Nicholas Sleep

Nomad Investment Partnership Letters

"Psychologists (McClure, Laibson, Loewenstein and Cohen 2004) have found that the brain perceives immediate rewards differently to deferred rewards because two different parts of the brain are involved. Immediate gains are perceived positively compared to larger deferred gains as the limbic (survival) system has the ability to over-ride the fronto-parietal (analytical) system. Interestingly, stress induces this override, and of course, money induces stress. So, the more stressed we are, the more we value short-term outcomes! This is not without reason, for if starving is a real possibility, a meal today is more important than a feast in a week's time, and the brain's wiring reflects that survival bias. Such notions are embedded in popular phrases such as "a bird in the hand is worth two in the bush". But at Nomad we try to be more analytical: it is the two birds in the bush we are concerned with and how they compare to the bird in the hand."

Niels Jensen

Mean Reversion of Wealth-to-GDP

"When you have ‘enjoyed’ the experience of a collapsing bubble a few times, you realize that there is a certain pattern to all bubbles. Obviously, they don’t all behave exactly the same way, but I have noticed certain common characteristics in the bubbles I have been through:

1. Retail investors account for a growing share of trading as the bubble grows.
2. Access to credit is almost always too easy.
3. Intrinsic value is being completely ignored by most investors.
4. Option activity skyrockets, particularly purchasing of small lots of call options.
5. Trading volumes are increasingly disproportionate to market caps.
6. Irrational behavior drives prices, i.e. equities rise for the weirdest reasons.
7. The bull market is fueled by misinterpreted information.
8. Well-meant warnings from officials are being ignored (take for example Greenspan’s warning about “irrational exuberance” in December 1996).
9. Insiders increasingly distance themselves, as they can is no longer see the logic behind the rise in prices."

Niels Jensen

Mean Reversion of Wealth-to-GDP

"The long-term mean value of wealth-to-GDP varies modestly from country to country. Why is that? Think of wealth as the total amount of capital available and think of GDP as the total output in an economy. Wealth-to-GDP is thus a gauge of capital-to-output and measures how much capital that is required to produce one unit of output. In other words, it is a measure of capital efficiency, and all countries do not deploy their capital equally efficiently."

Terry Smith

Fundsmith LLP 2020 Annual Letter to Shareholders

"One of the mantras which has been regularly trotted out by commentators is that the events of 2020 are unprecedented. Whilst that is literally true, as Mark Twain observed, history doesn’t repeat itself but it often rhymes. It is certainly true that most of us have never experienced anything like it, yet it may not be strictly true that the events of 2020 are without precedent.

There have been six identifiable pandemics over the past 130 years:

Recent Pandemics Estimated Deaths
Russian Flu (1889–90) 1m
Third Plague (1894–1922) 12m
Spanish Flu (1918–19) 50m
Asian Flu (1957–58) 2–5m
Hong Kong Flu (1968–69) 1–4m
Swine Flu (2009–10) 0.5m

We might be able to draw some parallels from these past pandemics as a guide for what may happen as a result of COVID.

One of the conclusions that you might draw from the economic effects of pandemics is that they do not so much cause new trends but rather they accelerate some existing trends.

The most obvious comparator — and one which people have most frequently alighted upon — is the Spanish Flu pandemic of 1918–19. The death toll of at least 50 million people caused a reduction in the workforce which may have been a factor in the subsequent widespread adoption of assembly line techniques for mass production. The assembly line was not invented as a result of the Spanish Flu pandemic — the Model T Ford was put on an assembly line in 1913 — but it accelerated its adoption.

The increase in productivity this delivered helped to fuel an economic boom as the cost of production of items such as cars and household electrical appliances were reduced as the volume of production rose so that they became affordable by the middle classes for the first time. This helped to fuel the economic and stock market boom of the Roaring Twenties.

