Nick Sleep Ran a Fund on One Idea: Give the Savings Back

Between 2001 and 2013, Nick Sleep and Qais Zakaria ran a small hedge fund called the Nomad Investment Partnership, writing some of the more unusual letters in the industry — long, unhurried, and built around a single argument they kept restating in different clothes across a decade. The idea: the most durable moats aren't built by keeping the advantages of scale. They're built by giving them away.

That sounds like a strange thing to say on a site named for the space between moat and margin. Most of what we write here treats a widening margin as evidence of strengthening pricing power — a company earns a bigger moat, it should show up as a bigger number on the income statement. Sleep's letters make the opposite case, at length, with receipts. It's worth sitting with, because it complicates a shortcut a lot of investors reach for without noticing.

The idea, stated plainly

In the letter for the period ended 31 December 2008 — written in the middle of the financial crisis, with the fund down 45.3% for the year against the MSCI World's 40.7% decline — Sleep laid out the contrast between two retail models:

"Let's take the incentives around high low retailing as compared to scale economics shared retailing. Under the first strategy operating costs are generally high as a result of operating inefficiencies, and prices are high to compensate... The incentives here are awful: customers are trained to buy on deal, be disloyal and shop around... Yuck. Scale economics shared operations are quite different. As the firm grows in size, scale savings are given back to the customer in the form of lower prices. The customer then reciprocates by purchasing more goods, which provides greater scale for the retailer who passes on the new savings as well. Yippee. This is why firms such as Costco enjoy sales per foot of retailing space four times greater than run-of-the-mill supermarkets."

The mechanism, as he describes it, isn't complicated: a company gets more efficient as it grows, and instead of banking the improvement as margin, it hands it to the customer as a lower price. The customer buys more. The company gets bigger, and more efficient again. The next round of savings goes back out the door too. Neither side of that loop is generosity — it's the incentive structure working as designed.

He named it working in three places at once in that same letter: retail (Costco), aviation (the low-cost Malaysian carrier AirAsia, whose load factors he says beat the flag carriers'), and e-commerce —

"Amazon have deployed it so well that Amazon's operating costs (per dollar of sales) plus its operating margin are less than some of its high street peers' costs (per dollar of sales). This offers the prospect that, in theory, Amazon's high street peers could price their products at net income breakeven and still not undercut Amazon's prices or profitability. For these high street competitors the game is over."

That last line is the point sharpened to its edge: a company running this loop long enough doesn't just have lower prices than a rival — it can have lower prices than a rival's cost base, at which point the rival's only paths are restructuring, repositioning, or closing.

Why "one big thing" is fragile and "many little things" isn't

The obvious objection: plenty of companies claim a cost advantage. What makes this version of it durable rather than temporary? Sleep's answer, from the letter for the period ended 30 June 2010, is a comparison he built around a Welsh insurance company he'd been slow to understand, and a drug company he uses as the counter-example:

"Take a one-big-thing-firm, such as a drug company, for example. A successful drug firm does not need to be particularly good at marketing, manufacturing, or research and development for that matter if, through a patent, it has a legal monopoly on a drug. But just look... how fragile the drug company ecosystem is. A rival could displace it at any time with a better chemical... Contrast this with a scale economics business: To better an incumbent's cost base a rival would have to be superior at, not one thing, but a million little actions — a far harder task."

He illustrates the "million little actions" with something almost absurdly small — a line from that year's Amazon shareholder letter noting the company was running 452 detailed internal efficiency goals for the year, each with an owner and a deadline — and a specific example of what one of those actions looked like in practice: an employee initiative to remove the light bulbs from Amazon's vending machines, saving the company $20,000 a year. Not a patent. Not a brand. A light bulb.

The logic is that a moat built from one legal or structural advantage has exactly one point of failure — a better chemical, an expired patent, a regulatory change. A moat built from a thousand small operating disciplines, compounding over years, has no single point a competitor can attack; they'd have to be better at all of it, continuously, which is a much harder bar to clear than inventing one clever workaround.

The company he kept coming back to

Sleep's favorite illustration of the pattern actually predates Costco and Amazon by decades. From the letter for the period ended 30 June 2009:

"In our opinion, the central engine of success at Wal-Mart was a thrift orientation fueling growth with the savings shared with the customer. The culture of the firm celebrated this orientation and reinforced the good behaviour... There are very few business models where growth begets growth. Scale economics turns size into an asset."

And the sharper version of the same point, aimed squarely at investors who missed it for forty years:

"Put simply: average companies do not do scale economics shared. Average companies do not have a healthy culture. After all, average companies are more like GM than Wal-Mart!"

The implication he draws isn't about Wal-Mart's stock price — it's about what investors were watching instead. He argues that people who owned Wal-Mart shares spent decades reacting to quarterly numbers, valuation multiples, and margin trends, when the one variable that actually mattered — a culture that kept sharing scale savings with customers, quarter after quarter — barely changed at all. The moat wasn't in that quarter's number. It was in the two decades of unglamorous decisions that produced it.

Why this is an uncomfortable idea for a site built on margin

A widening margin is one of the cleaner signals this desk uses to infer pricing power — and it's a fair signal much of the time. Sleep's argument doesn't say that's wrong. It says margin is a lagging read on a moat that's often being built somewhere less visible: in the decision to not take a margin the company could technically extract, because giving it up compounds into something worth more later. A company running the loop he describes might show flat or even shrinking margins for years while the moat underneath it gets wider every quarter — and a reader watching only the margin line would miss it entirely.

We haven't tested this pattern against any Indian company in this desk's own coverage with the document-level rigor we'd want before naming one — that's a different, harder piece of work, and one worth doing properly rather than gesturing at. What's worth taking from Sleep's letters today is narrower and more useful as a habit: before reading a shrinking margin as weakness, it's worth asking whether the company chose it, and where the savings went.

Educational research, not investment advice. Every quotation above is reproduced verbatim from the Nomad Investment Partnership's own letters (Sleep, Zakaria and Company, Ltd.), with the specific letter date and source page noted for each. No company in this desk's own coverage is named or scored against this pattern in this piece. No buy/sell recommendations, no price targets. Moat & Margin is not a SEBI-registered Research Analyst or Investment Adviser.