Intermediate3 min readTrading and Investing Strategies · 5/10
Long-Term Investing: How to Build an Investment Thesis
If someone asks why you hold a stock and your answer is "because it will go up," you do not yet have a thesis. An investment thesis is a few lines written before you buy: what you see in the company, what you will track, and what would prove you wrong.
What you will learn
Write an investment thesis in three parts.
Set a clear condition that tells you the thesis has broken.
Over the long term the price will rise and fall many times for reasons unrelated to the business. Without a written reason, every drop makes you ask "should I sell?" and every rise makes you say "I knew it." A written thesis lets you judge the company by what you bought it for, not by this week's price move.
Three parts
Delta Packaging (invented company)Written before buying
1
Why?It is expanding capacity, and sales have grown three years in a row.
2
What I will trackSales and profit margin every quarter, and debt.
3
When am I wrong?Sales fall two quarters in a row, or debt exceeds shareholders' equity.
A thesis for an invented company: the reason, what to track, and the condition for being wrong.
The reasonOne or two sentences about the business itself: growth, market position, management, or a price you believe is below its value. Not "it has fallen a lot" or "people are talking about it."
What you will trackSpecific numbers from the financial statements that measure that reason, checked with every set of results.
The condition for being wrongSomething in the business, not the price, which if it happens means your reason for buying is gone.
An example a year later
An invented companyYou buy Delta Packaging at EGP 30 with the thesis in the figure. After 6 months the stock falls to 24 in a broad market decline, but sales and margin are tracking what you wrote, so the thesis still stands despite the paper loss. After a year, sales have fallen two quarters in a row and the stock is at 31. The price is above your cost, yet the condition for being wrong has been met, and the thesis needs a serious review.
The example shows how a thesis separates two things: how the business performs and how the stock moves. The two are linked over the long run, but they can move in opposite directions for many months.
Watch outThe easiest mistake is quietly adjusting the thesis each time the numbers go against it, until it has become a completely new one without you noticing. Keep the original, dated, and write any change explicitly with its reason. The habit has a name: confirmation bias.
Start from the numbers
Open any company's page and try writing a three-line thesis: the reason, the numbers you would track, and the condition for being wrong.