Might something similar happen as a result of COVID? Obviously, I do not know, and fortunately my predictive capability is not the basis of our investment strategy. However, there are some clear signs that existing trends have been accelerated by COVID. For example:

• E-commerce
• Online working from remote locations using the cloud or distributed computing
• Home cooking and food delivery
• Online schooling and medicine
• Social media and communications
• Pets — which have become more important in isolation and when their owners are at home more
• Automation and AI"

Morgan Housel

Ideas That Changed My Life

"Everyone belongs to a tribe and underestimates how influential that tribe is on their thinking. There is little correlation between climate change denial and scientific literacy. But there is a strong correlation between climate change denial and political affiliation. That’s an extreme example, but everyone has views persuaded by identity over pure analysis. There’s four parts to this:

- Tribes are everywhere: Countries, states, parties, companies, industries, departments, investment styles, economic philosophies, religions, families, schools, majors, credentials, Twitter communities.

- People are drawn to tribes because there’s comfort in knowing others understand your background and goals.

- Tribes reduce the ability to challenge ideas or diversify your views because no one wants to lose support of the tribe.

- Tribes are as self-interested as people, encouraging ideas and narratives that promote their survival. But they’re exponentially more influential than any single person. So tribes are very effective at promoting views that aren’t analytical or rational, and people loyal to their tribes are very poor at realizing it.

Psychologist Geoffrey Cohen once showed Democratic voters supported Republican proposals when they were attributed to fellow Democrats more than they supported Democratic proposals attributed to Republicans (and the opposite for Republican voters). This kind of stuff happens everywhere, in every field, if you look for it.

Joe Biden

2020 Inaugural Address

"We all understand the world is watching, watching all of us today.

So here's my message to those beyond our borders: America has been tested and we've come out stronger for it.

We will repair our alliances and engage with the world once again.

Not to meet yesterday's challenges, but today's and tomorrow's challenges.

And we'll lead, not merely by the example of our power, but by the power of our example."

Justin Gage

What's DevOps

"Just 10-15 short years ago, a lot of delivering software meant literally delivering software - Microsoft Office used to ship to you on a CD that you'd install directly to your computer. And it wasn't web-based, so you didn't need internet access to use Excel or PowerPoint. The public cloud (AWS and co.) didn't exist, so if you needed to run software on a server or two, you'd need to literally build that infrastructure yourself, which used to cost millions of dollars up front. So naturally, software delivery was bespoke and on the slower side.

But then people started consuming software via the internet, and public clouds like AWS made it cheap and easy to use a server without having to build a data center. That fundamentally changed 3 things:

1. The scale of software increased - software is generally used by a lot more people than in the past. You could realistically need to support millions of users for your application.

2. Infrastructure got more complicated - we're moving towards increasingly specialized managed infrastructure for different parts of the stack. Generally, you don't just throw your code onto a box and forget about it anymore.

3. Teams started releasing a lot more often - changes in philosophy mean teams are now shipping code changes to users as often as multiple times a day, which means many, many more opportunities to break things."

Howard Marks

Something of Value

"Back in the old days Warren Buffett could find businesses that clearly were likely to remain dominant for long periods of time and perform relatively straightforward analysis to assess their valuation. For instance, he could look at something like the Washington Post, which essentially became the monopoly newspaper in a major city, and invest on the basis of reasonable, consistent assumptions regarding a few variables like circulation, subscription prices and ad rates. It was a foregone conclusion that the paper would remain dominant because of its strong moat, and thus that the past would look very much like the future. In contrast today:

- Because markets are global in nature, and the Internet and software have vastly increased their ultimate profit potential, technology firms or technologically aided businesses can grow to be much more valuable than we previously could have imagined.
- Innovation and technical adoption are happening at a much more rapid pace than ever before.
- It has never been easier to start a company, and there has never been more capital available to fund entrepreneurship.
- There have also never been as many highly capable people focused on starting and building companies.
- Since many of these companies are selling products primarily with code, their costs and capital requirements are extremely low and their profitability - especially on incremental sales - is unusually high. Thus, the economics of winners have never been more attractive, with very high profit margins and minimal capital requirements."

Howard Marks

Something of Value

"When you find an investment with the potential to compound over a long period of time, one of the hardest things is to be patient and maintain your position as long as doing so is warranted on the basis of prospective return and risk. Investors can easily be moved to sell by news, emotion, the fact that they've made a lot of money to date, or the excitement of a new, seemingly more promising idea. When you look at the chart for something that's one gone up and to the right for 20 years, think about all the times a holder would have had to convince himself not to sell."

