The Nomad Partnership Letters: Two of the greatest investors you’ve never heard of

Bryce: [00:00:54] Welcome to another episode of Equity Mates, the podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce, and as always, I'm joined by my equity buddy Ren. How are you going? 

Alec: [00:01:09] I'm very good. Bryce very excited for this episode. It's been another big week in markets. It's been another big week in your life and I'm excited to unpack it all today. 

Bryce: [00:01:20] Yeah. Well, I'm looking forward to understanding what you think has been going on in my life for sure. So today we're going to have a bit of a chinwag around what's going on with US inflation. Some data has just come through. We're going to speak about two of the greatest investors you've never heard of. 

Alec: [00:01:38] And spoiler alert, they're not you and I. 

Bryce: [00:01:40] That's true, yes. But Ren, you wanted to start off with some good news and bad news for me. 

Alec: [00:01:45] Yeah, Bryce. Obviously, it's been a big week for you and there's always you got to take the good with the bad. So where do you want to start doing some of the bad news or the good start with the good news? Well, Bryce the good news is that your honeymoon is back on because cruise lines are back in business, baby. 

Bryce: [00:02:04] I did not take cruise 

Alec: [00:02:05] ships, so Carnival Cruise announced earlier this month that they had the biggest one week booking in their 50 year history. That's big, that is big. So, look, it's good news for you and ham, and congratulations to the two of you can't wait to hear about the Hollywood. The more generally, it's good news because the world's reopening like cruise ships was sort of the canary in the coal mine for Covid, and now they're the canary out of the coal. 

Bryce: [00:02:36] I wonder what their policies are, though. If you get Covid on board, do you just isolate in your room? 

Alec: [00:02:41] Yeah. Or you take the Australian government approach and just don't tell anyone else, right? 

Bryce: [00:02:45] Yeah, I guess that's good news for those that enjoy cruising Ren. That is not me, unfortunately, or, well, that is not me yet. And maybe later in life. But for now, I'm not a cruise kind of guy. 

Alec: [00:02:56] Yeah, I'm interested because people kept trying to get in on the Carnival Cruise and the Norwegian Cruise, all the stocks that were trading. And I don't I think a lot of people pulled the trigger too early. I haven't seen how the share prices have gone. Not a class of in. They say, invest in what you know, and you could take that a step further. Invest in what you love, and it's probably not something that we're investing in.

Bryce: [00:03:19] Yeah. Well, since 2020, early 2020, when the stock plummeted so 30th March 23rd of April 2020 was its low, it's up 129 percent. Since then, you

Alec: [00:03:31] had say only a hundred. 

Bryce: [00:03:34] Yeah, this year, though, it's this year Carnival. This is Carnival Corp, by the way. It's pretty flat down three percent this year. 

Alec: [00:03:42] There you go. Yeah, so so that's the good news. Bryce, I guess. Now we have to turn to the bad news for you. Hit me R.M. Williams are changing their boats. 

Bryce: [00:03:52] Oh, you're kidding. What do you mean? 

Alec: [00:03:56] Well, this is a Twiggy Forrest story that I really just wanted to talk about, and they may not be changing. They may just be adding. But Twiggy Forrest Port R.M. Williams in twenty twenty four people who are unfamiliar with her, Twiggy is he is the chair of Fortescue, the one of Australia's big iron ore miners. Well, one of the world's big iron ore miners. He's a billionaire many times over. And he is very innovative. Canadian economist, one of our fellow podcasts here at Equity Mates labelled him Elon Musk's dad. And I think this they've got some this America. But R.M. Williams, so Twiggs Investment Company recently invested in a US plant based textile manufacturer, Natural Fibre Welding. They basically said, Well, the quote is, whilst R.M. Williams will always be at its core, a leather boot company, consumers are looking for different options, and this could allow us to produce a 100 percent plant based boot as an alternative cutter respect. 

Bryce: [00:04:59] That doesn't sound like they'll replace the leather boots, but you're right maybe a new product line plant based, but where

Alec: [00:05:06] is it something that you'll be getting in on? 

Bryce: [00:05:08] Yeah, I'm a forward thinking, ethical kind of guy, so. Absolutely. 

