Nick Sleep's Secret Sauce: How a Maverick Investor's Insights Can Supercharge Your Returns
Insights from Nick Sleep's Playbook
In the ever-evolving landscape of finance and investment, there are individuals whose remarkable stories not only inspire but also offer invaluable lessons for those seeking financial success. Nick Sleep is undeniably one of these luminaries, a figure whose journey from obscurity to financial stardom has left an indelible mark on the investment world. Co-founder of the Nomad Investment Partnership, Nick Sleep orchestrated a financial symphony that would make any investor's heart skip a beat. Over a span of 13 years, his fund achieved an astounding return of 921.1%, a meteoric rise when compared to the more modest 116.9% return of the MSCI World Index during the same period. It's a feat that investors worldwide have sought to dissect and understand.
Fortune smiles upon us as Nick Sleep generously shares his treasure trove of fund letters, allowing us an unprecedented glimpse into his world of wisdom. After tireless hours of dissecting these letters, I am thrilled to present the most invaluable lessons gleaned from the mind of Nick Sleep in this post.
The Robustness Ratio
The robustness ratio can be defined as the “combined distribution to customers and employees divided by the distribution to shareholders.” It basically is the amount of money a customer saves compared to the amount earning by shareholders. It is a framework one can use to think about or measure the size of a company's moat.
This ratio is clearly appropriate for companies which aim to provide goods/ services to customers at the lowest possible price( where the customer proposition is based on price), such as Costco and GEICO.
GEICO policyholders save $1bn on their policies when compared to the next cheapest carrier and GEICO itself earned $1bn too, $1 saving to the customer and $1 retained for shareholders. Costco saves the customer $5 for every $1 it retains, this clearly gives Costco a huge competitive advantage. The higher the ratio, the harder it will be for competitors to compete against the business.
Deep Discount To Replacement Cost With Latent Pricing Power
This is an investment model Nick Sleep has used to make numerous successful investments. During the Asian crisis, he invested in Siam Cement which rose 20x in 8 years, and in South Africa he invested in Pretoria Portland Cement which was bought at $20/ ton of capacity and now trades at $180/ton of capacity( i.e. at time of letter release).
His next investment using this model was into Zimcem. Zimcem was Zimbabwe’s second largest cement producer, which had 700 000 tons of cement capacity with replacements costs at around $70 to $100 million and had no debt. It is important to note that the business environment was not desirable as general inflation exceeded cement price inflation and there was low demand.
Replacement costs are “the cash outlay that the business has to pay to replace an old asset at the existing market price.”
Zimcem was priced on the Harare Stock Exchange( I tried to find it, but it does not seem to be listed anymore) at one seventieth of its replacement cost!
This model is based on the fact that the business needs to replace its assets. This will require prices( hence the latent pricing power) that will:
Fund the capex
Economically justify the spending
The Terminal Portfolio
In one of his letters , Nick Sleep lets out how he keeps a list of companies under the title “super high quality thinkers” and this list had up to 15 businesses in it. Entry into this list is not easy and it requires a business with good economics and management with disciplined capital allocation skills. The longer investors hold their shares, the more their outcome is linked to these two metrics.
The essence of this "terminal portfolio" is to invest in firms where shareholders can confidently entrust capital allocation to management due to their consistently excellent performance.
This “terminal portfolio” however didn’t match with Nomad’s current portfolio at the time.
Why?
The answer is Price.
Nick has the patience to wait to buy in these high quality businesses at the appropriate price.
“ Those that chase high prices today, leave less gunpowder for the future.”
We can clone Nick by creating our own terminal portfolio. We can create a concise list of about 15 high quality companies and simply wait till the price is right. Your search criteria should begin with quality and then you wait for the right price. Do not follow Wallstreet logic of investing in low quality businesses simply because they are cheap.
Scale Efficiencies Shared
This is another investment model Nick Sleep mentions, which has resulted in his investments into Costco and Amazon.
As a business gains scale(i.e. get larger) it has the advantage of achieving lower costs per unit, as the costs are getting spread over a larger base and the business has increase bargaining power over the suppliers. This results in a decrease in costs and hence an increase in margins.
Wallstreet applauds this increase in margins, but does this actually make the business better and does its increase its longevity?
Enter Costco. With Costco the cost savings achieved by scale are returned to the customers via even lower prices, thus we hardly see any increase in margins( This doesn’t please the analysts on Wallstreet). This attracts more customers, hence more scale and revenue, hence more costs savings and hence even more lower prices for the customer. It is essentially a perpetual growth machine!
The company grows by giving more back.
I rather chew on a 6x6 Egyptian Rug that compete with such a company.
Resisting Institutional Imperative
Nick once sought the services of an investment bank( This was his first and only time). He asked the investment bank to run a screen for him for companies that have not had an increase/ decrease in the number of shares outstanding in the last 10 years. He wanted to use this screen to fish out quality management as it would yield companies that had resisted the fashion of using stock repurchases, stock issuance and options to fund growth when it was common to do so. Basically companies that were able to resist the institutional imperative.
This screen yielded 7 companies, however Nick only mentions 4:
Fastenal
Wesco Financial
Eric Family Life
Hearshey Creamery
Quality Investor Base
At the end of almost every letter Nick Sleep doesn’t forget to mention Nomad’s key advantage. That advantage is the aggregate patient of its investor base. The patience of Nomad’s investor base allows Nick Sleep to truly invest for the long term unlike his counterparts on Wallstreet who are forced to try outperform every quarter.
Portfolio Concentration
Nick Sleep believes that diversification has nothing to do with investment excellence. But it is done for marketing, making clients feel comfortable and smoothening of investment results.
Hence portfolio concentration is preferred by Nick Sleep. As the number of stocks in your portfolio increase, your concentration is diluted among many securities. Thus it will be hard for you to play close attention to corporate governance, capital allocation and incentive plans
These lessons are explicit evidence of how much of a great thinker Nick Sleep is . If you interested in learning more about him , I suggest these two books.
Richer, Wiser, Happier by William Green
Zen and the Art of Motorcycle Maintenance ( This is one of Nick’s favorite books)
Done.
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