When I first started investing in startups, I knew that I enjoyed building companies and had a passion for the energy transition. But the more I studied investing, my passion became about applying the best investment techniques to a problem I loved.
My thesis was simple, if economics drive mass adoption of climate solutions, risk-adjusted returns drive mass investment in them.
Like most, I'd heard of the likes of Charlie Munger, but Howard Marks was a new name for me. Marks is the co-founder of Oaktree Capital Management. Oaktree is most well-known for its strategy of buying distressed debt and assets on the heels of the financial crisis, a bet they made based on market fundamentals.
Each quarter (sometimes more), Marks writes a memo on a topical financial trend. Last week, he wrote "Selling Out," covering the latest market correction. There were a lot of great insights, but this one stood out.
"If your investment thesis seems less valid than it did previously and/or the probability that it will prove accurate has declined, selling some or all of the holding is probably appropriate. Likewise, if another investment comes along that appears to have more promise – to offer a superior risk-adjusted prospective return – it's reasonable to reduce or eliminate existing holdings to make room for it."
This was my favorite passage of the entire letter because it's so simple at the beginning and more nuanced than it appears on the surface at the end.
The test of "does our thesis still hold true?" is so simple in that it asks a fundamental question we often forget to ask when things aren't going our way. We tend to be irrational during times of high stress and this question returns us to our original line of rational thought.
If so, we should hold even when its uncomfortable. A move that's easier said than done.
Just before this passage, Marks declares profit-taking as a strategy "has no place in institutional investing" - but profit-taking is often relative to the opportunity cost of investing elsewhere.
Investors who took profits in an inflated environment over the last 12 months are now more likely to find investments that offer "superior" risk-adjusted returns due to the recent correction.
They took advantage of heightened valuations to create stronger returns and are likely to re-invest at lower prices in the near to medium term, a win on two fronts. Profit-taking made sense relative to the opportunity cost.
Imagine riding Tesla to the top, or even the last 24 months, selling out, and re-investing those profits in 10-15 startups working on climate solutions. That's impact, and it's created by understanding financial markets.
Financial constructs and portfolio theory may not appear to be climate tech topics on the surface, but dive deeper, and the impacts become apparent. Better returns create more opportunities, and more opportunities create more impact.