Selva Book Club: The Most Important Thing by Howard Marks
The below is taken from Selva Ventures’ Q2 2021 Quarterly Investor Letter
In an effort to learn from the best builders of investment firms and share those reflections with our own investors, we are experimenting with a new section of our quarterly letters: Selva Book Club.
This section will take 2–3 passages from a prominent and relevant investment book and share learnings / reflections directly related to the firm building and investing strategy of Selva Ventures. I plan to share these publicly to invite feedback (and book suggestions!) from the broader investor and founder community.
The first book we’ve chosen is a classic: The Most Important Thing by Oaktree founder Howard Marks. I thoroughly enjoyed the read — it stands out to me as the best framing of “risk” that I’ve come across. While the book is quite tailored to public market value investing, the insights Howard shares on risk/return, emotion management and investment process had me highlighting what seemed like every other paragraph with learnings and reflections on Selva’s strategy. It was tough to distill this one down to the three passages below.
Passage: Certain common threads run through the best investments I’ve witnessed. They’re usually contrarian, challenging and uncomfortable — although the experienced contrarian takes comfort from his or her position outside the herd.
The best investments we can make at Selva exploit our deep conviction on a topic that our competitors misunderstand. That conviction can only be built through a rigorous analysis of the theme, category, product and team. It cannot result from the pedigree of the founder or the track record of the lead investor — those factors give cheap comfort that won’t stand up through normal turbulence. In each of our investments, we heard from credible sources at least one good reason why our investment might fail: “mushroom coffee can’t reach mass appeal” or “pet supplements are a small market”. These reasons make our investments uncomfortable, but also provide us with the upside only available when your conclusions are built on non-obvious premises.
Passage: There, many people tend to fall further in love with the thing they’ve bought as its price rises, since they feel validated, and they like it less as the price falls, when they begin to doubt their decision to buy. This makes it very difficult to hold, and to buy more at lower prices.
The need for quick validation is among the most counterproductive emotional traits a venture investor can have; it’s effectively the absence of conviction. Our illiquid strategy helps us avoid panic-selling, but we can still miss out on the unique opportunity to double down if we’re too focused on immediate lift in valuation. After we make an investment at Selva we are always asking ourselves if we want to own more of this company; often, our inside look at the founders and category give us better insight than we had during due diligence. If investors chase our brands it may feel good emotionally and look good for the firm, but if we’re still trying to build a position it’s better if our high conviction coincides with the market misunderstanding the business a little bit longer.
Passage: One of the most striking things I’ve noted over the last thirty-five years is how brief most outstanding investment careers are. Not as short as the careers of professional athletes, but shorter than they should be in a physically nondestructive vocation. Where are the leading competitors from the days when I first managed high yield bonds 25 or 30 ago? […] Many disappeared because organizational flaws rendered their game plans unsustainable. And the rest are gone because they swung for the fences but struck out instead.
Our ambition is to build Selva Ventures into the best consumer investment firm in the world. This means attracting the best talent and the best companies, building a culture that thrives and a process that is repeatable. Despite how much of our time we spend thinking about deals, it’s amazing how little of that is present in the memoirs of the best investors of all time. Successful investments are the outputs, not the inputs, of a lasting firm — it’s the discipline to build that process and culture slowly and methodically that few fund managers have and that we must keep focused on every day.
Please drop a comment on what you think of the format and what suggestions you have for future books. Next quarter’s book will be Principles by Ray Dalio.
