The Nomad Investment Partnership was an investment firm managed by Nick Sleep between 2001 and 2013.
During this period, the firm achieved one of the best investment track records of any hedge fund.
In its final letter to investors, the firm highlighted a 20.8% per annum return before fees between September 2001 and December 2013.
On a net basis, the fund returned 18.4%, compared to an annualized return of 6.5% for the firm's benchmark, the MSCI World, over the same period.
Finding the best businesses to hold
According to a recent video from Mohnish Pabrai (Trades, Portfolio), who's a close friend of Sleep, Nomad was forced to close its door by regulators who became concerned with its level of concentration.
In a recent question-and-answer session, Pabrai explained that when the partnership closed its doors, Sleep had 40% of the firm's assets invested in Amazon.com Inc. (AMZN, Financial). The remainder was split between Costco Wholesale Corp. (COST, Financial) and Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial).
Pabrai also explained that Sleep wanted to buy and hold excellent businesses forever. He reportedly still has most of his wealth invested in these three companies.
Sleep believed that business founders were the world's best investors. Only founders had the confidence to hold onto their shares through thick and thin for many decades. No matter how committed, individual investors would struggle to hold for this time frame. He also believed that the best founders were driven not by money, but by purpose. Money was just a fringe benefit of their success.
The fund manager explained this concept in his letter to investors for the first half of 2013:
"The best entrepreneurs we know don't particularly care about the terms of their compensation packages, and some, such as Jeff Bezos (Amazon) and Warren Buffett (Trades, Portfolio) (Berkshire Hathaway) have substantially and permanently waived their salaries, bonuses, or option packages...When we asked Nick Robertson, the founder of Asos, whose paper net worth has increased hugely since we have known him, whether, now he is a rich man, he has thoughts of leaving, his face lights up with the future possibilities of his firm and says he is having more fun now than ever before. In this aspect of his life he has moved on from monetary rewards driving his behavior, and we are sure the business will be better for it."
The letter went on to explain:
"The same is probably true for Jim Sinegal before his retirement (Costco), Lord Harris (Carpetright) and some of the other founders of the firms in which Nomad has invested. These people derive meaning from the challenge, identity, creativity, ethos (this list is not exhaustive) of their work, and not from the incentive packages their compensation committees have devised for them. The point is that financial incentives may be necessary, but they may also not be sufficient in themselves to bring out the best in people."
Of course, this does not mean there's always going to be a positive correlation between low CEO pay and positive equity performance. There's always going to be more than just one factor influencing business performance.
However, if we flip this debate around, it might make more sense. If some of the best business managers have low pay and care more about the journey than the money, managers on extremely high salaries might care more about the money than the results.
This is something investors might potentially need to keep in mind. A high CEO salary does not necessarily mean that the business will produce poor returns for shareholders.
That said, money that's going in the CEO's pocket is not going back into the business. If Buffett had been paid $100 million a year for the past two decades, Berkshire's investors would be $2 billion worse off today.
That's assuming the money wasn't invested back into the business. If the funds were reinvested and compounded at 10% per annum, it would be worth $6.4 billion. That's food for thought.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Howard Marks: A Roadmap for Investors to Follow
- What We Can Learn From Bill Ackman's Outstanding Comeback
- Where the World's Most Profitable Hedge Fund Is Investing
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