investment thesis summary

• Search Search Please fill out this field.

What Is an Investment Thesis?

• Understanding the Thesis

Special Considerations

• What's Included?

The Bottom Line

• Portfolio Management

Investment Thesis: An Argument in Support of Investing Decisions

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

The term investment thesis refers to a reasoned argument for a particular investment strategy, backed up by research and analysis. Investment theses are commonly prepared by (and for) individual investors and businesses. These formal written documents may be prepared by analysts or other financial professionals for presentation to their clients.

Key Takeaways

• An investment thesis is a written document that recommends a new investment, based on research and analysis of its potential for profit.
• Individual investors can use this technique to investigate and select investments that meet their goals.
• Financial professionals use the investment thesis to pitch their ideas.

Understanding the Investment Thesis

As noted above, an investment thesis is a written document that provides information about a potential investment. It is a research- and analysis-based proposal that is usually drafted by an investment or financial professional to provide insight into investments and to pitch investment ideas. In some cases, the investor will draft their own investment thesis, as is the case with venture capitalists and private equity firms.

This thesis can be used as a strategic decision-making tool. Investors and companies can use a thesis to decide whether or not to pursue a particular investment, such as a stock or acquiring another company. Or it can be used as a way to look back and analyze why a particular decision was made in the first place—and whether it was the right one. Putting things in writing can have a huge impact on the direction of a potential investment.

Let's say an investor purchases a stock based on the investment thesis that the stock is undervalued . The thesis states that the investor plans to hold the stock for three years, during which its price will rise to reflect its true worth. At that point, the stock will be sold at a profit. A year later, the stock market crashes, and the investor's pick crashes with it. The investor recalls the investment thesis, relies on the integrity of its conclusions, and continues to hold the stock.

That is a sound strategy unless some event that is totally unexpected and entirely absent from the investment thesis occurs. Examples of these might include the 2007-2008 financial crisis or the Brexit vote that forced the United Kingdom out of the European Union (EU) in 2016. These were highly unexpected events, and they might affect someone's investment thesis.

If you think your investment thesis holds up, stick with it through thick and thin.

An investment thesis is generally formally documented, but there are no universal standards for the contents. Some require fast action and are not elaborate compositions. When a thesis concerns a big trend, such as a global macro perspective, the investment thesis may be well documented and might even include a fair amount of promotional materials for presentation to potential investing partners.

Portfolio management is now a science-based discipline, not unlike engineering or medicine. As in those fields, breakthroughs in basic theory, technology, and market structures continuously translate into improvements in products and in professional practices. The investment thesis has been strengthened with qualitative and quantitative methods that are now widely accepted.

As with any thesis, an idea may surface but it is methodical research that takes it from an abstract concept to a recommendation for action. In the world of investments, the thesis serves as a game plan.

What's Included in an Investment Thesis?

Although there's no industry standard, there are usually some common components to this document. Remember, an investment thesis is generally a proposal that is based on research and analysis. As such, it is meant to be a guide about the viability of a particular investment.

Most investment theses include (but aren't limited to) the following information:

• The investment in question
• The investment goal(s)
• Viability of the investment, including any trends that support the investment
• Potential downsides and risks that may be associated with the investment
• Costs and potential returns as well as any losses that may result

Some theses also try to answer some key questions, including:

• Does the investment align with the intended goal(s)?
• What could go wrong?
• What do the financial statements say?
• What is the growth potential of this investment?

Putting everything in writing can help investors make more informed decisions. For instance, a company's management team can use a thesis to decide whether or not to pursue the acquisition of a rival. The thesis may highlight whether the target's vision aligns with the acquirer or it may identify opportunities for growth in the market.

Keep in mind that the complexity of an investment thesis depends on the type of investor involved and the nature of the investment. So the investment thesis for a corporation looking to acquire a rival may be more in-depth and complicated compared to that of an individual investor who wants to develop an investment portfolio.

Examples of an Investment Thesis

Portfolio managers and investment companies often post information about their investment theses on their websites. The following are just two examples.

Morgan Stanley

Morgan Stanley ( MS ) is one of the world's leading financial services firms. It offers investment management services, investment banking, securities, and wealth management services. According to the company, it has five steps that make up its investment process, including idea generation, quality assessment, valuation, risk management , and portfolio construction.

