, cost-cutting, and long-term investment.
• They often resist external pressures for immediate strong numbers and focus on future growth.

"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."

• Examples include Sam Walton, Jim Sinegal, and Jeff Bezos.

"Sam Walton, Jim Sinegal, Herb Keller, Rose Blomkin."

• Nick and Zach discovered Amazon in 1997 when it was a fledgling bookseller.
• Jeff Bezos’ vision included an extensive selection of books, cost advantages, and reinvestment of cash flow.

"Jeff Bezos gave a presentation in London explaining how he would offer an almost infinite selection of books, how it would gain a cost advantage by avoiding the expensive physical stores, and how it would reinvest in cash flow, the cash flow it makes in other businesses."

• Bezos followed in the footsteps of Henry Ford and Sam Walton by focusing on cost control and long-term investment.

"Jeff Bezos was following in the hallowed footsteps of Henry Ford, Sam Walton, Jim Sinegal, and the Internet would enable him to turbo charge their classic strategy."

• Bezos was extremely meticulous about saving money, exemplified by removing light bulbs from vending machines to save $20,000 annually.

"Amazon went so far as to save $20,000 a year by removing the light bulbs from the vending machines in its offices."

• He prioritized customer savings and long-term investments, despite Wall Street's criticism.

"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."

• Bezos' strategy of reinvesting efficiency improvements and scale economies into lower prices created a virtuous cycle leading to significant free cash flow and a more valuable Amazon.

"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."

• Visionaries like Sam Walton and Warren Buffett built an encyclopedic base of knowledge over years, enabling them to move quickly when opportunities arose.

"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 encyclopedic base of knowledge of retailing."

• This approach allows for rapid decision-making and seizing opportunities effectively.

"That compounding base of knowledge acts like a filter to separate the important from the unimportant."

• Nick and Zach focused on businesses using the scale economy shared model, heavily investing in Amazon, Costco, and Berkshire.

"They did all this work to get this earned secret, to understand the importance and the power of this business model, of the businesses that use the business model of scale economy."

• During the 2008 financial crisis, Nomad's portfolio fell 45.3%, but Nick and Zach remained steadfast and capitalized on the situation.

"Amazon lost half of its market value in 2008, and Nomad fell 45.3%."

• They upgraded their portfolio, concentrating on high-quality companies, leading to a 404% return over the next four years.

"While others panicked, they exploited the market mayhem to upgrade this. And this blew my mind. Everybody else is panicking. They're like, okay, cool opportunity here. We're going to upgrade our portfolio, concentrating even more heavily on its highest quality companies, including Amazon, Costco, and Berkshire."

• Nomad dissolved in 2014 after growing to $3 billion in assets, with Nick and Zach continuing to invest independently.

"In early 2014, Nick and Zach dissolved the Nomad investment partnership. By then, it had grown to about $3 billion in assets."

• They maintained a focus on long-term investments and disregarded short-term market pressures.

"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."

• By 2018, Amazon constituted over 70% of Nick's net worth, prompting him to sell half his stake due to concerns about market value limits.

"By 2018, Amazon had risen so much that it accounted for more than 70% of Nick's net worth."

• Despite selling, Nick felt conflicted about the decision, reflecting on the challenges of long-term investment strategies.

"How did it feel? I hated it, he says. I felt horribly conflicted, and I'm not sure it was a good decision."