How Nick Sleep Made Compounding Look Easy | Mohnish Pabrai | Stocks

My friend, Nick Sleep. Some of you have heard of him. How many of you have heard of Nick Sleep? We have some Nick Sleep fans here, more than Value Investors Club fans, which is good. So Nick and his partner, Zach, were managing about 2.6 billion about, I think, maybe 10, 12 years ago. And they're based in the UK, in London. And the British regulator was giving them grief, saying, you are too concentrated. You need to be diversified. And I just said that 70% should be in two stocks. Well, the British regulators don't believe that at all. They were telling them that you need to kind of broadly diversify the portfolio. The two of them looked at each other and said, we have more money than we ever thought we'd have. We are richer than we ever thought we'd be. I'm guessing they had a couple of hundred million each. And they said, why don't we just return all the money? And we can then invest our money the way we want. And no regulator is going to tell us anything. They said, what a great idea. So they wrote a letter to their partner saying, we had a great run, great ride, and we're returning all your capital. Nick told his investors that my own money, I'm putting one third into Amazon, one third into Costco, and one third into Berkshire Hathaway. And my suggestion for all of you is that when we return you the money, do exactly the same thing. And the good news is you don't need to pay anyone any fees anymore. And warm regards. Okay. And I get a panicked call from an endowment in the US telling me, did you hear that Nick is returning all the money? I said, yeah, but he also told you what to do. So they said, yes, but we're not allowed to buy individual stocks in our endowment. We have a rule. We can give the money to outside managers, but we can't buy individual stocks. So I said, let me just get this straight. I can set up a fund with the three holdings, and then you can invest, and you can pay me two and 20, and that's okay. He said, yeah, that would work. So I just want to let you know the way the world works. Nick put his money in these three stocks. I think if you calculate it from 2014 till now, he beat everybody. He's riding motorcycles in China, and he's racing cars in Japan, whatever else he's doing, not looking at his portfolio. But what happened is that after 2014, Amazon took off a lot more than the other two, and Amazon became 80% of the pie. Nick forgot something. So one of the things I need to add to the mental model is he forgot something known as escape velocity. Once we get escape velocity, it doesn't matter if one stock is really high, high portion. So he had 200 million, 67 million went into each of these three. I think if he just let it run till today, it's over a billion. So how does it matter if 800 million is in one stock and the 100 million in the other two each? Because even at 200 million, he had escape velocity. So it didn't matter. But what happened is he forgot this. No one talked to him. He hadn't attended his lecture and so on. And so he takes his Amazon position and sells half of it, and he buys what I think is a useless company called Asos. I actually told him that. I said, you could have asked me, I would have told you it's useless. So anyway, he buys this company Asos, which none of you have ever heard of for very good reasons. Asos, of course, goes nowhere. But even with the inefficiency of doing that, he still beat everybody. And then Nick loves this book, Zen and the Art of Motorcycle Maintenance. How many of you have read the book? Oh my God, here. Let me just tell you that it's difficult to get past the first three pages. And it's really difficult to get past the ghost. You know, once the ghost shows up, that's it. A lot of you are going to give up. But what I would suggest to you is that even though it's going to be really, really hard to read the book, please read the book. And the first time you read it, it will make no sense to you. Then read it one more time. And then you'll start to understand that basically, the important thing over that book, which is reflected in those three companies is you pursue the highest levels of quality in the businesses that you're investing in. And the highest level of quality in these businesses in terms of the management and the modes and how they do their business and all that is going to get you to the promised land. When we look at these three companies, they have those attributes. And so that's kind of where we need to be. Look at this table. A dollar invested in Nomad Investment Partnership at inception grew to $10.21 before fees compared to with just $2.17 in the MSCI World Index. That means Nomad compounded at around 20.8% a year versus roughly 6.5% for the index. So how did Nick Sleep achieve this? Stay with me till the end as I break how Nick Sleep compounded Nomad at 20.8% a year. Sleep's investment journey evolved from cigar butt investing to owning businesses almost permanently. And that shift reveals the core of Nomad's strategy. Concentration, very low turnover, deep research, and long-term holding period. Let's talk about the power of concentration. Imagine you have 2% position that becomes a 10 bagger. That investment becomes 20% of your original portfolio. But if you start with the 10% position and it becomes a 10 bagger, that single investment can generate a return equivalent And if you have several such investments, the effect of the compounding can be enormous. And that's why Nomad allowed its highest conviction ideas to become meaningful positions rather than constantly trimming them just because they had gone up. Sleep wasn't asking what will this stock do next quarter. He was asking what would this business be worth 10 years from now. And here's another fascinating example. In 2008, Nomad's partnership voted to This wasn't because they had given up on the public markets. The problem was that being listed became a restriction on how large an individual investment could become. For a fund built around concentrated, high conviction investing, those restrictions could actually become a problem. After delisting, Nomad had greater freedom to let its best ideas become much larger positions. Sleep estimated that this change made Nomad's NAV was around 20% higher than it would have been if those investment limits had remained. In other words, sometimes portfolio structure itself can affect investment returns. And then there's perhaps the most counterintuitive lesson. At the end of 2008, Nomad pointed out that after five years of hard work, its cumulative return was only about 0.4% versus minus 2.5% of the MSA world index. Five years of research, patience, and investing had almost nothing to show for it. Yet they did not abandon the strategy. Sometimes they simply did nothing. In one letter, Sleep described Nomad as essentially inactive because they already owned the businesses they wanted. And that's perhaps the biggest Nomad lessons. Research deeply, concentrate when conviction is high, hold great businesses for a very long time, and don't confuse activity with investing.