Nick Sleep and Nomad: Scale Economies Shared Explained
Nick Sleep ran the Nomad Investment Partnership with Qais Zakaria from 2001 to 2014, turning a small fund into one of the best long-term records of its generation by owning a handful of businesses, including Costco and Amazon, for years at a time. His signature idea, "scale economies shared", describes a company that passes the savings from its growing size back to customers, which makes it bigger, cheaper and harder to compete with every year. For individual investors, Nomad is a masterclass in patience, concentration and thinking about where a business will be in ten years rather than next quarter.
Where this fits: this is a Learning from the Masters article. Sleep's ideas speak most directly to Criterion 1, great business, and Criterion 2, durable moat, in the Five Criteria. It sits alongside our guide to the greatest investors of all time.
Who is Nick Sleep?
Nick Sleep is a British fund manager who, with his partner Qais "Zak" Zakaria, founded the Nomad Investment Partnership. Both had worked at Marathon Asset Management in London, and Nomad began life under Marathon's umbrella. The partnership launched on 10 September 2001, the day before the 9/11 attacks, according to the partners' own Nomad letters.
Over roughly 13 years, Nomad compounded at about 20.8% a year against about 6.5% for the MSCI World Index. From inception to the end of 2013, that was a cumulative gain of roughly 921% versus about 117% for the index, as summarised in this analysis of the letters. In 2014 Sleep and Zakaria returned outside capital and closed the fund, choosing to manage their own money and focus on philanthropy.
The pair rarely gave interviews. Most of what we know comes from their partnership letters, which have circulated widely since, and from William Green's 2021 book Richer, Wiser, Happier, which profiles them. Their letters are now read as a modern classic of long-term investing.
What does "scale economies shared" mean?
Most businesses get cheaper to run per unit as they grow. A retailer that doubles its sales does not need to double its head office. Those are scale economies, and most companies keep them as higher profit margins.
A "scale economies shared" business does something different. It passes most of those savings back to customers as lower prices. Lower prices bring in more customers, which increases scale, which lowers costs again. The flywheel keeps turning.
Sleep's favourite example was Costco. As Quartr's review of the Costco investment notes, Nomad's 2002 letter described how Costco capped its mark-ups at around 14% on branded goods and 15% on its own-label products. Costco earned its profit mainly from membership fees, not from squeezing shoppers. Customers noticed, renewed their memberships and spent more.
Amazon became the other great example. It reinvested the benefits of its growing scale in lower prices, faster delivery and free shipping. Each step made it harder for smaller rivals to match.
Why sharing creates a deeper moat
The paradox Sleep kept returning to is that the company grows by giving more back. Short-term profit margins look lower than they could be. But competitors face a rival whose costs fall every year and who is choosing not to pocket the difference.
That is a cost advantage moat that widens with time. A competitor cannot simply copy the price list. It would need the same scale first, and it cannot get that scale without the low prices. Our guide to economic moats explains how cost advantages fit alongside the other four moat sources.
Nick Sleep's core principles
Reading the Nomad letters, a handful of principles stand out. None is complicated. What made them powerful was how seriously the partners took them.
1. Think about the destination, not the next quarter
Sleep encouraged investors to ask where a business will be in ten or twenty years. This is sometimes called "destination analysis". If the long-run destination is clear and attractive, short-term noise about quarterly margins matters much less.
2. Concentrate in your best ideas
Nomad became very concentrated. Analyses of the letters report that Amazon, Costco and Berkshire Hathaway grew to dominate the portfolio in later years. The partners argued that selling a great compounder early is one of the most expensive mistakes an investor can make.
3. Do less, and hold for a long time
Sleep argued that the investment industry trades far too much. Much of the value from owning a great business comes from simply staying invested while the flywheel turns. Inactivity, when you own the right companies, is a strength.
4. Back owner-managers with long horizons
Nomad favoured companies run by founders or long-serving managers who owned meaningful stakes and made decisions whose payoff might take years to show. The June 2002 letter described looking for firms run by managers making decisions "the fruits of which may not be apparent for several years to come".
5. Align the fee with the partners
Nomad charged a small management fee meant to cover costs, plus a performance fee only above a 6% annual hurdle, as Emerging Moats describes. The partners wanted to earn money when their investors did, not simply by growing assets. It was their own version of sharing scale.
Worked example: two retailers, two strategies
Here is a hypothetical example with round numbers.
Company A and Company B are both discount retailers with $10 billion in sales. Each finds $300 million of annual cost savings from its growing scale.
Company A keeps the savings. Its operating margin rises from 4% to 7%, and profit jumps from $400 million to $700 million this year.
Company B cuts prices by the full $300 million. Its margin stays at 4%, and profit stays at $400 million this year.
On the next results day, Company A looks far better. Now follow them for five years.
Company B's lower prices bring in more shoppers. Suppose sales grow 12% a year, reaching about $17.6 billion. Even at a 4% margin, profit rises to about $700 million, and its scale lead over rivals has widened.
