The complete letters of Nomad Investment Partnership [UPDATE]

Stuck on what to read over the Christmas break? Or perhaps fearful of what you might be given to read in your stocking? Well, dear investors, fear not. Because someone* (update: this has changed! see below) has taken the effort to upload the complete letters of the Nomad Investment Partnership — an investment firm run by Nicholas Sleep and Qais Zakaria — to the internet.

You’ll find a link here.

You may not be familiar with the two names — they’re not cannon investment figures like Charlie Munger, Joel Greenblatt or Peter Lynch — but their track record is equally as good. During the 12 years the two ran Nomad, to 2013, the fund returned 921.1 per cent, or 18.4 per cent per annum after performance fees. Not bad eh?

What’s even more impressive, however, is the writing. After all, we should know more than anyone that generating eloquent prose on a subject like investing is harder than beating a benchmark (well sometimes it feels like that anyway).

So take a dive into the letters, and what you’ll find are several nuggets on the two managers’ investing style, which seems to simultaneously straddle value, growth and special situations, depending on the market mood.

In our read-through this afternoon, this one paragraph from a June 30 2010 letter stood out on the subject of competitive dynamics:

Take a one-big-thing-firm, such as a drug company, for example. A successful drug firm does not need to be particularly good at marketing, manufacturing, or research and development for that matter if, through a patent, it has a legal monopoly on a drug. But just look, if you will, at how fragile the drug company ecosystem is. A rival could displace it at any time with a better chemical and the firm would be left with little to fall back on, certainly not marketing, R&D, and manufacturing. Its period of exceptional profitability may therefore be quite finite and the big drug firms wrestle with this issue today.

Contrast this with a scale economics business: To better an incumbent’s cost base a rival would have to be superior at, not one thing, but a million little actions – a far harder task. Amazon’s letter to shareholders this year contains the following section:

“…We believe that focussing our energy on the controllable inputs to our business is the most effective way to maximise our financial outputs over time…we’ve been using this same annual [goal setting] process for many years. For 2010, we have 452 detailed goals, with owners, deliverables and targeted completion dates”.

At Amazon one employee initiative to remove the light bulbs from the vending machines (really!) saves the firm U$20,000 per annum! At the Welsh insurance company the penny dropped: firms that have a process to do many things a little better than their rivals may be less risky than firms that do one thing right because their future success is more predictable. They are simply harder to beat. And if they are harder to beat then they may be very valuable businesses indeed.

For those who weren’t aware, two of Nomad’s core positions were Costco and Amazon. Which, judging by the above, makes a lot of sense.

Anyway, happy reading. And do let us know your favourite bits in the comments below.

*UPDATE: Nick and Zach have decided to upload an official version of the letters on Nick’s foundation website, I.G.Y. Do have an explore of the Foundation, it seems as thoughtful as the letters.

Related Links:
Cult figure of investing one of few to grasp early promise of internet stocks — FT
Another lesson from cult fundie Nicholas Sleep — FT Alphaville