Alec: [00:05:12] Not just love to see. 

Bryce: [00:05:15] The thing is, arms are so good that they last so long that I had just, you just don't need another pair. 

Alec: [00:05:21] It's like the whole problem with buying a new car now that it's going to have like 15 years or 20 years of internal combustion engine light. Yeah, I don't want that. Twiggy, I think, is going to go down as like the greatest entrepreneur of it's not really our generation is of our parents generation. 

Bryce: [00:05:39] I think one of yeah, he's pretty phenomenal. Yeah. 

Alec: [00:05:41] So Fortescue's cost curve, like the way that they reduce the cost of per tonne of iron ore is pretty incredible. We did a company Deep Dive, a while ago. We spoke about it and it's worth pulling that chart out. Have you heard about his his three km electric train? 

Bryce: [00:05:59] Yeah, I was we were chatting about a couple of days ago. 

Alec: [00:06:02] Yeah. So he's building a three km train with all this with a formula, a Formula One company is building it for him. Yeah. Um, I don't want to drive to survive, so I can't tell you which one. But Sascha knew it.

Bryce: [00:06:14] All right. Well, it'd be good if you could throw out a few names. But anyway, Kate

Alec: [00:06:18] Williams 

Bryce: [00:06:18] that one. Yeah, that's one. It could be that I'd be surprised because they're the worst here. Well, diversified 

Alec: [00:06:26] anyway. Oh, good. No, it's not that important. Anyway, so they're building a three kilometre long train that's basically going to roll iron ore down the hill to the port, and it's going to use the kinetic energy it generates from braking as it rolls down the hill to then basically power the batteries to get it back up the hill. 

Bryce: [00:06:44] Wow. You're right, it's Williams. Williams advanced engineering. 

Alec: [00:06:47] That's pretty cool. Yeah, yeah, yeah. Yeah. He is obviously running ahead with hydrogen to the point where he made an ad that challenged other billionaires to get on board to chase him because he was. It was too easy at the moment. He was just taking his pick of all the best opportunities. Yeah, it's a very forward thinking their Sun cable. Have you heard of this? Yes. So he and Mike Cannon-Brookes, who is the Atlassian co-CEO and co-founder, are funding. I think it's 4000 km long undersea cable from the north of Australia to Singapore, and then they're building one of the biggest solar farms in the north of Australia. And they plan to provide 20 percent of Singapore's power from a solar farm in the north of Australia. Wow, that's pretty cool. Yeah. These are like, maybe they're not quite. Elon Musk level electric cars and a reusable rockets, but they're very impressive. 

Bryce: [00:07:49] Yeah. So Fortescue has bought Williams advanced engineering. Oh, really? Yeah. But I don't know. No. Yeah, he has it, says Williams. Advanced Engineering Quad by FMG for $220 in January 2022. But I don't think we need to just draw the lines of how that relates to the to the F1. It is, yeah, Williams has been sold to Fortescue in anyway.

Alec: [00:08:11] So Fortescue owning their fund? 

Bryce: [00:08:13] No, Ren, not quiet. As I understand it, he owns the battery arm, which is Williams advanced engineering of the Williams Racing Group. Right? Something along those lines, anyway. Williams Grand Prix Engineering is the Williams Racing Group. And then there's Williams and Advanced Engineering, which Fortescue owns, and I'm sure there's some sort of collaboration going on, but he doesn't own the racing team, I guess. Anyway, that's what you can do as a billionaire just by heaps of things. 

Alec: [00:08:41] We often speak about the billionaires don't have enough fun with their money.

Bryce: [00:08:44] He's having a lot of he's having good fun. Good fun. 

Alec: [00:08:47] Yeah, yeah. And the most recent thing he's done, they he's bought eight per cent of the shipbuilder Austal. Yeah, yeah, that'll be an interesting one to watch. The Aam Williams thing was really just a vehicle for us to talk about some of the crazy stuff, too. He's doing because it's, um, it's impressive and it's exciting.