Howard Marks

Something of Value

"Thus, to me the essential underlying principles of value investing are these:

- the understanding of securities as stakes in actual businesses,
- the focus on true worth as opposed to price,
- the use of fundamentals to calculate intrinsic value,
- the recognition that attractive investments come when there is wide divergence between the price at which something is offered in the market and the actual fundamental worth you've determined, and
- the emotional discipline to act when such an opportunity is presented and not otherwise."

Felix Narhi

December 23, 2020 CIOs Commentary

"Two Types of Investing:

The type of investment you hold should also weigh into your decision on whether to sell or not.

Close the Discount Investing:
- Pay $0.70 for $1 of value, then sell at $1
- This strategy pays off once

Compounder Investing:
- Pay >$1.30 for $1 value that can grow into $10
- This strategy pays off multiple times
- A gift that keeps on giving"

Mark Manson

1,500 People Give All The Relationship Advice You'll Ever Need

"[John] Gottman has been able to narrow down four characteristics of a couple that tend to lead to divorces (or breakups). He has gone on and called these 'the four horseman' of the relationship apocalypse in his books.

1. Criticizing your partner’s character (“you’re so stupid” vs “that thing you did was stupid.”)
2. Defensiveness (or basically, blame shifting, “I wouldn’t have done that if you weren’t late all the time.”)
3. Contempt (putting down your partner and making them feel inferior.)
4. Stonewalling (withdrawing from an argument and ignoring your partner.)"

Mark Manson

1,500 People Give All The Relationship Advice You'll Ever Need

"Trust is like a china plate - if you drop it and it breaks, you can only put it back together with a lot of work and care. If you drop it and break it a second time, it will split into more pieces and it will require more time and care to put back together again. But drop and break it enough times, and it will shatter into so many pieces that you will never be able to put it back together again, no matter what you do."

Mark Manson

1,500 People Give All The Relationship Advice You'll Ever Need

"Don't ever be with someone because someone else pressure you to. I got married the first time because I was raised catholic and that's what you were supposed to do. Wrong. I got married the second time because I was miserable and lonely and thought having a loving wife would fix everything for me. Also wrong. Took me three tries to figure out what should have been obvious from the beginning, the only reason you should ever be with the person you're with is because you simply love being around them. It really is that simple.

- Greg"

Mark Manson

1,500 People Give All The Relationship Advice You'll Ever Need

"1. Be Together for the right reasons
2. Have realistic expectations about relationships and romance
3. The most important factor in a relationship is not communication, but respect
4. Talk openly about everything, especially the stuff that hurts
5. A healthy relationship means two healthy individuals
6. Give each other space
7. You and your partner will grow and change in unexpected ways - embrace it
8. Get good at fighting
9. Get good at forgiveness
10. The little things add up to big things
11. Be Practical, and create relationship rules
12. Learn to ride the waves"

Blas Moros

The Latticework: Physics

"Newton's Laws of Motion are three fundamental, general laws which help describe how objects in the world move and react to forces.

1. First Law - The Inertia Law (an object at rest, stays at rest)
2. Second Law - Force=Mass * Acceleration (F=ma)
3. Third Law - The Law of Reciprocity (for every action there is an equal and opposite reaction)"

Robert Fritz

The Path of Least Resistance

"One basic principle found throughout nature is this: tension seeks resolution. From the spider web to the human body, from the formation of galaxies to the shifts of continents, from the swing of pendulums to the movement of wind-up toys, tension resolution systems are in play. We can observe in nature and in our lives both simple and complex tension-resolution systems that influence not only the changes that occur but how those changes will occur. The simplest tension resolution system is a structure that contains a single tension. The tendency of the structure is to resolve the tension. If you stretch a rubber band, the tendency of the rubber band is to pull back to resolve the tension in the structure. A compressed coiled spring has a tendency to release the tension by springing back toward its original state."

Paul Graham

The Other Road Ahead

"Most people, most of the time, will take whatever choice requires least work - death before inconvenience. When you understand this, you can take advantage of it - whether you're a programmer or the operator of a business. Often competitors will not be willing to put in the work required and although it is by definition difficult, it will be successful. Successful design sees through the customer's eyes and makes whatever choice they are being asked to make as simple as possible. Little nudges go a long way."

Charlie Munger

December 16, 2020 Caltech Interview

"Moderator: What are the traits to be a great investor?

