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Wandering through Nick Sleep letters
First of all and quick comment, I’ll be spending next Saturday in New York, my flight to Argentina is on Sunday. I think I’ll be staying in Brooklyn. If someone’s from that area and would like to go for a cup of coffee, I’d be more than happy to!
My email is: firstname.lastname@example.org and my LinkedIn is Giuliano Mana
I started reading Nicholas shareholder letters in late March. However, I’m embarrassed to say I did not finish them (left them at 60% read approximately), but will of course return to them as soon as I mentally can. In the meantime, I sadly did not enjoy reading The War of the End of the World, but I loved The House of the Spirits and Notes from Underground (highly recommend this one). Currently, I’m half way through The Feast of the Goat, great book as well.
The reason why I’m not going straight to the article is that I think there’s a pragmatic and applicable piece of advice that derives from this experience. It is very common to saturate oneself by reading a lot of singular topics, but, the longer you keep that extreme focus without taking a break, the less will you enjoy the task. I found that, in times like these, something that brings back my passion for reading is going to literature and history. Once energy and delight are recharged, I’ll get back to going all-in finance.
“Read what you love until you love to read”
Nick was the co-founder and manager of Nomad Investment Partnership, which started operating in 2001. The firm’s profile was quite unique and Nicholas’ letters are delightful to read. They contain thorough explanations of investments in companies like Costco, Amazon, but also cover a lot of psychological ground and how both managers think. Nomad’s track record was spectacular.
These guys approach to investing was very in line with many long-term investors, but the execution differed in a dramatic way. The thesis was the following:
“We are looking for businesses trading at around half of their real business value, companies run by owner-oriented management and employing capital allocation strategies consistent with long term shareholder wealth creation” Jan, 2002
The quote is extremely appropriate in describing their approach. Since we’ve already gone through investors’ philosophy, such as Buffett or Smith, on this occasion, we’ll expand on what I consider are the true gems of Nicholas’ letters.
What makes him unique
I cannot stress enough how much emphasis Nick puts into thinking and his execution gives faith of this. The type of investments Nomad made are one of a kind. They realized that:
“Following what everyone else is doing may be hard to resist, but it is also unlikely to be associated with good investment results” June, 2005
“Good investing is a minority sport, which means that in order to earn returns better than everyone else we need to be doing things different from the crowd” Dec, 2006
Interestingly, we’ve been playing with the idea for a while in this newsletter. It is the common pattern that arises from his and Warren’s letters. Nick further addresses the topic by quoting Ayn Rand and, somewhat related, he refers to investing as a probabilistic field. The latter conforms a developable mental model that can help detaching from the crowd.
“No substitute can do your thinking” Ayn Rand
“What you are trying to do as an investor is exploit the fact that fewer things will happen than can happen” June, 2005
I’ve been lately listening to the audiobook ‘Thinking, Fast and Slow’ and I remember to have heard an explanation of why is thinking probabilistically so hard. Kahnemann distinguishes two forms the brain adopt when looking for answers, System 1 and System 2. The first one is the one that’s continuously active and, therefore, provides the fast answers, it is intuitive and instinctive. System 2 is slow and requires energy, but it is the one capable of methodical and rational thinking. Thinking probabilistically is not intuitive, for which, it is up to System 2. However, System 2 is lazy and, unless we willingly engage with the process of thinking, it will leave the job to System 1. Since humans hardly want to spend this type of energy, system 1 is always at the wheel.
On this regard, Nick also quotes Michael Mauboussin:
“Individuals who achieve the most satisfactory long term results across various probabilistic fields have more in common with one another than they do with participants in their own field”
I never saw someone articulate this concept before in the way Nick does. In 2004, he said Nomad was after an ‘Optimal Portfolio’, which is composed of the ‘super high-quality businesses’. However, Nick realizes the best companies in the world are not always underpriced, for which, to arrive to the optimal portfolio, patience is required. Moreover, he brought to this 2004 letter a study that showed the following:
“Over time, this offers (the study) the prospect that any business, indeed all businesses, will be meaningfully mispriced” June, 2004
Nick not only sees destination as a form of objective in regards to the portfolio, but to businesses as well. This allows me to connect to the previous idea and touch another point, position sizing.
“The high weighting makes sense given our understanding of the destination of the business and the probability of reaching that destination” June, 2007
Of course, Nomad had a heavily concentrated portfolio. They really understood and played around the idea that, over the long term, fundamentals and prices converge. Consequently, if you know the probabilities of a company ending in X scenario, the logical thing to do seems to concentrate appropriately. They let investors know the randomness and oscillation of the fund’s yearly returns, but also say that, over time, returns will tend towards the destination.
Tried something different today. I didn’t feel I could properly cover Nick’s philosophy, so I opted to reproduce two of his great ideas, I need to read the remaining letters. There’s also some other ideas that were left behind and truly unique case-studies to share, so I’ll probably return to him in the future. Hope you enjoyed the article and feel free to subscribe below.
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