Bryce: [00:09:04] Yeah, and we do have an open invite to Twiggy on our show at any time. So I'm feeling this is the year that it happens. But let's let's see 

Alec: [00:09:11] if we just keep pumping his tyres up like this. Maybe you don't have to sacrifice anyway. Ren hold on. Maybe we ask if we can jump in the three kilometre train and go with Twiggy down the hill, 

Bryce: [00:09:25] but let's move on US inflation data. It's come out Ren and it's come out hot. 8.4 per cent is the latest figure and that is a 41 year high. Prices continue to go up at an astonishing rate. It's up one point two percentage points from last month, and this is the highest month to month jump since 2005. Yeah. 

Alec: [00:09:45] Now this is the US should be clear. Yeah, but the drivers in the US are likely also to affect inflation around the world. The main one being petrol prices, petrol prices. 

Bryce: [00:09:57] We've seen it here in Australia at the pump, so much so that in the recent federal budget, it was such a pain point that the Australian government halved the petrol excise. And there's no doubt that it was seriously hitting the pockets of many people, but also food and housing costs over in the states are driving inflation and worse. We're also seeing saying that here in Australia as well. So core inflation, which excludes food and energy prices, has increased 6.5 per cent, so still pretty significant increase there. This is coupled, though, with a pretty strong US economy record high job openings and unemployment is dipping to a 50 year low. So we're also saying that here in Australia, unemployment about four per cent expected 

Alec: [00:10:42] you've done better than Albo.

Bryce: [00:10:43] Yes. Expected to hit three point seventy five or thereabouts, which would be, I think, a 40 year low or hasn't happened. Yeah, something something similar to that. Yeah, it's a very interesting dynamic at the moment and one that we certainly need to to keep a close eye on. 

Alec: [00:10:57] Yeah, there are a few economists that when this number came out were in the media saying this is going to be the high point like forward looking indicators say that we should start to see inflation plateau and then we'll be cycling these numbers next year. But honestly, like fool me once, shame on you, fool me twice. Shame on me. Those same economists were saying that this was going to be transitory. 

Bryce: [00:11:22] Yeah, exactly. Speaking to a number of investors as well, who made investment decisions off the back of this being purely transitory and just brushed this off. So, yeah, yeah.

Alec: [00:11:33] So I think for me, there's a lot of noise created by macro headlines, but it's like you just no one knows. 

Bryce: [00:11:39] Yeah, no, no. Yeah. 

Alec: [00:11:42] So I'm not going to spend a lot of time thinking about it. But we tweeted out a sign that we came across on Twitter that they had a sign in the window. Current prices on our menu do not reflect updated prices. We apologise for any inconvenience. We're currently waiting for new signs to be printed when prices are rising quicker than signs can be printed. 

Bryce: [00:12:06] That's crazy. Yeah. Oh my God. A burrito is now six six nine six seven eight there. 

Alec: [00:12:13] Um, I guess the question, you know, this is an investing podcast we're trying to figure. About how to invest on the back of it. There was another podcast that I was listening to that were talking about the perils of trying to invest on the back, like use inflation as a reason to short the market or anything like that. They use the example of Zimbabwe, which I know is an extreme example. But in 2008, Zimbabwe got crushed with hyperinflation. And if you were like, you know, the currency is getting weaker and the stock market's going to follow and just taking a really conservative short position, a two per cent short position while the currency was getting decimated, the stock market went up 500 times in local currency terms or 50 times in US dollar terms. And that means you two percent short position would have wiped your whole portfolio out. After that, the stock market then basically went to zero. So you were right on that. You would have lost a lot of money or you would've lost all your money on everything. That didn't explain why the market shot up so much, but I guess it's because people were just trying to get out of cash into any asset possible. I think it was just it was an interesting example because there's been a lot of headlines about inflation and it's like, Well, how do you play this? What do you invest in? Like, what's the what's the portfolio positioning and listening to that story? I was just like, You don't go. You just find good companies that have pricing power that can, you know, survive through this inflation cycle. And you know, we see this like everything will pass. You know, inflation has been bad before and it will be bad again. I think people who start saying it's like the why republic in Germany or Zimbabwe just need to relax a little bit. We've gone from like a decade pre-COVID of no one being able to get any inflation in the system to now having a lot of inflation very quickly. But let's just take it easy to find good companies or pretty ahead and in your investing strategy about index funds or whatever it is. Just seven relax, especially the headline headline writers. You've heard

