How much do we really know as investors? Do we know the ins and outs of a diversified portfolio of say 80 stocks? I’ve recently read through the Nomad Investment Partnership letters and one of its management duo Nick Sleep believed there are just a few big things in life that are knowable and it was for that reason Nomad had just a few investments. If you believe the probabilities are in your favour that you have found an insightful business truth then you may be justified in having a concentrated portfolio of 10 businesses.
Steve Schwarzman in his book lessons in the pursuit of excellence thinks in a similar way to sleep noting that typically there are only two or three important factors that are important in every deal an investor should pay attention to, the rest is largely noise.
As a fundamental investor Sleep touched upon what has been a robust investment principle:
“ The trick it seems to us, if one is to be a successful long term investor is to recognise the sources of enduring business success, get in early and own enough to make a difference.”
This seems obvious but simply pursuing the sources of enduring business success could be contrarian in an investment community where there is a mass army of short term quantitative traders, technical approaches, macro forecasters and sentiment based market timers. Superior investment success requires doing something different and better than the herd and pre 2014 when Sleep ran Nomad - his long term, business focused strategy was superior to the crowd.
Thus as we look at crypto investments it might pay to ask the questions Sleep asked to his stocks while at Nomad:
What are the sources of crypto projects success? Are they predictable and if so why are they not discounted in prices already?
One of Nomad’s valuable insights that Nick believed drove enduring success was the scale economies shared model that Amazon and Walmart used and which turned size -normally an anchor on business growth in to an asset. While many valuation heuristics would scale down growth in their DCF models this was the wrong way to value businesses who shared their scale benefits with customers through price give backs. Nomad realised that Amazon’s culture of price give backs was stable overtime and the source of great success. Culture however is harder to quantify and less easily screened for and thus went undervalued to a large part of the investment community.
So to sum what investment principles can we take away as long term fundamental value driven investors:
Superior performance requires unconventional thinking and requires your approach to be different and better than the herd. If your analysis is wrong you run the risk of under performance.
Digging down deep in to the root cause of enduring business success can be contrarian however obvious it seems and thus can lead to superior performance.
Be obsessively customer focused rather than competitor focused.
When you find an important business truth that is probably right it pays to outweigh your bet size.
A highly concentrated inactive portfolio or as Charlie Munger says sitting on your ass requires daily decisions not to sell. Sleep believes almost no one does this because it requires patience. A trait lacking in the investment profession.
Resources
https://igyfoundation.org.uk/wp-content/uploads/2021/03/Full_Collection_Nomad_Letters_.pdf