When it comes to developing its investment thesis, the company tries to answer three questions as part of its quality assessment step:

• "Is the company a disruptor or is it insulated from disruptive change? 
• Does the company demonstrate financial strength with high returns on invested capital, high margins, strong cash conversion, low capital intensity and low leverage? 
• Are there environmental or social externalities not borne by the company, or governance and accounting risks that may alter the investment thesis?"

Connetic Ventures

Connetic Adventures is a venture capital firm that invests in early-stage companies. The company uses data to develop its investment thesis, which is made up of three pillars. According to its blog, there were three pillars or principles that contributed to Connetic's venture capital investment strategy. These included diversification, value, and follow-on—each of which comes with a pro and con.

Why Is an Investment Thesis Important?

An investment thesis is a written proposal or research-based analysis of why investors or companies should pursue an investment. In some cases, it may also serve as a historical guide as to whether the investment was a good move or not. Whatever the reason, an investment thesis allows investors to make better, more informed decisions about whether to put their money into a specific investment. This written document provides insight into what the investment is, the goals of the investment, any associated costs, the potential for returns, as well as any possible risks and losses that may result.

Who Should Have an Investment Thesis?

An investment thesis is important for anyone who wants to invest their money. Individual investors can use a thesis to decide whether to purchase stock in a particular company and what strategy they should use, whether it's a buy-and-hold strategy or one where they only have the stock for a short period of time. A company can craft its own investment thesis to help weigh out whether an acquisition or growth strategy is worthwhile.

How Do You Create an Investment Thesis?

It's important to put your investment thesis in writing. Seeing your proposal in print can help you make a better decision. When you're writing your investment thesis, be sure to be clear and concise. Make sure you do your research and include any facts and figures that can help you make your decision. Be sure to include your goals, the potential for upside, and any risks that you may come across. Try to ask and answer some key questions, including whether the investment meets your investment goals and what could go wrong if you go ahead with the deal.

It's always important to have a plan, especially when it comes to investing. After all, you are putting your money at risk. Having an investment thesis can help you make more informed decisions about whether a potential investment is worth your while. Make sure you put your thesis in writing and answer some key questions about your goals, costs, and potential outcomes. Having a concrete proposal in place can spell the difference between earning returns and losing all your money. And that's if your thesis supports the investment in the first place.

Harvard Business School. " Writing a Credible Investment Thesis ."

Lanturn. " What is an Investment Thesis and 3 Tips to Make One ."

Morgan Stanley. " Global Opportunity ."

Medium. " The Data That Built Our Fund's Investment Thesis ."

• Terms of Service
• Editorial Policy
• Privacy Policy

Popular Searches

Your previous searches, recently visited pages.

Content added to Red Folder

Removed from Red Folder

Writing a Credible Investment Thesis

Only a third of acquiring executives actually write down the reasons for doing a deal.

By David Harding and Sam Rovit

• November 15, 2004

Every deal your company proposes to do—big or small, strategic or tactical—should start with a clear statement how that particular deal would create value for your company. We call this the investment thesis. The investment thesis is no more or less than a definitive statement, based on a clear understanding of how money is made in your business, that outlines how adding this particular business to your portfolio will make your company more valuable. Many of the best acquirers write out their investment theses in black and white. Joe Trustey, managing partner of private equity and venture capital firm Summit Partners, describes the tool in one short sentence: "It tells me why I would want to own this business."

Perhaps you're rolling your eyes and saying to yourself, "Well, of course our company uses an investment thesis!" But unless you're in the private equity business—which in our experience is more disciplined in crafting investment theses than are corporate buyers—the odds aren't with you. For example, our survey of 250 senior executives across all industries revealed that only 29% of acquiring executives started out with an investment thesis (defined in that survey as a "sound reason for buying a company") that stood the test of time. More than 40% had no investment thesis whatsoever (!). Of those who did, fully half discovered within three years of closing the deal that their thesis was wrong.

Studies conducted by other firms support the conclusion that most companies are terrifyingly unclear about why they spend their shareholders' capital on acquisitions. A 2002 Accenture study, for example, found that 83% of executives surveyed admitted they were unable to distinguish between the value levers of M&A deals. In Booz Allen Hamilton's 1999 review of thirty-four frequent acquirers, which focused chiefly on integration, unsuccessful acquirers admitted that they fished in uncharted waters. They ranked "learning about new (and potentially related) business areas" as a top reason for making an acquisition. (Surely companies should know whether a business area is related to their core before they decide to buy into it!) Successful acquirers, by contrast, were more likely to cite "leading or responding to industry restructuring" as a reason for making an acquisition, suggesting that these companies had at least thought through the strategic implications of their moves.

