What is an investment thesis? This may seem like a simple question, but it's actually quite complex when considering all of the different factors that go into it. An investment thesis is essentially a roadmap for how you plan to invest your money.
Now, that can seem like a daunting task, but don't worry, as we'll walk you through everything you need to know about writing an investment thesis.
What is an investment thesis?
An investment thesis is a document that outlines your reasoning for investing in a particular security, or asset. It should include everything from your analysis of the business to your estimation of future growth potential.
If it is a personal thesis, it should also include your risk tolerance and investment goals. This is important because it will help you determine what type of investments are right for you.
For example, if you're retired and looking for income, you'll likely want to focus on dividend-paying stocks or bonds. On the other hand, if you're young and have a long time horizon, you may be more interested in growth stocks. Once you have a good understanding of your investment goals, you can start to develop your thesis.
There are a few different ways to go about this, but one of the most important things to remember is that your thesis should be based on sound reasoning and evidence.
For example, let's say you're considering investing in a small-cap stock. Your thesis might be something like, "I believe that this company has significant growth potential and is undervalued by the market.
After researching this industry, reports have indicated that the sector is poised to grow by 25% over the next year. I believe this stock is a good buy at its current price." To support this thesis, you would need to do some research on the company's financials, industry trends, and competitive landscape.
By developing structured investment theses in this way, you can make more informed decisions.
Why an investment thesis is important
An investment thesis is important because it helps to keep you focused and disciplined in your investing. It's easy to get caught up in the excitement of a hot new stock or the latest market trend.
But if you don't have a solid thesis to guide your decisions, you may end up taking on too much risk. It helps you make financial decisions based on logical explanations. This increases the probability of success. All the best investors do it. It can be written on paper and privately held to reevaluate as time goes on. Some public fund managers might post on public websites to notify others. While others will simply have it written out in their memory bank. Either way, it’s a critical part of the investment process.
Where can you find investment thesis examples?
Hedge fund websites are ripe with examples of investment thesis because they’re trying to market their strategies to attract new clients and capital. However, anyone can write an investment thesis.
How to write an investment thesis
The best way to write an investment thesis is to start with an introduction. This should be followed by a section on the company's background and history. Next, you'll want to include a section on the current market conditions.
After that, you'll need to discuss the positive and negative potential outcomes of investing in the company or asset. Finally, you'll want to provide your conclusion.
There are variations of this structure, but generally, it goes as follows:
2. Positive Body
3. Positive Body
4. Positive Body
5. Negative Body
6. Negative Body
7. Negative Body
You can also structure the thesis by writing a negative body immediately after a positive one for a more dynamic back and forth. This can create a live debate in your head that can make the process more fun.
2. Positive Body
3. Negative Body
4. Positive Body
5. Negative Body
6. Positive Body
7. Negative Body
When writing an investment thesis, it is important to be clear and concise. You will also want to make sure that your argument is easy to follow. Try to avoid using jargon or technical terms that might not be familiar to your audience.
It is also important to back up your assertions with data and evidence. This will make your argument more persuasive and convince readers that you have done your research. Be sure to cite any sources that you use so that readers can check them for themselves.
Finally, remember that an investment thesis is not set in stone. As new information arises, you may need to revise your thesis. This is perfectly normal and shows that you are willing to adapt your opinion as new data becomes available.
What should an investment thesis include?
Here are some of the points your investment thesis should include:
- A clear description of the security or company you are investing in
By generally introducing what the company does, you set the stage for the rest of your investment thesis.
- A discussion of the overall market for this security or company
This is where you establish the opportunity that exists for this particular security or company. Is this market growing? What is the consumer sentiment for this market?
- An analysis of the competitive landscape
Who are the major players? What are their strengths and weaknesses? Is it possible that others will put the company out of business?
- An evaluation of the management team
Will this team run a great company to the ground or will they conduct intelligent business decisions?
- A financial analysis of the security or company
How close are they to bankruptcy? Are they profitable and does the product margin justify the current valuation?
- A discussion of the risks associated with the investment
By arguing against yourself, you can provide a more objective opinion.
- A conclusion that outlines your opinion on the investment
To summarize, do you believe this is a good or bad investment?
- An actionable plan
What will you do if the thesis does not play out as expected? Are you allocating a certain amount of capital to this position?
When constructing an investment thesis, always remember to be as objective as possible. Investment theses are not about being right or wrong, they're about providing insights into a decision. Now that we've gone over what an investment thesis is and what it should include, let's take a look at how to conduct the research needed to write one.
How do you do investment research?
There are a few ways to go about conducting investment research. The most important thing is to be as comprehensive as possible in your analysis. This means looking at all the available information and data, both good and bad.
One way to do this is by reading analyst reports. These are written by professionals who have analyzed the security or company in question and have come to a conclusion about its investment potential.
Read the company’s filings
Another way to research investment is by reading company filings and financial statements. This will give you a more in-depth look at the numbers behind the business. You can also use online resources such as Google Finance or Yahoo Finance to find information about a company's stock price, earnings, and other financial data.
Research the industry
Educating yourself on the broader industry trends is also helpful. This will give you a better understanding of the market in which the company operates. For example, if you're looking at a tech company, it would be beneficial to read about the latest trends in technology.
Attend industry conferences
You can also attend industry conferences or meetups to network with other professionals who might have insights into the company or security you're researching.
Look at every source of information
Reading books, listening to podcasts, and watching documentaries on the industry can also be helpful. This will help expand your knowledge and give you a different perspective on the company or security you're researching.
Talk with customers
Last but not least, don't forget to talk to people who are using the product or service. This can give you valuable insights into whether or not the company is providing benefits to the marketplace.
When conducting investment research, it's important to remember that there is no such thing as perfect information. The goal is to gather as much data as possible and then make an informed decision.
Unless it is data points, you should understand that all other sources can be subject to bias and other personal agendas. Research is critical but you also need to know how to use it intelligently and you need to know how to think for yourself.
Investment thesis vs investment strategy
The main difference between an investment thesis and an investment strategy is that an investment thesis focuses on a specific company or security, while an investment strategy is broader and can be applied to any security.
For example, a strategy can be how to allocate the entire investment portfolio. A strategy could be an approach where the investor tries to benefit from the growth potential of technology but still maintains some income through dividends.
Each investor will likely have their own investment strategy. An investment thesis could be a report on if a company's dividends are sustainable. A separate thesis within the strategy could be based on the tech company within the portfolio.
Together with the broader investment strategy, investment theses can help an investor make better financial decisions.
Investment thesis: A sales pitch or fair research?
The investment thesis is a critical part of any investment decision. It is the document that outlines why you are investing in a particular security or company.
Thesis reports can be very simple or quite complex, but they all serve the same purpose: to convince the reader that your investment is a good idea.
If you are selling your fund's reasoning, to an LP or a group of co-investors, the investment thesis is your sales pitch. However, if you want to be seen as more trustworthy or would like to avoid biased investing, argue both sides of the investment.
Describe the risks associated with it. Don't be afraid to challenge your own thesis. After all, if your investment thesis isn't sound, you could be left holding the bag.
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