Charlie Munger: Obviously you have to know a lot but partly it's temperament, partly it's deferred gratification. You got to be willing to wait. Good investing requires a weird combination of patience and aggression and not many people have it. It also... requires a big amount of self awareness and how much you know, and how much you don't know. You have to know the edge of your own competency. And a lot of brilliant people are no good at knowing the edge of their own competency. They think that they're way smarter than they are. And of course, that's dangerous and it causes trouble."

Packy McCormick

APIs All The Way Down

"One of the most common refrains that API-first businesses hear is, "Oh Company X will just build that in-house," and yet, they almost never do. It's not for lack of resources. Facebook generated more profit in 2019 ($57 billion) than Twilio's entire market cap ($51 billion). It's that once they're integrated into a customer's product, API-first companies have incredibly deep moats. Specifically, they benefit from network effects, economies of scale, and high switching costs."

Packy McCormick

APIs All The Way Down

"Coherent actions are the set of interconnected things that a company does to carry out the guiding policy, each reinforcing the other to build a chain-link system that is nearly impossible to replicate. Walmart isn't the leading retailer because it has lower prices, or because it puts its stores in a certain type of town, or because it's built up the right distribution network, or because of any single thing that it does. It's the leading retailer because all of those pieces work together in such a way that no one could copy Walmart without copying the whole system."

Jeremy Grantham

Waiting for the Last Dance - January 6, 2021

"The "Buffett indicator," total stock market capitalization to GDP, broke through its all-time-high 2000 record. In 2020, there were 480 IPOs (including an incredible 248 SPACs) – more new listings than the 406 IPOs in 2000. There are 150 non-micro-cap companies (that is, with market capitalization of over $250 million) that have more than tripled in the year, which is over 3 times as many as any year in the previous decade. The volume of small retail purchases, of less than 10 contracts, of call options on U.S. equities has increased 8-fold compared to 2019, and 2019 was already well above long-run average. Perhaps most troubling of all: Nobel laureate and long-time bear Robert Shiller – who correctly and bravely called the 2000 and 2007 bubbles and who is one of the very few economists I respect – is hedging his bets this time, recently making the point that his legendary CAPE asset-pricing indicator (which suggests stocks are nearly as overpriced as at the 2000 bubble peak) shows less impressive overvaluation when compared to bonds. Bonds, however, are even more spectacularly expensive by historical comparison than stocks."

Lauren Templeton

Templeton and Phillips 10/31/20 Investor Letter

"Therein lies the problem with government debt. It is readily observable whether in the multi-decade case of Japan or the most indebted nations of the Eurozone that high total debt balances and lower economic growth show correlation. Several notable studies from economists point out similar relationships across the centuries. The basic summary is that the average growth rate in GDP for countries with a debt to GDP between 90%-120% is 2.4%, but when debt to GDP crosses 120% growth slips to 1.6%, on average."

Ray Dalio

The Changing World Order

"In the 30 years from 1914 and 1944, there were two world wars and the global depression, which led to the creation of a lot of debt that had the interest rates on it legally capped while all major currencies were delinked from gold, gold ownership was outlawed, the abilities to take money out of most countries were eliminated, and price controls on rent and other items were created. Then central banks printed a lot of money, which produced a lot of inflation, sharply reducing the real value of fixed-income and equity assets. Additionally, in most countries (especially in Europe) businesses were expropriated or nationalized, and the war damage destroyed a lot of property. Capitalists and capitalism were widely blamed and hated especially as a result of the stock market crashes and depressions, so many of them were killed."

Ray Dalio

The Changing World Order

"Examples of revolutionary changes within the existing orders include Roosevelt’s revolutionary shifts to the left in the early 1930s and Reagan’s and Thatcher’s revolutionary shifts to the right in the early 1980s. They were reflected in radically different wealth distribution policies that were exemplified by the radically different top income tax rates. For example, the top marginal tax rate in the US and UK since 1900, the changes in which are shown in the following charts, went from 0% to over 90% in 30 years and almost all wealth was redistributed in the 30 years between 1914 and 1944."

Niels Jensen

The Rising Gap Between Rich and Poor

"The extraordinarily good performance of both bonds, equities and property since the mid-1980s has resulted in significant wealth creation amongst the already very wealthy, causing the gap to widen again. The wealthiest 1% began to grab a bigger slice of the pie when Reaganomics in the 1980s changed the economic landscape, and they have managed to do so ever since. Even if the poorest 99% are wealthier than ever before when measured in absolute terms, many of them feel poorer as they can see the wealthiest 1% building their wealth much faster."