Bryce: [00:14:24] it here. First, everyone relax. So Ren. I did mention at the top of the episode that we're going to have a chat about two of the greatest investors you may never have heard of, and we are going to get to that on the other side of this break. But before we do really exciting news, the latest podcast in the Equity Mates media stable is the dive, and it launches on Wednesday with put in a lot of hard yards to get to this point. And we're turning business news on its head, delivering it in the Equity Mates way. [00:14:52][28.6]

Alec: [00:14:53] Yes. So if you want to know what that means, head over to the dive. The first episode is released this Wednesday, so depending on when you're listening to this, it may be out in a couple of days or it may already be out, but head over. Listen to the trailer. Listen to the episode! So if they're out, give us a review. It really does help us in the charts early days. If you subscribe, listen, right? Review Tell your friends. Hey, listen, listen when you go to sleep q all the episodes up and play them overnight. That's it. The early days, especially on Apple Podcasts, give you a chance to hit the charts and would love your help to do that. 

Bryce: [00:15:31] That's it. So who says business news needs to be your business head of and subscribe now, and let's take a quick break to hear from our sponsors. Or I Ren to great investors. You've never heard of us. We've heard of Buffett and Charlie. Yup. 

Alec: [00:15:46] We've heard of a man and woman bill 

Bryce: [00:15:51] who sold us and Cathie Wood for us. Yes.

Alec: [00:15:55] What did you say? 

Bryce: [00:15:56] So I haven't heard of Todd. 

Alec: [00:15:59] You never heard of it. Say this, but

Bryce: [00:16:03] have you heard of Nomad partnership? 

Alec: [00:16:06] Well, yeah, I have. Um. So Nick Sleep and Kai Zachariah are the two investors that we're talking about today. And the reason that we're talking about them is because they absolutely crushed the market when they were in there, number one, number two. They got out when they had enough money they had. I hope they do. They had a number. Well, you know, Buffett, at $90 billion, is like, how much money do you need, man? Yeah. Yeah, I 

Bryce: [00:16:36] mean, I keep going. 

Alec: [00:16:36] What's going 

Bryce: [00:16:37] on? I think so. I think it's in the Hundreds. But anyway, and 90, 100 same stuff. 

Alec: [00:16:42] The same thing. Yeah, what what the like are the marginal benefit moving from 90 million to 100 billion zero? And they wrote some of the best investor letters going around. It's the third reason and a lot of people haven't heard of their names, so we thought we'd talk about them and some of the key lessons from their partnership letters. We will also include a link to all of the partnership letters that they published to for free in the show notes, so you can open that and read them. Let's start with where they ended, which they wrote a letter to Warren Buffett when they decided they were going to wrap up the partnership. And it includes this paragraph, which I think really sums up a lot about investing. It appears to all the world that the performance that Nomad has enjoyed over the years was created by Zach and me. This is not the case. As time goes by, the performance that our clients have received is the capitalisation or the success of the firms in which we have invested. In other words, the real work is done by you and the good people at Berkshire.

Bryce: [00:17:47] Nice. Which is true. Yeah, yeah, yeah. Like the hard yards are done on the inside of the phone. 

Alec: [00:17:53] Think, think about every great investor that we load their returns. I mean, Buffett himself, you know, his returns are just a culmination of Tim Cook's work at Apple and a number of his privately held companies, his insurance team, you know, back in the day, the the Katharine Graham's of The Washington Post and I have no idea who am I to say I was over the journey, but whoever ran Amex as Buffett held for decades? It's a good reminder.

Bryce: [00:18:24] It is a good reminder. Yeah, it's something that I've actually it's good to come to front of mind because it does really sum up the investing game quite well. 

Alec: [00:18:32] Yeah, I was about to name a whole bunch more investors in the SEC, but you get the point. 

Bryce: [00:18:37] So Ren, you mentioned that Nick and Kai absolutely crushed the market. Yeah, they were in operation from 2001 to 2014. Yeah. To what degree did they actually crush the market? 

