“The Fed tightens, stocks go up.
The dollar falls, stocks go up.
Oil soars, stocks go up.
Retail sales wobble, stocks go up.
Is this a great country or what?
Stop me if the sentiment above sounds familiar.
That was the mood as of December 2004 from the seat of Nick Sleep and Qais Zakaria as they reported to their investors in their Nomad Investment Partnership.
It had been another good year, the fourth straight for these so-called “value investors”.
They sat there realizing that the higher prices for stocks across various opportunity sets posed the potential to be a headwind for returns going forward.
Over the past few weeks I wrote a series of posts titled “Are You Intelligent”, covering the book The Intelligent Investor, widely regarded as the seminal work of Benjamin Graham.
We already know that Graham’s work influenced Buffett and today we’ll see how this work influenced some of the greatest investors of the 2000s, Sleep and Zakaria.
In doing so we’ll cover one of the greatest business secrets ever shared, one that has taken on various names and that once you grasp it, you see it shows up in many places.
But first, Sleep and Zakaria needed to dispel a little myth. Value and Growth investing are not two separate disciplines. Wait? Tell that to the teams managing separate strategies on these dimensions at the leading investment managers.
Here’s what Nomad had to say: “We won’t end the debate here but, so that we all understand, our definition is that a business is worth the free cash flow that it can be expected to generate between now and judgment day, discounted back at a reasonable rate. Period. Growth is therefore inherently part of the value judgment, not a separate discipline. “
We’ve seen this thinking before - go back to our discussion on Chapter 11 of The Intelligent Investor - but when you read it, it’s hard to argue against the logic. To the Nomad team the reason the distinction between value and growth even gets attention is heuristics and marketing. It’s just easier to talk about a few summary ratios, label them and move on. But easier doesn’t make things true.
Their letter discusses this value v. growth topic largely because simple categorizations can lead to grave investment mistakes. What are those potentially grave mistakes: 1) Not seeing success and 2) Not selling simply because the categorization in the media changed.
The root of these two mistakes is a failure to dig “down to the underlying reality of the company, the engine of its success. That is, one must see an investment not as a static balance sheet but as an evolving, compounding machine.” Like Graham and Buffett they learned to think about Business Values as opposed to Stock Prices. They understood the lesson on Mr. Market.
And now we learn their secret, what they believe is a vital attribute to finding these “compounding machines”.
The Secret: Scale Efficiencies Shared (or Scale Economics Shared)
Most of us would not believe that capping a margin over cost is likely the best way to generate shareholder value. It seems to fly in the face of everything we think we know. If a business knows it can charge a customer more without losing that sale, why shouldn’t they?
The answer is simple, if done correctly, as your business scales, costs drop, and instead of pocketing higher margins, you pass the cost savings back to your customers. Those customers in turn bring you even more of their business, which reinforces your ability to scale, creating a positive flywheel effect that extends the probability of continued success of the franchise.
Costco’s business model with gross margins capped is the classic example of this phenomenon and the one cited by Sleep and Zakaria. A model they saw employed in other businesses as well.
Costco is also the example held up more recently by author Eric Reis in his book: Incorruptible, writing about why good companies go bad and great companies stay great. Reis uses it to discuss the idea of a “harder is easier” mission, a fundamental means of contributing to human flourishing, a methodology where companies make more money by actually accomplishing more of their mission. For Reis the “easy” path is one of a business extracting more margin at the altar of short-term profits, one that potentially erodes customer loyalty and trust. The “hard” path is honoring and protecting your commitments.
The paradox is the “harder” way, the one that protects and transmits the company's ethos into fulfilling its mission is ultimately “easier” because customer trust becomes the only engine that needs to be solved for, eliminating the need to attempt to cater to every short-term extractive practice. Want to avoid internal battles, the need for constant reinvention, chasing quarterly-earnings? Choose “hard”, because those things are actually the hard things. Acting in accordance with your mission should be “easy”.
