#364 Nick & Zak's Excellent Adventure: How Nick Sleep and Qais Zaharia Built Their Investment Partnership

**David Senra** (0:00)
Here's something exciting for you. I am doing a live podcast next Monday, September 16th in New York City with my friend Patrick from Invest Like the Best. It is free because of the good people, my friends at RAMP. It is going to be at RAMP's headquarters in Manhattan. If you live in New York and you want to attend, or if you want to hop on a plane for that matter and fly to New York on short notice next week, there is a link down below on your podcast player, and you can use that link to register to attend. You gotta move fast, space is very, very limited. I'm very grateful to the founders of RAMP for offering to do this, to offering to make it free for all. One thing that's really important to the founders of RAMP who have become good friends and I spent a lot of time with, it's also important to me. It's also important to Nick and Zak and the crazy story that you're about to hear, and that is this relentless dedication to quality. As you're about to find out, Nick Sleep and his partner, Zak, have this cult-like following, this mystique about them. Not only do they have this phenomenal performance in the very unique and maverick way they built their fund and their partnership, a partnership that made their investors about $2 billion in profit in 10 years. But Nick and Zak's organizing principle was around caring intensely about the quality of your actions and decisions. And so they made very few but heavily concentrated bets on what they thought were the highest quality businesses run by the highest quality founders. And in this book, Nick and Zak talk about the qualities that these world-class founders have. And if you've been listening to Founders for a while now, this is not going to come as a surprise for you. They said these formidably efficient companies kept costs low. At one point, they have about 70% of their net worth tied up in Amazon. They talk about what they loved about. One of the things I loved about Bezos is that Jeff Bezos was ruthlessly efficient about controlling costs. Nick and Zak's partnership started before Founders existed and ended before Founders existed. And yet it is through their relentless study of the history of entrepreneurship that they arrived at the exact same conclusion. It's exactly what Andrew Carnegie said. He'd repeat the mantra over and over again that profits and prices are cyclical. They're subject to any number of transient forces on the marketplace. Costs, however, could be strictly controlled. And in Andrew Carnegie's view, any savings achieved in the costs were permanent. And it is because he believed that there's a line in Andrew Carnegie's biography that says cost control became an obsession. The reason I partnered with Ramp is because Ramp shares that obsession. The reason Ramp exists is to give you everything you need to control your spend. Ramp gives you everything you need to control your cost. Ramp gives you easy to use corporate cards for your entire team, automated expense reporting and cost control. I've been spending a lot of time with their CTO and co-founder and a good friend of mine, Kareem, and their heads of AI. The technical talent inside of Ramp, which I'll tell you more about in the upcoming weeks, is incredible. When you become a Ramp customer, that means you have these mad scientists and math and technical geniuses working 24 hours a day, building products that help you run an efficient organization. Check out Ramp's website. I think it's incredible. Make history's greatest entrepreneurs proud by going to ramp.com to learn how they can help your business control costs. That is ramp.com.
Nick Sleep wanted to stay in Edinburgh. So he looked around to see what Edinburgh was good at. And he learned that Edinburgh had a reputation for fund management. So he read an obscure book titled Investment Trust Explained to help him figure out what the investing business was all about. He came away intrigued. He said, I like the sense of it being an intellectual investigation. So Sleep landed a job as a trainee investment analyst at a small scottish fund company. He was not abundantly qualified for the job. At college, he had studied geology and then switched to geography. His employment history offered no evidence that he was going to be good for a career in finance. He had worked in a department store, at an IT firm and had been a sponsored windsurfer. Still he had stumbled into a field that perfectly suited his idiosyncratic mind. Like all of the best investors, Sleep views the world from an unusual angle. Sleep commented on this saying all the way back in high school. He says, I got comfortable with being different from everyone else early on. I was happy being outside the group. When Sleep was about 20, he read the book Zen and the Art of Motorcycle Maintenance, An Inquiry into Values. It was a strange but brilliant meditation on what it means to lead a life dedicated to quality. The book exalts people who care so intensely about the quality of their actions and decisions that even the most mundane work becomes a spiritual exercise. For the author, motorcycle maintenance provides an ideal metaphor for how to live and work in a transcendent way. The real cycle you're working on is a cycle called yourself. The book's approach to life resonated deeply with Sleep and shaped the type of investor he would become. This is how Nick Sleep described the book's enduring impact on him. You really want to do everything with quality, as that is where the satisfaction and peace is. But what does this mean when it comes to investing? In 2001, Sleep and his friend Qais Zaharia created a fund called the Nomad Investment Partnership, which they viewed as a laboratory test for how to invest, think and behave in the most high-quality way. Sleep