Thread by @PhillipsRelic

#NickSleep on promoters: Empty Vessels and a Quieter Approach. Upon reflection, it is curious that this quiet attitude extends, in its own way, to the companies in which we have entrusted your dollars: Amazon and Costco do not advertise (no shouting here); /1

Berkshire does not provide earnings guidance;
Amazon, Costco, AirAsia, and parts of Berkshire give back margin to the customer. 2/3rd's of the portfolio is invested in firms that in some way shun commonplace promotional activity and they are no less successful as a result. /2

If one steps outside of stock market listed companies to instead observe private firms run by proprietors and founders, it is the quiet approach that is far closer to the norm. Let’s invert: why are publicly listed companies so promotional about their affairs? /3

Nomad’s investments may be in publicly listed firms but these firms are overwhelmingly run by proprietors who think and behave as if they ran private firms. Amazon for example struggles w/ institutional investor relations; Bezos, thinks their role is all but a waste of time! /4

Bezos was also quite forthright on the subject of product promotion and advertising at this year’s annual general meeting: “Advertising is the price you pay for having an unremarkable product or service”. /5

Hyper-efficient low cost providers, who share the benefits w/ their customers, often take permanent market share. This reminded us of a quip by Sam Walton, who, when asked about the recession of the early 1990s, stated: “I’ve thought about it, and decided not to participate." /6

I used to have a notice on my desk that read, “share prices are more volatile than corporate cash flow, which is more volatile than asset replacement cost”. It was reminder to concentrate on non transitory items. Share prices are more volatile than business values. /7

In business, thoughtful whispering works, which makes it all the more remarkable that the investment industry spend so much time shouting. So much commentary espouses certainty on a multitude of issues, and
so little of what is said is, at least in our opinion, knowable. /8

The church of diversification, in whose pews the professional fund management industry sits, proposes many holdings. They do this not because managers have so many insights, but so few! Diversity, in this context, is seen as insurance against any one idea being wrong. /9

We propose that if knowledge is a source of value added, and few things can be known for sure, then it logically follows that owning more stocks does not lower risk but raises it! Real diversification is offered by index funds at a fraction of the price of active management. /10

Sam Walton did not make his money through diversifying his holdings. Nor did Gates, Carnegie, Rockefeller, Slim, Li Ka-shing or Buffett. Great
businesses are not built that way. Their portfolios were, more or less, 100% in one company and they did not consider it risky! /11

It is interesting to note that none of the great fund management organizations got rich on the back of the most successful companies of the modern era either! The trick is to recognize the sources of enduring business success, get in early and own enough to make a difference. /12

Which raises two questions: what are the sources of
success and second, if these are so readily recognized up front why are they not discounted in prices already? /12

How might corporate success be predictable? There are clues around us. Companies that share scale w/ the customer such as Costco, Berkshire
Hathaway, Amazon and AirAsia make up 60% of the Partnership. It turns size, normally an anchor to growth / returns, into an asset. /13

Investors are rational people (they all knew that Wal-Mart was a wonderful business) and fund managers operate under healthy profit incentives that ought to
foster good outcomes, so why is it that no one but the founding Walton family owned Wal-Mart all the way through? /14

We offer the following reasons for this mistake:
1. Misanalysis: Investors are used to firms which have one good idea, such as a new product, but then struggle to replicate success and end up diluting returns. /15

Wal-Mart's strategy of price givebacks did not change from year to year; culture plays a part in the continuity
of a successful price giveback strategy and factors such as culture, because they are hard to quantify, often go undervalued by investors. /16

2. Structural or behavioral: Active fund managers have to look active. One way to do this is to sell Wal-Mart, which appeared expensive (but actually wasn’t), to buy
something that appeared cheaper (but err, also wasn’t) /17

3. Odds or incorrectly weighing the bet: In the words of my first boss, investors tend not to believe in “longevity of compound”. Conventional thinking has it that good
things do not last, and indeed, on average that’s right! On average, companies fail. /18

The list above is not exhaustive. What matters is the effect of this collective mis-cognition. Investors
know in time average companies fail, and so stocks are discounted for that risk. However, this discount is applied to all stocks even those that, in the end, do not fail. /19

The shares of great companies can therefore be cheap, in some cases, for decades. The market struggles to appreciate the magnitude and longevity of the business’ success. Investors see information but, in our opinion, they incorrectly weigh the information. /20

Lots of things had to go right for Wal-Mart to grow for 40 years. That's true but, at its heart, a few simple things really mattered. In our opinion, the central engine of success at Wal-Mart was a thrift orientation fuelling growth with the savings shared with the customer. /21

The culture of the firm celebrated this orientation and reinforced the good behaviour. This is the deep reality of the business. This should have had the greatest weighting in the minds of long-term investors even if other things looked more important at the time. /22

Instead investors may place too much emphasis on valuation heuristics, or margin trends, or incremental growth rates in revenues or any of the list above, but these items are transitory and anecdotal in nature. /23

There are very few business models where growth begets growth. Scale economics turns size into an asset. Companies that follow this path are at a huge advantage. Put simply: average companies do not do scale economics shared. Average companies do not have
a healthy culture. /24

The removal of failure risk from the investment equation creates a huge opportunity for investors that can see the company in its true perspective and act w/ patience. It's an anomaly that investors recognize success incrementally when success factors may be constant. /End

Does $SHOP belong in this discussion? I bought my first shares after this post. Tiny position, but paying more attention, at long last.