Building and testing an investment thesis
- Write a clear, testable thesis
- Define what would prove it wrong
- Review decisions by process, not just outcome
What a thesis is
An investment thesis is a short explanation of why you expect an investment to do well, over what time frame, and what has to happen for that to be true.
‘It’s a great company’ is not a thesis. ‘Subscription revenue should keep growing above 15% a year for three years because churn is falling, while margins widen as costs grow more slowly’ is.
Make it testable
Name the evidence you will watch: revenue growth, margins, market share, debt. Then write your kill criteria: what would show you were wrong, such as two quarters of falling subscribers.
Decide this before you buy, while you are calm.
Fight your own biases
Confirmation bias is the habit of noticing evidence that supports what we already believe. Anchoring keeps us tied to the price we paid. Writing the bear case and the kill criteria in advance counters both.
Judge the process
Good decisions sometimes lose money and bad decisions sometimes win, because outcomes include luck. Review whether your reasoning held up, not just whether the price went up. A journal makes this possible.
‘I’m buying a 4% position in a hypothetical payments company because transaction volume is growing about 20% a year and operating margin has risen for three years. Over the next two years I expect growth above 15% and stable margins. I will sell or reduce if volume growth falls below 10% for two quarters or a major competitor undercuts its fees.’
Key terms
- Investment thesis
- A written, testable reason for owning an investment.
- Kill criteria
- Pre-defined evidence that would show a thesis is wrong.
- Confirmation bias
- Favouring information that supports existing beliefs.
- Anchoring
- Over-relying on a reference number, such as the purchase price.
- Outcome bias
- Judging a decision only by its result rather than by the quality of the reasoning.
Write a one-paragraph thesis with kill criteria for one stock, and save it as a journal entry in the Paper Challenge.
Key takeaways
- A thesis is specific, time-bound and testable.
- Write kill criteria before buying.
- Counter confirmation bias and anchoring by writing the bear case.
- Judge decisions by process; outcomes include luck.