Welcome back! I am going to try out a new “series” of posts where I just convey sort of an unformatted “stream of consciousness” about what I’m reading, listening to, or thinking. These posts can hopefully serve as sort of notes or observations for future discussion or reference.
I will stick these on a separate page for ease reference. With this format I won’t feel like I have to try and organize and polish, which can be kind of a drag when your day job is mostly drafting various sorts of formal documents
Ok so first, I’ve been reading the Nomad Investment Partnership letters (you can download them here). Nick Sleep and his partner Qais Zakaria have published the letters online on the site of a charity they support. These guys are former Marathon Asset Management employees. To the best of my knowledge, Marathon is a famous British hedge fund and the Marathon mates (Edward Chancellor is the author I recall) published Capital Account (which is a compendium of their fund letters around the tech bubble) and Capital Returns (which is sort of about their philosophy of at least part of investing; that good returns are generally made in industries and counties, etc… when capital is scarce…basically).
Anyways, Sleep and Zakaria are from Marathon and they went off and started Nomad (well started it while at Marathon and eventually spun off). They’re famous for being big Amazon and Costco winners. If you have never heard of them, maybe check out @neckarvalue’s (that’s his twitter handle) article about Sleep and Nomad.
Ok I am boring myself now. For my purposes, these guys are reputedly great investors. They identified Amazon and Costco and some other stuff early(ish) and really reaped the rewards. At least one of their big ideas, which allowed them to profit from these investments was “scale economies shared.” This basically involves a business which benefits from increased scale and then rather than taking most/all of that benefit in the form of increased margins or profits, they “share” the benefits of that scale with their customers (e.g., lower price or two day delivery) and thereby increase their competitive advantage which leads to more scale.
So Costco is the great example. They charge a standard markup for their members which is supposed to approximate break even. They use their scale to get better deals on coke or Dunkin’ or whatever and then as more people join they get more leverage and a better deal, so there’s a bit of a feedback loop.
Sleep asserted that they engender loyalty and positive feelings via sharing most of the benefits of their model with the customer. Customer first, but with a bit more nuance. Sleep also writes about the “robustness ratio” as a measure of how much of the gains from the model are going to customers versus owners of the business or employees. I noticed that Bezos has included this in some of his letters (Amazon, as stated, is one of Nomads big winners/examples).
The letters also have other good discussion like a bunch of thoughts on observations from behavioral psychology and how they might relate to investing as well as Munger’s thoughts on the subject. Basically a bunch of the Poor Charlie’s Alamanac stuff.
I’m about halfway through the letters. Anyways, some quick observations. I noticed he talked about Amazon and how they were reinvesting all these funds into logistics back in like 2004. He highlighted how it would increase the consumer surplus/delight and robustness ratio (and increase amazon’s moat). He then compared the business to Ebay’s asset light focused model and highlighted pros and cons. After noting the basically infinite scale and fantastic margins for eBay he jokes that maybe they should also own eBay. He definitely proved right on Amazon and I agree about their logistics moat.
I guess AWS fits into this. They definitely get some scale economics from that operation and I guess they are kind of sharing the benefits of their ecommerce operation which was big enough to spin up the AWS cloud with their computing power customers. I don’t know it’s almost like the key was something different, still scaling but scaling a cost base/infrastructure with other businesses, even competitors. I guess it fits with his thesis. Maybe the sharing of economics is just one aspect of AMZN’s success. I will see what Sleep says about it over time through the remaining letters.
Sleep also talks about Berkshire in the context of this “sharing moat.” Specifically, GEICO. GEICO has a cost advantage over competitors and Sleep says their advantage gets greater with scale which they share with customers which deepens their brand affinity and moat leading to more scale. GEICO definitely competes on price and has scale benefits but I wonder if this is just a fancy way of saying they compete on price. GEICO will certainly hike your premiums as all of us are finding out this year.
Nomad wrapped up and return funds to investors. Sleep reportedly (I haven’t reached that part yet) told investors there wasn’t any reason to keep paying him carry because he would just hold Amazon, Costco, and Berkshire basically in perpetuity. So my big observation here is that I should probably load up on Berkshire. It’s not as cheap it was the last couple of years but versus Costco and Amazon it is probably a screaming bargain.
I also observed that Sleep talks a lot about some low cost airlines in Europe and asia and how they took the Southwest Airlines model and employed it (maybe with some tweaks…I think he talked about Ryan Air and some airlines in Asia). I don’t really care about that but it did get me thinking about Southwest (LUV).
LUV could be a name to consider examining. First, it has exemplified Sleep’s model of using scale to achieve benefits and sharing those with customers. It also is pretty customer focused historically for an airline. For example, blowing off the profitable baggage fees and eschewing most of the boarding zone stuff. They stick to one type of plane for economies but it also it nice for customers to know what to expect.
I really think, largely as a result of this sharing of economies, that LUV has a strong brand affinity. Here’s a podcast with the LUV founder (RIP as of 2019). They’ve grown into the largest domestic airline (I think).
Thinking of LUV as an example of Sleeps’ theory, I also remembered that Buffett bought a basket of the airlines before covid. He had to sell them because of covid (and probably the impact that having Berkshire as a shareholder would have had on their requests for government aid and/or his reputation).
The theory bandied about by some/reverse engineered for his airlines basket purchase (after all he has several times lost money in airlines and has often joked about what a trash business it is) was that airline consolidation and just maturation of the industry made it more like the rails (at some point there are no more gates or routes even if you have some credit and an aircraft leasing outfit to back your suicide mission). So like the rails, new competition is pretty much nil and yeah it’s capital intensive but you can command returns as kind of a utility. Also there has been even more regulatory capture (probably) after 9-11. I kind of bought this theory. Maybe the fact that no airlines had to declare bankruptcy even with covid supports the conclusion that the business is better and had the stroke to get assistance rather than simply have half the industry file for bankruptcy.
Airlines in general are not that cheap because the put on a lot of debt to get through covid. LUV doesn’t look to bad though. Also, it seems if business travel is permanently impaired (I’m not sure about that but going to in person work retreats and training does seem especially horrible/archaic now) LUV would be less impacted as mostly a low cost domestic, leisure carrier. So they could stretch their already winning position. If I get moderately serious about it, one thing to look at is what the shareholder base looks like.
Before I sign off, one more potential example of Sleep’s sharing thesis. Charles Schwab (SCHW). Schwab has been cutting prices, scaling up (and offering good stuff) since like the 80’s. They shared their low cost model via broker commissions and eventually they did it via higher rates offered on their cash management accounts. I really like how they are positioning themselves for RIAs. They’ve done the same thing by being the first to go to $0 fees first. They have also really geared up their asset management with cheap funds and ETFs. I guess fidelity and many of their other competitors have also competed on price, but like Fidelity for example still offers and can steer customers to higher fee active funds. I don’t think Schwab offers any of that (or those kind of inherent conflicts and potential dings to the brand).
They benefit from strong brand affinity from what I gather which is probably mostly due to them not trying to sell you stuff and rip you off. I do note that they make money by sticking a bunch of $$$ in cash in their models. So yeah Schwab could be another example. I don’t know, at some point every business that scales and competes on price could look like Amazon, if you focus on this too heavily. I need to look at the Schwab shareholder base. I think Charles Schwab has enough stock to call shots, but not sure. I also should read his book.
Wow this post is getting long. I’m getting a nosebleed. I was going to write more about SMG and some podcasts and other books I’m reading, but we will table that until the next blast.