Alec: [00:18:50] Well, they 10x their partners money, while the MSCI World Index would have doubled the money. 

Bryce: [00:18:57] Love to say 

Alec: [00:18:58] that. Yeah. So to put numbers to it, nine hundred and twenty one percent return in that time before fees, compared to one hundred and seventeen percent for the MSCI All World Index. So 10x they double after fees, that works out. They returned eighteen point four percent a year after fees, and the MSCI World Index did six point five percent. 

Bryce: [00:19:21] Wow, they took a lot of fees. 

Alec: [00:19:24] What do you mean? 

Bryce: [00:19:24] Well, that's only three times, but they've OK, yeah, I get it, 

Alec: [00:19:28] but three times a year over 14 years, compound? Yes.

Bryce: [00:19:34] What was that number? Do you know? You said they they hit their number and left. 

Alec: [00:19:37] I don't think they ever said what the number was right. But basically they did got to the point where they did 13. They're probably billionaires. They're doing what they're doing a lot of charitable stuff now. Um, but yeah, they had a number and they got out. Wow. So the link to all of the letters are in the show notes, but let's talk about some of the key things that we've taken from the letters. 

Bryce: [00:19:59] The first is around the joy of investing, and here's a quote that they've pulled out that we've pulled out. There are perhaps few things finer than the pleasure of finding out something new. Discovery is one of the joys of life, and, in our opinion, is one of the real thrills of the investment process. I love this. I feel like we've spoken about this a couple of times, particularly on Get Started Investing feed, that when you really get into the get into the game of investing, it definitely opens up your eyes to things that you would never otherwise be researching and raiding and becoming interested in. And there is real enjoyment, and I think that's where you and I particularly get a lot of enjoyment out of the process of discovery. 

Alec: [00:20:43] Yeah, discovering just so much like later this week, you'll hear an episode that we've done in partnership with Steak around the future of an industry. We're doing three episodes on the future of different industries, and just being able to just learn is just so exciting. And investing in some ways is just a way to monetise your learning. Monetise your size. Monetise your curiosity. Yeah, yeah, yeah. Yeah, yeah. And these guys definitely monetise their curiosity. So they came out of the buffet school of, you know, buying a dollar for 50 cents. Yeah, but then they came across what many people think is the best business of all time. Costco, yeah, OK. And they fell in love with this idea of scale economics. And they dubbed this term scale economics shared why they fell in love with Costco was Costco as they grew. They didn't take more of the margin for themselves. Instead, they shared it with their customers for lower prices. And that creates a moat that is incredibly hard to break. They actually have this quote. They ask, You know, what is it about growth stocks that dooms them to failure? The answer is that the success encourages competition and capital flows into an industry to compete away the excess returns. That's the simple way of understanding competitive dynamics of an industry. But basically, they then asked what if the excess returns weren't kept by the company and they were actually returned to the customers, the customers, then there are no excess returns to compete away. And then you build a real competitive advantage because businesses that are starting up don't have the scale. And so they're starting from a point of higher prices, and it's not like they can come in and compete your marginal way. They come in and they can't compete with you on price. Yeah, right. And so that was the Costco model that they fell in love with. And then they found Amazon. 

Bryce: [00:22:54] And what happened to Amazon? 

Alec: [00:22:56] Well, Amazon is the quintessential example of a company that is scaled economics shared. Yeah, and it's funny. They actually, in an early letter, they actually asked the hypothetical question What characteristics could one bestow on a company that would make it the most valuable in the world? OK. Without reading it, do you have a crack at answering that well or management? Okay. 

Bryce: [00:23:22] Some sort of pricing power. 

Alec: [00:23:25] Okay. 

Bryce: [00:23:25] High switching

Alec: [00:23:26] costs. So they said a huge marketplace. Yeah. Total addressable market is huge. High barriers to entry, which gives that longevity. So yeah, you had that switching costs and then a very low level of capital employed. So yeah, they just generate types of free cash flow. And they actually suggested that eBay could be the most valuable company in the world. And remember that right at the time of their writing this in like the early 2000s? Yeah, right? And they were like, eBay has a huge marketplace. You know, they have high barriers to entry because of like the whole network effect and very capital light business. 