Company A's higher prices leave room for competitors. Suppose sales grow only 3% a year, reaching about $11.6 billion. If competition forces its margin back down to 5%, profit is about $580 million.
Company B ends with more profit, a bigger customer base and a wider moat. That is the logic Sleep saw in Costco and Amazon. The lesson is to judge margins in context. A low margin can be a deliberate choice that strengthens the business.
What Sleep got wrong, and where the approach struggles
No investor is perfect, and Sleep was candid about his errors in the letters.
Early deep-value holdings. Nomad started with many cheap, statistically undervalued stocks. Several of those early positions disappointed, which pushed the partners toward higher-quality compounders.
Some "sharers" did not work. Analysts of the letters point to holdings such as AirAsia, a low-cost airline with a sharing model, that did not deliver the results the partners had hoped for. A sharing strategy still needs a sound industry.
A painful 2008. Nomad fell about 45% in 2008, slightly worse than the index, according to the same letter analysis. Concentration cuts both ways in the short run.
Hindsight makes it look easy. Amazon's low reported profits scared many investors for years. Holding through that took a conviction most people cannot copy, and many companies that "invest for the long term" never reach the destination.
Low margins can simply mean a weak business. Not every low-margin company is sharing scale. Some just lack pricing power.
How we use this in the Five Criteria
Sleep's work gives us a sharper lens for the first two criteria and a useful reminder on the fifth. Here is how his ideas map to our framework.
Nomad idea | Five Criteria link | How we apply it |
Businesses that reinvest at high returns | Criterion 1: Great business | ROIC of 15%+ for 5+ years; FCF of 90%+ of net income |
Scale economies shared | Criterion 2: Durable moat | Name the source (here, cost advantage) and check ROIC held through a downturn |
Owner-managers with long horizons | Criterion 3: Aligned management | Meaningful insider ownership; share count flat or falling |
No leverage in the fund | Criterion 4: Sound balance sheet | Net debt/EBITDA of 2.0x or less; interest coverage of 5x or more |
Buying quality below its worth | Criterion 5: Reasonable price | FCF yield of 5%+ or 25% below conservative intrinsic value |
One nuance matters. A scale sharer may show a modest operating margin, but its return on invested capital can still be excellent. Costco needs little capital per dollar of sales because it turns its inventory quickly. That is why we test business quality with ROIC, not margins alone. Our guide to return on invested capital shows how to calculate it.
We also keep Criterion 5. Sleep's Costco purchase in 2002 was, by the partners' account, at a price well below what they thought the business was worth. Great businesses bought at silly prices can still disappoint for years, as our guide to overpaying for stocks explains.
Having worked in investor relations, I would add one practical test. Listen to how management talks about price cuts. A true sharer describes them as an investment in the customer and can explain the payoff. A struggling company describes them as a response to competitors.
Common mistakes when applying Nick Sleep's ideas
Treating every low-margin company as a hidden sharer. Check that returns on capital are high and customer numbers are growing. Otherwise the low margin may just reflect a weak position.
Copying the concentration without the conviction. Nomad's big positions came from years of study. Size positions so you can survive being wrong, as our guide to position sizing explains.
Ignoring price entirely. Destination analysis does not mean any price is fine. A great destination bought too dearly can still produce poor returns.
Selling too early. Sleep's biggest lesson is that trimming a great compounder because it has "gone up a lot" is often a costly error.
Confusing activity with progress. Checking prices daily and trading often rarely adds value. Our guide to filtering signal from noise offers a better routine.
Frequently Asked Questions
Who are Nick Sleep and Qais Zakaria? They are British investors who ran the Nomad Investment Partnership from September 2001 until 2014, after working at Marathon Asset Management. Their fund compounded at about 20.8% a year versus about 6.5% for the MSCI World Index.
What is "scale economies shared"? It describes a business that passes the cost savings from its growing size back to customers through lower prices. That wins more customers, increases scale and lowers costs again, building a cost-advantage moat.
Why did the Nomad Investment Partnership close? Sleep and Zakaria returned outside capital in 2014 to manage their own money and focus on other interests, including philanthropy. They had largely completed what they set out to do.
What stocks did Nick Sleep own? Nomad's best-known holdings were Costco, Amazon and Berkshire Hathaway, which grew to dominate the portfolio. Earlier holdings included a range of smaller value stocks around the world.
Your Next Step
Learn to identify the five sources of competitive advantage in our guide to economic moats.
See how to measure whether a business earns high returns in our guide to return on invested capital.
Read how to find the management discussion that reveals strategy in our guide on how to read an annual report.
About the author: Cameron Hayes is a senior investor relations and finance professional who has worked in IR at Nasdaq Copenhagen-listed companies including Nilfisk and Maersk Drilling. He holds an MSc from Copenhagen Business School and a BCom from the University of Ottawa, and founded Gingernomics to teach individual investors the Five Criteria framework. More about Gingernomics.
The content on Gingernomics is for educational and informational purposes only and does not constitute financial advice. Always do your own research and consult a licensed financial advisor before making any investment decisions. Past performance is not indicative of future results.
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