TIP664: The Nomad Investment Partnership Way: Quality In Business and Beyond w/ Kyle Grieve

Episode Summary

Executive Summary: The episode distills Nick Sleep and Zach’s Nomad Investment Partnership philosophy: long-term ownership of high-quality, founder-led businesses, especially those with shared scale economics and strong customer alignment. It emphasizes patience, concentrated portfolios, destination analysis, and avoiding behavioral traps like commitment bias. The core message is that inactivity can be a powerful advantage when paired with deep understanding and superior business models.

Main Topics: Nomad’s quality-first investing philosophy (Priority: 5/5): Sleep and Zak increasingly focused on businesses, cultures, and managers of exceptional quality, eventually favoring companies with durable advantages and long runways over cheap cigar-butt opportunities. Partnership structure and aligned incentives (Priority: 5/5): Nomad was designed to serve partners, not gather assets. Its fee structure, hurdles, and refund mechanics reflected an unusual commitment to low fees, patience, and shared outcomes. Scale economics shared and customer alignment (Priority: 5/5): A central investment model was businesses that pass scale benefits to customers, creating a flywheel of lower prices, more volume, and stronger moats. Costco is the clearest example. Cone of uncertainty, risk, and position sizing (Priority: 5/5): Nomad used a 'cone of uncertainty' to think about predictability, conviction, and risk. Larger positions were reserved for businesses with smaller uncertainty and higher certainty of favorable outcomes. Inactivity, concentration, and long-term holding (Priority: 4/5): They argued that inactivity is valuable when it means holding a few deep-understood compounders. Concentration was not seen as reckless when applied to high-certainty businesses. Destination analysis and mistake avoidance (Priority: 4/5): Nomad evaluated firms by their likely future destination and what management must do today to reach it. They also identified recurring behavioral mistakes such as denial, anchoring, drift, and judging.

Key Arguments: Nomad’s edge came from patience, not trading activity; they built a structure that rewarded long-term compounding rather than asset gathering. High-quality businesses with customer-aligned economics are safer investments because their future outcomes are more predictable. Scale economics shared can strengthen moats by converting business scale into lower customer prices and more customer loyalty. Concentrating capital in the best-understood businesses can reduce risk when those businesses have the smallest cone of uncertainty. Inactivity is only effective when paired with high-quality compounders; it is not a universal strategy for all holdings. Measuring performance over rolling multi-year periods is more appropriate for long-duration strategies than short-term benchmarking. Publicly sharing ideas can create commitment bias, making it harder to change one’s mind when facts change. Destination analysis helps investors think in terms of where a business is headed, not just what it looks like today.

Data Points: Nomad annualized return (2001-2013): 20.8% before fees / over 18% after fees - Long-term performance of the partnership Dollar growth of partner capital: $1 grew to $10.21 before fees - Illustrates compounding over the partnership’s life MSCI World Index annualized return (same period): 6.5% per annum - Benchmark comparison for 2001-2013 Performance fee hurdle: 6% - Nomad charged performance fees only above this hurdle Initial undervaluation screen: 50% of intrinsic value - Early Nomad investment criterion Five-year intrinsic value example: $1.00 intrinsic value grows to about $1.62 - Used to illustrate value growth over time at 10% intrinsic value growth Compounded annual growth from buying at a 50% discount: ~26% CAGR - Assumes intrinsic value growth and eventual price-to-value convergence Flat-outcome scenario over five years: ~13% CAGR - Even without price re-rating, discount capture plus value growth still compounds well Amazon drawdown in 2008: 64% - Used as an example of volatility in a key Nomad holding Costco drawdown in 2009: 47% - Used as an example of volatility in a key Nomad holding Berkshire Hathaway drawdown in 2009: 51% - Used as an example of volatility in a key Nomad holding Amazon CAGR from bottom: 31% - Performance from the 2008 bottom Costco CAGR from bottom: 23% - Performance from the 2009 bottom Berkshire Hathaway CAGR from bottom: 14% - Performance from the 2009 bottom S&P 500 peak-to-trough (2007-2009): 1,565 to 676 - Great Financial Crisis context Portfolio-wide weighted average revenue growth: Over 30% per annum (2011) - Example of portfolio-level metrics Nomad tracked Price-to-value ratio: About 60% - Indicated portfolio undervaluation versus Nomad’s assessed value Return on invested capital: About double competitors - Portfolio businesses versus peers Robustness ratio at Geico: 1:1 - Customer savings versus shareholder earnings example Robustness ratio at Costco: About 5:1 - Customer savings greatly exceeded shareholder capture Average number of positions: Around 10 - Nomad’s concentrated portfolio approach Positions held in June 2009: About 20 positions; 10 made up 80% of the portfolio - Shows concentration despite some smaller tracking positions Largest single position share: 30% of portfolio - Illustrates extreme conviction in one holding Aritzia example initial purchase price: Around $16 - Used by the speaker to illustrate anchoring bias Aritzia later price range: Around $60 - Shows the stock’s run-up after initial purchase Aritzia later repurchases: Bought more in the 30s and 20s - Speaker’s example of overcoming anchoring bias

Pivotal Quotes: "It may not feel like it, but for long-term investors, this is the best of the times, not the worst. Take heart and look to the horizon." — Nick and Zach (via transcript quote): Framing the Great Financial Crisis as an opportunity for patient investors "Our portfolio in action continues and we are delighted to report that purchase and sale transactions have grinded to a halt." — Nick and Zach: Expressing the value of inactivity when portfolio holdings are high quality "What you are trying to do as an investor is exploit the fact that fewer things will happen than can happen." — Nick and Zach: Explaining their view of risk and the cone of uncertainty

Implications: For investors, the lesson is to seek businesses with durable customer-aligned moats, size positions by certainty, and ignore short-term noise. For funds, low fees, patience, and alignment can be real competitive advantages.