Niels Jensen

The Rising Gap Between Rich and Poor

"The rising gap between rich and poor has many implications. The spending powers of ordinary people are under pressure, which affects GDP growth negatively. As those spending powers continue to decline, the overall level of anxiety in society rises which affects social stability. Even worse, populists in the political elite take advantage by making many (mostly empty) promises. About 25% of all Europeans vote for a populist these days. I probably don’t need to remind you that, last time populism was in vogue, we ended up with a problem called Adolf Hitler."

Tim Sweeney

The Economy of the Metaverse | Interview with Epic CEO Tim Sweeney

"But the Metaverse is going to be some sort of real time 3D social medium where instead of sending messages and pictures to each other asynchronously, you’re together with them and in a virtual world and interacting and having fun experiences which might span anything from purely games to purely social experiences.

The other critical element of the Metaverse is it’s not just built by one mega corporation, right? It’s gonna be the work, the creative work of millions of people who can each add their own elements to it through content creation and programing and design...

So it will be a massively participatory medium of a type that we really haven’t seen yet. And even though you have Fortnite and Minecraft and Roblox each manifest some aspects of it, I think we’re still pretty far from having the thing. But yet the talk about this thing is it’s not just the work of one company. It’s not just one company’s product or revenue stream. Right. We’re talking about a mass participatory media, which needs to be an economy if there’s not an economy underlying this thing."

Ray Dalio

Reddit - Ask Me Anything December 8, 2020


Hi Ray, Big fan of your series “The Changing World Order” on LinkedIn and how it explores the current “big cycle” trends related to the decline of the US and the rise of China. As I read through the series, I can’t help but wonder, 'What should I do with this information?' What actions can the average person in the US take to mitigate the potential negative impact of the changing world order on the country and on their own life?

Ray Dalio:

Save and put your savings in to a well-diversified mix of currencies, countries, and asset classes so that your savings will not depreciate in value and will be enough to help cushion the bumps. Think broadly rather than narrowly about the environments that you might be in so that they are safe, satisfying, and economical. Pay attention to the patterns in history and how they compare with what is going on as a way of thinking about the possibilities. Do these things without being stressed. I recommend that you meditate."

Ray Dalio

The Archetypical Cycle of Internal Order and Disorder

"As Aristotle said a long time ago: 'The poor and the rich quarrel with one another, and whichever side gets the better, instead of establishing a just or popular government, regards political supremacy as the prize of victory.'"

Ray Dalio

The Archetypical Cycle of Internal Order and Disorder

"I also saw that going from one extreme to another in a long cycle has been the norm, not the exception - that it is a very rare county in a very rare century that doesn't have at least one boom/harmonious/prosperous period and one depression/civil war/revolution, so we should expect both. Yet, I saw how most people thought, and still think, that it is implausible that they will experience a period that is more opposite than similar to that which they have experienced. That is because the really big boom periods and really big depression/revolution periods come along about once in a lifetime, and one-in-a-lifetime experiences are naturally surprising... and because the swings between great and terrible times tend to be far apart, the futures we encounter are more likely to be more opposite than similar to those that we had and expect.

For example, my dad and most of his peers who went through the Great Depression and World War II (which came about because of the Roaring 20's debt boom) never imagined the post World War II economic boom because it was more opposite than similar to what they had experienced."

Ryan Holiday

How to Beat Procrastination Like a Stoic Philosopher

"In the sports world, University of Alabama coach Nick Saban taught his players to ignore the big picture - important games, winning championships, the opponent's enormous lead - and focus instead on doing the absolutely small things well. He would tell them, 'Think about what you need to do in this drill, on this play, in this moment. That's the process: Let's think about what we can do today, the task at hand."

Jerry Neumann

Productive Uncertainty

"Why are incumbents adaptive in one way but not the other?

The answer is that to adapt they have to feel comfortable with how uncertain the new technology or new market is. Incumbents strongly dislike uncertainty so they wait for it to be mitigated. But startups can build moats in new markets while they are still uncertain where they usually can't with new technologies."

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