Episode #364: Nick & Zak's Excellent Adventure: How Nick Sleep and Qais Zaharia Built Their Investment Partnership
Release Date: September 10, 2024
Host: David Senra
Podcast: Founders
Book Reference: Richer, Wiser, Happier by William Green
Introduction
In Episode #364 of Founders, host David Senra delves into the extraordinary journey of Nick Sleep and Qais Zaharia (Zach), the dynamic duo behind the Nomad Investment Partnership. Drawing insights from William Green's biography of these investment legends, Senra unpacks their unique approach to investing, their unwavering dedication to quality, and the profound lessons entrepreneurs can glean from their story.
Early Careers and Backgrounds
Nick Sleep's Unconventional Path [07:30]
Nick Sleep's journey into finance was anything but straightforward. Originally studying geology and geography, Sleep's diverse employment history included roles in IT and even windsurfing sponsorships. Despite lacking traditional qualifications, his intellectual curiosity led him to Edinburgh's renowned fund management scene. Inspired by Marc Andreessen's belief in learning from historical entrepreneurial experiments, Sleep immersed himself in understanding investment strategies, eventually securing a trainee analyst position at a small Scottish fund.
Zach Zaharia's Resilience and Adaptability [15:45]
Zach Zaharia's story is one of resilience. Born in Iraq to a privileged family, he fled the country amid political turmoil, rebuilding his life in the United Kingdom. Despite facing setbacks, including his father's bankruptcy due to speculative losses, Zach's determination saw him through roles in equity analysis at Deutsche Bank and later, a transformative partnership with Nick Sleep at Marathon Asset Management.
Founding of Nomad Investment Partnership
The Spark of Collaboration [25:10]
In 2001, amidst the aftermath of the Asian Financial Crisis, Sleep and Zach co-founded the Nomad Investment Partnership. Their collaboration was rooted in a shared philosophy of quality and efficiency, inspired by mentors like Jeremy Hosking from Marathon Asset Management and literary influences such as Zen and the Art of Motorcycle Maintenance. This partnership aimed to invest in high-quality businesses with long-term growth potential, steering clear of ephemeral market trends.
Philosophical Underpinnings [35:20]
Nick Sleep emphasized, “[Nick] and [Zach] developed a deep understanding. They make their money on things they understand deeply” ([35:20]). This commitment to depth over breadth became the cornerstone of their investment strategy, focusing on businesses with sustainable competitive advantages.
Investment Philosophy and Strategy
Relentless Dedication to Quality [50:05]
Sleep and Zach's investment philosophy was heavily influenced by their dedication to quality. Reflecting on William James, Sleep noted, “The art of being wise is the art of knowing what to overlook” ([50:05]). They practiced intentional disconnection, avoiding transient market noise to focus on long-term value creation.
Destination Analysis [1:05:30]
A key component of their strategy was destination analysis—projecting where a business would stand in 10 to 20 years and determining the necessary steps to reach that vision. This method ensured that their investments were aligned with long-term growth and sustainability rather than short-term gains.
Scale Economies, Shared Model [1:25:15]
Identifying the "scale economies, shared" model as their earned secret, Sleep and Zach sought companies that leveraged economies of scale to pass savings onto customers, fostering loyalty and sustained growth. This model was epitomized by their investments in Costco and later, Amazon.
Key Investments and Successes
Costco: A Paradigm of Shared Economies [1:40:50]
Investing in Costco in 2002 marked a pivotal moment for Nomad. Despite Wall Street's skepticism over Costco's low-profit margins, Sleep and Zach recognized the long-term value in its customer-centric strategy. Sleep articulated, “I believe that good things grow” ([1:50:10]), encapsulating their faith in Costco's virtuous cycle of growth through customer satisfaction and cost efficiency.
Amazon: Embracing the Future [2:10:40]
Their investment in Amazon, initiated at around $30 per share in 2005, showcased their ability to identify companies poised for monumental growth. By deeply understanding Jeff Bezos's vision of relentless efficiency and customer value, they saw Amazon as a continuation of the successful models pioneered by industry giants like Henry Ford and Sam Walton.
Lessons Learned and Evolution of Strategy
Adapting Through Market Turbulence [2:35:25]
The 2008 financial crisis tested Nomad's strategy, with Amazon's market value halving and Nomad’s fund dropping by 45.3%. Contrary to prevailing panic, Sleep and Zach saw this as an opportunity to reinforce their commitment to high-quality investments. As Sleep put it, “[They] exploited the market mayhem to upgrade this” ([2:40:05]), ultimately leading to a 404% return in the subsequent four years.
From Cigar Butt Investing to Quality Holdings [2:55:50]
Initially focused on "cigar butt" investing—buying undervalued stocks with the intent to sell once they rebounded—Sleep and Zach transitioned to a buy-and-hold strategy for exceptional businesses. This shift was catalyzed by their experience with Stagecoach, where early profits missed out on the company's substantial upside, reinforcing the importance of long-term commitment.
Retirement and Continued Investing
Dissolving Nomad and Personal Portfolios [3:15:30]
In 2014, after decimating Nomad Investment Partnership with $2 billion in profits, Sleep and Zach retired, choosing to manage their wealth independently. Their personal portfolios reflected their investment philosophy, with Sleep concentrating almost entirely on Amazon, Costco, and Berkshire Hathaway—demonstrating their unwavering belief in these companies' enduring value.
Navigating Emotional Decisions [3:35:45]
Facing the immense growth of Amazon, Sleep confronted the emotional challenge of divesting from his favorite investment. He confessed, “I felt horribly conflicted and I'm not sure it was a good decision” ([3:40:00]), highlighting the psychological complexities of managing success and adhering to personal investment principles.
Conclusion and Key Takeaways
Nick Sleep and Qais Zaharia's journey with Nomad Investment Partnership offers invaluable lessons for entrepreneurs and investors alike:
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Deep Understanding Over Surface Knowledge: Success stems from a profound comprehension of chosen investments, not just superficial familiarity.
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Long-Term Commitment: Embracing a buy-and-hold strategy for exceptional businesses fosters sustained growth and resilience against market volatility.
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Quality and Efficiency: Prioritizing quality in actions and decisions leads to enduring success, as exemplified by their investment choices.
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Intentional Disconnection: Avoiding transient distractions allows for focused, strategic decision-making aligned with long-term goals.
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Adaptability: Evolving investment strategies in response to real-world experiences ensures continued relevance and performance.
David Senra concludes the episode by highly recommending William Green's Richer, Wiser, Happier for its comprehensive portrayal of Sleep and Zach's investment philosophies and achievements. He also teases an upcoming episode that will delve into Nick Sleep's partnership letters, promising listeners deeper insights into their strategic thinking.
Notable Quotes:
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Nick Sleep on Quality:
“I believe that good things grow.” [1:45:10] -
Destination Analysis Concept:
“The art of being wise is the art of knowing what to overlook.” [50:05] -
On Investment Strategy Shift:
“We need to forget this cigar butt business. We need to find wonderful businesses and hold those businesses for the long term.” [1:30:25] -
Emotional Decision-Making:
“I felt horribly conflicted and I'm not sure it was a good decision.” [3:40:00]
This episode serves as a masterclass in disciplined investing, emphasizing the importance of quality, long-term vision, and unwavering commitment to foundational principles. For entrepreneurs and investors seeking inspiration and actionable insights, the story of Nick Sleep and Qais Zaharia is both enlightening and empowering.