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Nick Sleep letters – Chapter 3

There are some excellent insights in the third chapter of Sleep’s letters. Sleep talks about investing in Stagecoach and Costco.

With Stagecoach he highlights how important good management is in running a successful business. He also points out how bad managers do things like diversify, or as Peter Lynch would say “diworsification”.

The entire Stagecoach story is laid out in Sleep’s letters and it’s a great summary of a business turnaround. It starts with Brian Souter, who before becoming CEO was a conductor on Stagecoach’s buses. He focused on the customer and made the bus service something that worked for them. The stock price rose 10x in ten years as a result. He retired and that’s when the business started performing poorly.

The new managers began buying businesses that didn’t fit with their existing business. The big one being Coach USA which was a amalgamation of bus, taxi and coach services. The cost to purchase and remake Coach USA weighed on profits and share performance suffered. Ten years after his retirement Souter came back.

The turnaround opportunity that presented itself to Sleep in the early 2000’s was conditional on having good management operating the business. The opportunity itself was a result of years of poor management. I like this story because it makes it clear that investors should seek out good business managers if they want good returns.

Next Sleep discusses the business of Costco.

Once again Sleep emphasizes the importance of good management as a criteria for investing. Costco managers maintain a strict adherence to only marking products up 15%. This delivers on Costco’s reputation for being the place to get good deals.

He also does a good summary of its upcoming expansion plans. I won’t go into the details but if you want to see how Sleep uses logic to reach his conclusions, I’d recommend reading Nick Sleep’s letters.