Bryce: [00:24:02] Did they invest in eBay? 

Alec: [00:24:04] Probably. Yeah. Well, actually, no. They finished this quote with perhaps we should own eBay as well. Maybe they didn't, but they kind of now hit the nail on the head. They just got the wrong company. Yeah, it was. Amazon was Amazon Amazon. Huge market, high barriers to entry, very low levels of capital employed. Good on them. And so that then really defined the investing style and they have this quite early in the pace 2004. We often ask companies what they would do with windfall profits, and most spend it on something or other or return the cash to shareholders. Almost no one replies, Give it back to customers. How would that go down with Wall Street? 

Bryce: [00:24:40] Yeah. Nice. 

Alec: [00:24:41] But how it should go down with Wall Street is great. Well, these are the generation unbelievable companies. 

Bryce: [00:24:48] Yeah, yeah. Are there any other examples of companies that do give it back or is Costco their main kind of example? And then Amazon.

Alec: [00:24:56] So they write about a number of others. So Costco, obviously Amazon. Then they also write about Dell. Okay? I feel like we kind of missed the first generation of computing stocks like IBM, IBM and Dell. But by the looks of it from their letters, Dell was had this philosophy, and HP, which was Carly Fiorina, was the CEO at that time. She's now like the Republican. Yeah. Southwest Airlines. They say Wal Mart is a good example. Geico insurance. So there's a few others that they found over the journey. But I think Amazon for them was was 

Bryce: [00:25:34] the big three. Yeah. So Ren, as you mentioned, I had never heard of them. What is it, 218 page letter? Or is that all of 

Alec: [00:25:44] its all the letters total from 

Bryce: [00:25:45] 2001 to 2004. And so we really include the notes, and it's just a great reminder of how quality these letters are in terms of investing information and getting insight into how some of the best investors in the world think about companies. And and, you know, answer the question what is the most valuable company in the world?

Alec: [00:26:05] Yeah. And I think they for me, are a classic example of how you need to. You don't need to have a contrarian insight on a business per say, but you need to have some insight that the market. Is getting wrong, and for them, the key insight, so this this whole scale economic shed was like the driver of their investing philosophy. But when when you look at it in the metrics, what that looks like is a profit margin that is getting smaller every year. And you know, the like your return on equity and return on invested capital. And those metrics won't look particularly strong because what investors traditionally want to see is profit margins growing and that profit number getting bigger. And, you know, a business having operating leverage. So profit is growing faster than revenue like that. They're some of the things that traditionally you would say. All this business has clearly got a moat, they've clearly got a competitive advantage and they're using that to grow their profit line. But these guys flip that on its head and they said, Well, no, the source of competitive advantage is customer loyalty and having a having scale that in that new entrants can't compete with you on price. And so a lot of the metrics that they were looking for were the opposite of what the rest of the market were looking for. 

Bryce: [00:27:22] Yeah, love that. Love that or Ren. That does bring us to the end of our a.m. chat for Monday. But as we mentioned halfway through the episode, we are launching the dive this Wednesday. It's been a massive undertaking. It's our eighth podcast. It's going to be a massive show. We're really, really excited about it. We don't think there's anything quite like it in the market at the moment, and we really hope that, oh, you guys in the Equity Mates community and beyond will we'll really enjoy it as well as you know, there are plenty of podcasts out there. So one thing we do ask you is for a small favour. If you can jump over now, write it, review it, at least if it isn't out, subscribe to it. And then on Wednesday, once it does launch, give it a listen and give it a five star review. It does really help out with the charts and also getting in front of new listeners, so we would really appreciate your help on that, and we really do hope you enjoy it, appreciate your feedback as well if you do want to hit us up with any feedback or questions. Hit us up at contact et Equity Mates dot com. Don't forget also, that Fin Fest is coming in October. More information will be coming on that shortly. You can register at Equity Mates dot com slash fin fest, but Ren, as always, really great fun to chat stocks, and we'll pick it up next week.