A letter a day!

A letter a day!

Letter# 18 2013
(The last letter)

1.A different take on incentives.

This has been explained by Nick in the context of the management fee charged by them at 6%.They have always believed that the management fee shouldn’t be a profit center.

“The management fee should not be a profit center as we do not create value through managing the Partnership per se (hence our break- even cost reimbursement management fee); the performance fee should respect the notion of the opportunity cost of capital (and long bonds had been six percent or so); and if we owned shares for long periods, then performance fees should be at risk for an extended period too.”

They have also explained a slight uncongenial approach to being paid. In other words, in other words, the normal relationship between price and quality had been inverted by the value one placed on one’s own work.

“In the 1940s the food companies began manufacturing a new product, the powdered cake mixes, which was marketed as a time saving innovation as the mix required only the addition of water before baking. To the marketer’s great surprise – sales were terrible! Something had to be done and so, almost as an experiment, a new product was launched which required the cook to add fresh eggs, milk and sugar and although it took longer to make, paradoxically, sales improved! Anyone who has laboured through assembling Ikea furniture may understand why. To the builder of flat pack furniture or the baker of cakes, the perceived value of the end product is influenced by the input of the consumer’s own efforts. In doing some work themselves the builder, or cook, puts a little bit of meaning, perhaps even a little bit of love, into the product.”

2.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 (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 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. In its own little way, this is why Zak and I are quite relaxed about six percent not being six percent. It was an arbitrary number in the first place, and we derive a great deal of value from the meaning of the work we do (challenge, sense of job well done, identity, creativity and so on) not just from the financial rewards (although we will learn to live with those too!). By having an attitude that is somewhat independent of financial rewards, we are sure that Nomad’s performance in the long run will be far better too.”

This ends the Nomad investment partnership letters! 2014 was the year when Nick and Zak had decided to close the subscriptions.

“When we wrote the December 2013 letter, we did not know that it would be our last but, afew months later, the portfolio had been liquidated, funds returned to our partners and on we go. We did not like that final phase one bit: selling stakes built up over years felt wrong, the clients were grace itself but, even so, it is still an awkward conversation to take something away from someone, especially people that you like, and there was the administrative headaches of winding up an operation. Psychologically it all felt wrong.”