This is the MOAT that Sleep and Zakaria saw, it is a compounding, virtuous cycle of customer reciprocation fueled by sharing scale-driven savings. A practice that protects the company's core mission where trustworthiness becomes the source of long-term value.
In 2026’s Incorruptible Reis is writing about all of the forces that act upon companies causing them to lose what should be their moats. The way that success itself acts upon a company, not just in the sense of an invitation for competition, but also in the way it invites pressure from extractive short-term forces. Why do some companies cave and others bend the world to their mission? Reis provides his list of answers and choosing this “harder” path is one of those important characteristics.
Sleep and Zakaria in 2004 were asking the same questions, pondering why some companies persist in the face of competition that should be eroding their business returns. They explain how deferring profits today is done in order to “extend the life of the franchise.” The margin cap, the taking care of everyone in the ecosystem, all actually keeps the competition at bay, fuels growth, all generally building a formidable moat. The reality is what Reis calls “financial gravity”, the pull of short-term incentives that tend towards structural mediocrity, tends to dominate. The Nomad team stated: “most companies pursue scale efficiencies, but few share them. It’s the sharing that makes the model so powerful. But in the center of the model is a paradox: the company grows through giving more back….almost no one gives profits back to customers.”
For Sleep and Zakaria the most valuable company in the world would have the following characteristics: 1) a huge marketplace 2) high barriers to entry (offering longevity) and 3) very low levels of capital employed (offering free cash flow). Companies whose business models embodied ‘scale economics shared’ tend to do well in matching these characteristics.
These companies tend to control their own destinies, which can be a valuable asset.
Just like Reis writes about in his book twenty years later, Sleep and Zakaria are writing about how Wall Street often is quick to misdiagnose the company’s greatest strength as its biggest problem. How was Costco viewed in 2004? Well the consensus was “that Costco is a low margin, expensive retailer with a cost problem.” The Nomad team saw differently, they called it, “a cost disciplined, intellectually honest, high product integrity, perpetual motion machine trading at a discount to value.”
Fast forward to June 30, 2025, the Nomad team continued to expand on their argument that this secret of ‘scale economies shared’ is a powerful misunderstood force. We already covered why it is so misunderstood, which is generally that wall street largely can’t fathom not trying to make every dollar possible now, even if that means risking the business later. And that thinking is understandable, we would all agree that the cone of uncertainty increases with time, but one of the powers of the ‘scale economies shared’ model is that it makes the businesses future much more predictable in the future and less risky. Second, these types of business where the customer saves more than shareholder earns have tremendous moats, again reducing uncertainty arising from competition.
Once the Nomad team saw this model it became a core business model they looked to invest in and one place they saw it when others couldn’t see it was in Amazon. At the time most of the investing world couldn’t understand how Bezos was blowing all the company’s free cash flow into price givebacks, shipping subsidies, things that were building trust with customers. Bezos on the other hand was telling those who would listen what the plan was:
“As our shareholders know, we have made a decision to continuously and significantly lower prices for customers year after year as our efficiency and scale make it possible. This is an example of a very important decision that cannot be made in a math-based way. In fact, when we lower prices, we go against the math that we can do, which always says that the smart move is to raise prices.” Further providing that “Our judgment is that relentlessly returning efficiency improvements and scale economies to customers in the form of lower prices creates a virtuous cycle that leads over the long-term to a much larger dollar amount of free cash flow, and thereby to a much more valuable Amazon.com “.
The Nomad team understood this secret while the rest of the world didn’t.
Maybe you know what this secret looks like today or maybe you know what other business model is worthy of the investment pedestal that Sleep and Zakaria placed ‘scale economics shared’ on. I don’t know with certainty what current companies are the next best examples of these concepts, the companies that the market is discounting because the company seems to be ‘irrationally’ treating their customers, employees, suppliers, etc. in a manner that isn’t extracting every last dime from them, but maybe you can find them.
An enduring lesson from the work on Nomad and of Eric Reis is that companies focused on immediate extraction metrics don’t always tend to make the best long-term investments.
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