An Investment Thesis is a written document that outlines why you are investing in a particular idea. It is grounded in your research and analysis and forms the cornerstone of the Investment Process. The Investment Thesis will help to explain with reasoning why you believe a certain investment is viable and how you came to that conclusion.

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What is an Investment Thesis?

The Investment Thesis is a crucial component of any long-term investment strategy. It requires thorough research and analysis to help make informed investment decisions. Many investors take positions in companies without fully understanding what they own. An Investment Thesis is a way to present the case for why you are investing in a particular opportunity and why you think it is a wise decision.

Know what you own, and know why you own it.

Peter Lynch

Although it doesn’t need to be as complicated as a university thesis, which could take years of research and hundreds of pages to complete, an Investment Thesis should be a simplified document that distills all of your analysis and investigative work into a concise explanation.

An Investment Thesis can help explain the reasoning behind why you believe that this particular investment deserves your capital over the thousands of other opportunities available. Why are you investing in it? What potential do you see in this business? What are your expectations for the return on your investment? Are there potential risks and downsides to this investment?

Why is an Investment Thesis important?

Investors often overlook the importance of having an Investment Thesis. It is an effective way to streamline the investment process. Although it is possible to research and invest after scanning a company, it becomes increasingly difficult after doing it multiple times. It is challenging to remember all the knowledge required to make informed decisions. As you move from one idea to another, it can be tough to remember the reason behind your investment in a particular company.

Having a well-structured Investment Thesis can help you make informed decisions and identify when a company is veering off track. This knowledge can help you make sell-side decisions based on research and not emotions. It serves as a kind of “Business Plan” for every investment decision you make.

You should have an investment thesis that essentially says why you think this is potentially a good idea.

Reid Hoffman

An Investment Thesis helps to test your knowledge about your ideas and identify any biases you may have. It forces you to look at the idea from an optimist and a pessimist perspective. It allows you to consider both bull and bear cases, avoiding narrative and confirmation biases.

The primary benefit of an Investment Thesis is research. It gives investors the ability to make more informed decisions based on financial data, analysis, and facts. With a well-curated Thesis, investors can navigate the market’s extremities, and stand firm during market downturns, and when volatility strikes.

That is what the Investment Process is about. To give meaning to your investing activities and better prepare you for the long term. Your investing activities should be replicable and not lumpy or erratic.

10 Key reasons for an Investment Thesis.

Here are my main reasons for having an Investment Thesis.

1. After working through your checklist on an idea the thesis summarises it.
2. If you know what you own and the thesis is valid, volatility does not matter.
3. If the thesis is at risk, nothing matters more.
4. Forces deep research beyond buying a ticker symbol, know what you own.
5. Stress-test your thesis and ideas to avoid biases and emotional investing.
6. Know what you want out of a stock, if uncertain don’t invest in it.
7. An investment system is what separates the speculators from the pros.
8. Identify risks and poke holes in your knowledge about a business.
9. A good indicator is to know when the ‘thesis is broken’ and to sell.
10. Putting in the work to research a company helps to have a long-term view.

To write a powerful investment thesis, you need to put in the effort. Do the homework, research, scuttlebutt, understand the industry, market, the theme the company is playing on, identify the challenges and risks, what interests you about the business, how you think it solves problems, and what the future “could” be.

How to build an Investment Thesis?

Putting everything in writing can help you make more informed decisions and bring a level of seriousness to your investment activities. Your investment thesis should be written in your own words, based on your research and perspective, and not replicated from management or other analysts.

The investment thesis is the product of your investment process. There is no one-size-fits-all approach, as the thesis will be based around your goals and what areas you find important. It should be shaped by the areas your criteria outline. If you prioritize quantitative analysis, then the thesis will lean heavily on valuation and financial metrics. If you lean towards qualitative measures, then it will be shaped around that.

The thesis must corroborate your investment philosophy and strategy. When you are in the middle of researching a company and building your thesis, it is challenging to capture and describe so simply why you own a company. By working through the steps you can develop a greater conviction about the idea, or the opposite, decide it isn’t as good as you initially thought.

The investment thesis comes after you have carried out your checklist on the idea. If a company does not pass the checklist, it won’t make it to the investment thesis stage. The investment checklist weeds out all the companies that don’t meet your investment criteria. There will be some overlapping questions in the thesis that will elaborate on certain areas. For example, the checklist will ask “Is this within your Circle of Competence?” YES/NO. The thesis will expand on this knowledge.

Questions and Ideas to include in a Thesis.

In order to assist you in creating an Investment Thesis, let’s walk through the process of developing one based on my own thesis. This will give you a better understanding of the areas I focus on and include in my thesis. You are welcome to download a template and use it for your own purposes. Below you will find the questions that I used to elaborate on each area in more detail.

What does the Company do?

Simplify the business model, how does it make money? What are the business products and services? Ensure you understand each of the business segments, the cost of goods sold, and the business operations. If you cannot understand the business model, then you shouldn’t invest in it.

Is it within my Circle of Competence and easy to understand?

Do you understand the industry? Ensure you understanding how to value this type of business and what differentiates it from other company’s. The Circle of Competence test is important. Aligning this question with the first can help to understand the fundamentals that drive this company within an industry.

What interests me about the company?

Is there a reason that I was drawn to this company? Perhaps a user of the product or service. Do I believe there is a theme at play, or a future opportunity that I want exposure to?

What is the Key Opportunity that I see?

