Table of Contents
- What Is an Investment Thesis?
- Key Takeaways
- Understanding the Investment Thesis
- Tip
- Special Considerations
- What's Included in an Investment Thesis?
- Examples of an Investment Thesis
- Why Is an Investment Thesis Important?
- Who Should Have an Investment Thesis?
- How Do You Create an Investment Thesis?
- The Bottom Line
What Is an Investment Thesis?
Let me explain what an investment thesis really is. It's a reasoned argument for a specific investment strategy, supported by solid research and analysis. You'll see these prepared by individual investors and businesses alike. Often, analysts or financial professionals draft them formally to present to clients.
Key Takeaways
Here's what you need to remember: An investment thesis is a written document that recommends a new investment, grounded in research and analysis of its profit potential. As an individual investor, you can use this approach to investigate and pick investments that align with your goals. Financial professionals rely on it to pitch their ideas effectively.
Understanding the Investment Thesis
As I mentioned, an investment thesis is a written document detailing a potential investment. It's a proposal based on research and analysis, typically created by investment or financial professionals to offer insights and pitch ideas. Sometimes, investors like venture capitalists or private equity firms draft their own.
You can use this thesis as a strategic tool for decision-making. It helps investors and companies decide if they should pursue something like a stock or a company acquisition. It also lets you look back and evaluate past decisions to see if they were right. Putting it all in writing can significantly influence the direction of an investment.
Consider this scenario: Suppose you buy a stock based on a thesis that it's undervalued. Your plan is to hold it for three years until its price reflects its true value, then sell for a profit. If the market crashes a year in, you revisit your thesis, trust its conclusions, and hold on. That's a solid strategy, unless something completely unexpected happens, like the 2007-2008 financial crisis or the Brexit vote in 2016. Those kinds of events, absent from your thesis, could impact it.
Tip
If you believe your investment thesis is sound, stick with it through ups and downs.
Special Considerations
An investment thesis is usually formally documented, but there's no universal standard for what goes in it. Some are quick and to the point, meant for fast action, while others, like those on big global trends, are detailed and might include promotional materials for potential partners.
Portfolio management has become a science-based field, similar to engineering or medicine. Advances in theory, technology, and market structures lead to better products and practices. The investment thesis benefits from widely accepted qualitative and quantitative methods.
Remember, any thesis starts as an idea, but it's the methodical research that turns it into an actionable recommendation. In investing, it acts as your game plan.
What's Included in an Investment Thesis?
There's no strict industry standard, but investment theses usually have common elements. It's a proposal based on research and analysis, serving as a guide to an investment's viability.
Most include details on the investment itself, the goals, its viability with supporting trends, potential downsides and risks, costs, potential returns, and any possible losses.
Some also address key questions: Does it align with your goals? What could go wrong? What do the financial statements reveal? What's the growth potential?
Writing it all out helps with informed decisions. For example, a company's management might use a thesis to evaluate acquiring a rival, checking if visions align or if there are market growth opportunities. The complexity varies— a corporation's thesis for an acquisition will be more detailed than an individual's for building a portfolio.
Examples of an Investment Thesis
Portfolio managers and investment firms often share their theses online. Take Morgan Stanley, a leading financial services firm offering investment management, banking, securities, and wealth management. Their process has five steps: idea generation, quality assessment, valuation, risk management, and portfolio construction. In quality assessment, they ask if the company is a disruptor or insulated from change, if it shows financial strength with high returns, margins, cash conversion, low capital intensity, and leverage, and if there are environmental, social, governance, or accounting risks.
Another example is Connetic Ventures, a venture capital firm investing in early-stage companies. They base their thesis on data, with three pillars: diversification, value, and follow-on, each with pros and cons contributing to their strategy.
Why Is an Investment Thesis Important?
An investment thesis is a written proposal or analysis explaining why to pursue an investment. It can also review if a past investment was wise. It enables better decisions by detailing the investment, goals, costs, returns, risks, and losses.
Who Should Have an Investment Thesis?
Anyone investing money should have one. Individual investors use it to choose stocks and strategies, like buy-and-hold or short-term. Companies use it to assess acquisitions or growth.
How Do You Create an Investment Thesis?
Put it in writing to make better decisions. Be clear and concise, do your research, include facts and figures. Cover your goals, upside potential, and risks. Ask if it meets your goals and what could go wrong.
The Bottom Line
Always have a plan when investing, since your money is at risk. An investment thesis helps you decide if an opportunity is worthwhile. Write it out, answer questions on goals, costs, and outcomes. A solid thesis can mean the difference between profits and losses, assuming it supports the investment.
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