wrote eloquent and amusing letters to shareholders, which have been sent to me many times over the years, and people have asked, requested that I do an episode on them, which will be the next episode after this one. And there was a stunning outcome of this high-minded experiment. It's over about 14 years, they went up 10X-ing the money. In 2014, Sleep and Zak returned their shareholder money and retired as fund managers at the ripe old age of 45 Since then, they've managed their own money with equally striking success, approximately tripling their wealth in the first five years of retirement. Sleep, with characteristic indifference to conventional opinion, invested almost all of his fortune in just three stocks. At times, he and Zak had as much as 70% of their money in a single stock. And then, it lists a few of the traits that other investors admire about them. Their complete independence, the clarity of their thinking, the very deep research and the very high concentration that they have. And then, of course, their mystique. Nick and Zak have always flown under the radar. They had minimal interest in marketing their fund and even less in self-promotion. As a result, their story has never been told. But over the last few years, I've interviewed Nick Sleep on multiple occasions. I spent an afternoon with him and Zak at their office in London. It was there that they reflected on what they called their adventures in capitalism. That was an excerpt of the book I'm going to talk to you about today, which is Richer, Wiser, Happier, How the World's Greatest Investors Win in Markets and Life, and is written by William Green. And actually, I'm going to focus on a single chapter, chapter six, in this excellent book. And as a matter of fact, the chapter is called Nick and Zak's Excellent Adventure. A radically unconventional investment partnership reveals that the richest rewards go to those who resist the lure of instant gratification. In fact, at the very end of Nick Sleep's shareholder letters, I guess partnership letters is more accurate, he recommends reading this book. He says, to those who wish to read more, you can do so in William Green's book, Richer, Wiser, Happier. William has written the kind of book that we would have loved to have written. We are sure you will enjoy the read. And I definitely agree. I think William Green does this fantastic job of giving us an overview of exactly how they built this investment partnership. And I think covering this first and then next week, you and I discussing the ideas that are actually Nick Sleep's partnership letters is the perfect sequence. So let's go ahead and jump in to a little background on both Nick and Zak. So Zak was born in Iraq in 1969 He says he was born into a relatively privileged family. His father worked at the Iraqi Central Bank, and his mother lectured at the University of Baghdad. Three years later, Zak describes them having to flee the country by saying we were purged. They had to flee Iraq, leave everything behind and take refuge in the United Kingdom. His dad builds the family back up by starting a successful business that exports machinery back into Iraq. By the time Zak is leaving home to go to school, he's going to go to Cambridge to study mathematics. His dad goes bankrupt. He goes bankrupt not through his main business. He actually goes bankrupt because he was speculating in the stock market with borrowed money. This is the way Zak describes it, I think it's really important. My father had made his money on things he understood, and lost them on things he didn't understand. And so on every single episode, before I sit down to talk to you, I go over my notes and highlights multiple, multiple, multiple times. And the last time I went over them, because now I'm rereading notes and highlights, I know how the story ends. And this part becomes even more important because he says, you know, my father made his money on things he understood, and lost it on things he didn't understand. Nick and Zak, a cornerstone to their partnership, I would say, is the fact that Nick and Zak develop a deep understanding. They make their money on things they understand deeply. So after graduating from Cambridge, Zak heads to Hong Kong. He gets a job as an equity analyst. This doesn't last long because it turns out his boss was crooked. His boss was being fired and then fined millions of dollars. And then as a result, Zak was laid off. And so Zak was telling William Green about like how desperate this part of his life was, that he would call all his friends, apply to any job, say he would literally do anything. And there's a reoccurring theme when you read a lot of biographies. The way I would summarize this is that opportunity is a strange beast. It frequently appears after a loss. The only job he can get is a job he doesn't want. And that job is as a sell side analyst specializing Asian stocks at Deutsche Bank. Zak describes this part of his life as absolute hell. He said, I did it for four years and it was absolute hell. I was not being someone who is easily sold to, I couldn't sell to anyone. But there was one consolation is because of this job that he meets Nick Sleep. Opportunity is a strange beast. It frequently appears after a loss or what is perceived as a loss, a temporary loss. So it's during the same time that Nick left that small scottish fund. He went and got a job at Sun Life of Canada, which was this gigantic financial services firm, had tens of thousands of employees. That's Nick could never work in a big company, he says, because I was almost allergic to working there. Once you've worked for a feisty company, it's quite difficult to go work for something that's big, dull and boring. So he quits and then gets a job at the place, this is actually one of the last jobs we'll ever have. And in 1995, he goes and starts working at Marathon Asset