Outline the underlying catalyst at play, what do I see as the upside potential? Is it a growth play, an undervalued opportunity? If there is a future outlook I believe this company can play to then outline it.

Who leads the company?

Who manages this company? Are they trustworthy and aligned with shareholders. Owner operator, founder run or dedicated long standing management with skin in the game? Identify how they are contributing to the growth of the business.

Is there a Competitive Edge?

Does the business have a MOAT? Outline how this business can protect itself and its margins into the future. Is it sustainable or are they under threat of being competed away?

Is the business financially healthy?

Financial health is critical. What does the balance sheet look like? Is it Healthy? Do they have increasing revenues, EPS, and margins or are key metrics declining? Is there anything unusual?

Has the company been consistent?

Consistency is key. Has the business shown consistency for years, not just a handful of quarters (earnings growth, operating margins)? Any lumpy years and earnings reporting? Is there consistency with the issuing of shares or is there abnormal share dilution? Look at irregular dividends and share buybacks.

What is the Macroeconomic factor, trend or Theme?

Is this company playing to a long-term theme or macroeconomic factor? Is there a trend at play? It is important to understand the future outlook of the industry and how this company fits within it.

Why Invest in this company?

Do I see something that perhaps the market has not seen? What do I believe this company can achieve? Outline and detail every reason why I believe this business makes for a great investment.

What is the Bullish outlook?

Outline what they key drivers of this business are? What is the bullish outlook, the grand story the big picture. Are the optimists saying positive things about the business? Describe key reasons.

What is the Bearish outlook?

This is the most important part of the Thesis outside of valuation and the financial assessment. What are the key risks? Outlining all the key risks, what could go wrong is what forces deeper levels of thinking and not being blind to the risks involved. What would cause this business to fail?

If I had to sell what would trigger it?

This expands on the key risks by outlining in advance what would trigger a sale. It could be certain metrics not being achieved, management leaving or a new entrant competing away market share. Outlining the threats and what would cause this Thesis to break can help you know what to monitor for.

What are the metrics I will use to measure performance?

Outlining the milestones and key metrics can help you to monitor the performance of the business. Is it certain sales growth targets, market share milestones, expansion targets, new product launches. Identify certain milestones over shorter to longer time frames to know what to monitor and keep track of.

Key Financial Metrics.

Go through each of the key financial metrics and ratios to see where the business is. Understand how they have evolved over the years and also get an average indicator for most of the return and valuation metrics. This can help determine historically where the business has been trading as well as where it falls against its peers.

Have I reviewed the Financial Statements?

Go through the 3 financial statements. Understand the working capital requirements and how the statements intertwine. Play close attention to cash conversion and differences between the income statement and the cash flow statement. Look for customer concentration, turnover ratios and unusual intangible assets.

Is there a clear sign of smart Capital Allocation?

How has the business been allocating its capital? How has management been rewarding shareholders? The Shareholder yield is very important here. Are there any poor acquisitions? Is the company diversifying away from the core business?

Does the company have the ability to self-fund growth?

Does the business have the funds to continue to organically grow? Will it need to raise capital by share dilution, taking on debt? Is there cash to sustain and support growth plans?

Can the company reinvest it’s Free Cash Flow?

This is about reinvestment opportunities. A business that can create a lot of positive free cash flow in addition to reinvesting opportunities with high returns on capital can create tremendous value. Does this business have the ability to keep expanding and generating high returns or does it already have a large market share?

Why don’t I invest in this company?

This is an important inversion concept. What are the reasons I wouldn’t invest in this business? What turns me off the business? It is beyond known risks, are there certain factors or traits I dislike?

Is there a competitor that is better?

Is there a competitor that is public or private that is a better opportunity? Where does the business lie, is it best in class or top dog? If not why do I believe this business can continue to grow and do well over the competitive landscape?

Valuation and Summary of Investment.

This outlines the valuation of the business based on whatever valuation metric I used. Ensuring I use the appropriate approach for the style of business. Outline entry price, margin of safety if any, holding period, capital invested as well as my bullish price target. Outline also my conviction level of the business.

Expected Returns on the Investment.

Outline what returns I expect from the business. This is done by using the expected annual returns estimation formula. If I hold an investment long term it needs to provide at least a 10% CAGR.

Simplify in one sentence why I own this company.

This summarises all the research into one short sentence explaining why you own this business. It is the “elevator pitch” the main reason you want to own a share of the business. If you have to explain it to someone this is what you would say. A simple way to reflect on the Thesis as you hold a company is to assess whether you can comfortably still say why you own it. If you are no longer confident in your “one-liner” then it may be time to reassess the thesis and the company.

In Summary…

I find the Thesis to be a helpful tool as it provides a systematic process that I must follow and asks important questions that guide me in the right direction. It also helps me avoid rushing and forces me to be selective in my investments. By having a Thesis, I am able to determine which companies are not worth investing in, simply because they are not worth putting in the time.

The key to successful investing is owning a real business, not just a piece of paper. The Thesis reinforces this idea by encouraging investors to thoroughly understand the companies they invest in. You should be able to explain why you own a particular company in a short sentence, highlighting their strengths and potential for growth.

The Thesis also helps investors determine when to exit a position. If the Thesis breaks or the investment reaches its valuation, it’s time to review and potentially sell. By reflecting on the initial research and comparing it to the current state of the company, investors can make unemotional decisions about whether to buy more, sell or hold the investment. ⬇️ Download a FREE Investment Thesis Template.