Management. He's going to wind up staying there for more than a decade, and then wind up spinning out Nomad Investment Partnership from Marathon Asset Management. This is the way he described the company he's working for. It was a scrappy, high-flying investment firm in London that was trying to outbox the big guys. Nick's mentor there was one of Marathon's co-founders, this guy named Jeremy Hosking, and this is how Nick describes him. He's naturally iconoclastic. His bias is to buy about the most despised thing he can find. He likes the controversy, he likes the difficulty. The reason I was thinking about reading this now is because I just spent two weeks studying Li Lu and there's a lot of similarities in the way they think. In fact, the collection of Nomad Investment Partnership letters, it starts with a letter from Nick Sleep to Warren Buffett and then the response by Buffett. Just like last week, we saw the huge influence that Buffett and Munger had on Li Lu. It's the exact same thing for Nick and Zak. One of the things that jumped out to me is Li Lu talked about, he started his fund when the Asian financial crisis was happening in 1997 We see that exact same event is what brings Nick and Zak together. Nick is describing his mentor, one of the co-founders of Marathon Asset Management. He's like, hey, this guy's iconoclastic, he likes controversy, he likes difficulty, just sell me everything that other people won't buy. It says, the Asian financial crisis struck in 1997 Nick and his mentor go scavenging for cheap stocks in the smoldering markets of Southeast Asia. Everybody else at the time is running for cover and they're running in. It is through this process that they find this unlikely ally, which is this Asian-based broker who wasn't like everyone else, that is Zak. Nick is at Marathon Asset Management, Zak is at Deutsche Bank, they're talking regularly about all these crazy bargains that they're unearthing in places like Singapore, Hong Kong, the Philippines. And so Jeremy Hosking tells Zak, hey, when you can't sell a stock to anyone else, call us. And so this is what Nick means about Jeremy Hosking being naturally iconoclastic. In less than a year, Marathon invested about $500 million in Southeast Asia and made a killing as the region rebounded. So pre-Asian financial crisis, stocks were trading at like three times the replacement cost of their assets during the crisis. They were buying those exact same stocks for one quarter of the replacement cost of their assets. And so it's after this when they recruit Zak to Marathon. So he moves from Hong Kong to London in 2000 And it says Zak escaped from Deutsche Bank to work with Nick as an analyst at Marathon's office in London. Together, they traveled to Omaha for Berkshire Hathaway's annual meeting. It was wonderful, Zak said. Warren Buffett and Charlie Munger spoke about companies they expected to own for decades. Oh my God, thought Zak. This is nothing to do with a casino. This is about real businesses. Nick kept nagging his bosses to let him launch a concentrated fund within Marathon, with Buffett serving as his model. Buffett struck him as the embodiment of quality. And so all throughout the margins, all through these notes, I'm constantly writing there. When they mentioned things like this, I just keep writing Lelou. This is just like Lelou. In the interviews that you and I talked about last week, Lelou's like, hey, I learned, I stumbled into this random talk at Columbia from this Buffett guy. Turns out I went up learning from the very best. I don't need anything else besides that. And so when you have somebody like Nick that was fundamentally changed by this book that says, hey, dedicate your life to the quality, the quality of your craft. And then he goes to Omaha and he listens to the philosophy and the perspective of Buffett and he realizes, oh, this is the, Buffett in my business, Buffett is the embodiment of quality. So in 2001, Nick's bosses give him the green light to start Nomad Investment Partnership and then he asked Zak to join him as a co-manager of the fund. And then go back to what Nick said about, hey, I was real comfortable, I like being an outsider from a very young age. And so he says, it was obvious that we were always going to do something a little bit odd. From the start, they regarded Nomad as an act of rebellion. And then this part just sings to my soul because they decide to concentrate on what to ignore. This section is called, never mind the bollocks, I need to translate that to American for you. Never mind the bullshit, is the way I would put it. And so they start out with a very simple ambition. Their target is a 10-fold increase in Nomad's net asset value. And this is the part which I absolutely love. There's a great line, a great maxim from the history of entrepreneurship that comes up over and over again. This is genius has the fewest moving parts. I think about that often as a reminder of myself to keep things simple. So what did they do? They have a one line description of actually what they want to do. They want to 10X their assets. And to do so, they work backwards from figuring out what to ignore. So Nick is going to quote the philosopher William James about their thinking. It's going to sound a lot like Buffett and Munger too. Nick cites a line from the philosopher, William James. The art of being wise is the art of knowing what to overlook. We just got rid of all the things we didn't like. They disregarded, this is one of my favorite parts. This is why I say this part sinks to my soul. They disregarded all ephemeral information. Ephemeral information distracts investors or entrepreneurs or really anybody from what matters. Nick notes that information like food has a sell-by date. Some information is especially perishable while some information has a long shelf life. This concept of shelf life became a valuable filter.