Not that tipping one's hat to strategy is a cure-all. In our work with companies that are thinking about doing a deal, we often hear that the acquisition is intended for "strategic" reasons. That's simply not good enough. A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value.

A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value. This point needs underscoring. Justifying a deal as being "strategic" ex post facto is, in most cases, an invitation to inferior returns. Given how frequently we have heard weak "strategic" justifications after a deal has closed, it's worth passing along a warning from Craig Tall, vice chair of corporate development and strategic planning at Washington Mutual. In recent years, Tall's bank has made acquisitions a key part of a stunningly successful growth record. "When I see an expensive deal," Tall told us, "and they say it was a 'strategic' deal, it's a code for me that somebody paid too much."

And although sometimes the best offense is a good defense, this axiom does not really stand in for a valid investment thesis. On more than a few occasions, we have been witness to deals that were initiated because an investment banker uttered the Eight Magic Words: If you don't buy it, your competitors will.

Well, so be it. If a potential acquisition is not compelling to you on its own merits, let it go. Let your competitors put their good money down, and prove that their investment theses are strong.

Let's look at a case in point: [Clear Channel Communications' leaders Lowry, Mark and Randall] Mayses' decision to move from radios into outdoor advertising (billboards, to most of us). Based on our conversations with Randall Mays, we summarize their investment thesis for buying into the billboard business as follows:

Clear Channel's expansion into outdoor advertising leverages the company's core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements. Second, similar to the radio industry twenty years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to "roll up" a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.

Note that in Clear Channel's investment thesis (at least as we've stated it), the benefits would be derived from three sources:

• Leveraging an existing sales force more extensively
• Using the balance sheet to roll up and fund an undercapitalized business
• Applying operating skills learned in the radio trade

Note also the emphasis on tangible and quantifiable results, which can be easily communicated and tested. All stakeholders, including investors, employees, debtors and vendors, should understand why a deal will make their company stronger. Does the investment thesis make sense only to those who know the company best? If so, that's probably a bad sign. Is senior management arguing that a deal's inherent genius is too complex to be understood by all stakeholders, or simply asserting that the deal is "strategic"? These, too, are probably bad signs.

Most of the best acquirers we've studied try to get the thesis down on paper as soon as possible. Getting it down in black and white—wrapping specific words around the ideas—allows them to circulate the thesis internally and to generate reactions early and often.

The perils of the "transformational" deal. Some readers may be wondering whether there isn't a less tangible, but equally credible, rationale for an investment thesis: the transformational deal. Such transactions, which became popular in the exuberant '90s, aim to turn companies (and sometimes even whole industries) on their head and "transform" them. In effect, they change a company's basis of competition through a dramatic redeployment of assets.

The roster of companies that have favored transformational deals includes Vivendi Universal, AOL Time Warner (which changed its name back to Time Warner in October 2003), Enron, Williams, and others. Perhaps that list alone is enough to turn our readers off the concept of the transformational deal. (We admit it: We keep wanting to put that word transformational in quotes.) But let's dig a little deeper.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. In search of effective transformations, people sometimes cite the examples of DuPont—which after World War I used M&A to transform itself from a maker of explosives into a broad-based leader in the chemicals industry—and General Motors, which, through the consolidation of several car companies, transformed the auto industry. But when you actually dissect the moves of such industry winners, you find that they worked their way down the same learning curve as the best-practice companies in our global study. GM never attempted the transformational deal; instead, it rolled up smaller car companies until it had the scale to take on a Ford—and win. DuPont was similarly patient; it broadened its product scope into a range of chemistry-based industries, acquisition by acquisition.

In a more recent example, Rexam PLC has transformed itself from a broad-based conglomerate into a global leader in packaging by actively managing its portfolio and growing its core business. Beginning in the late '90s, Rexam shed diverse businesses in cyclical industries and grew scale in cans. First it acquired Europe's largest beverage—can manufacturer, Sweden's PLM, in 1999. Then it bought U.S.-based packager American National Can in 2000, making itself the largest beverage-can maker in the world. In other words, Rexam acquired with a clear investment thesis in mind: to grow scale in can making or broaden geographic scope. The collective impact of these many small steps was transformation. 14

But what of the literal transformational deal? You saw the preceding list of companies. Our advice is unequivocal: Stay out of this high-stakes game. Recent efforts to transform companies via the megadeal have failed or faltered. The glamour is blinding, which only makes the route more treacherous and the destination less clear. If you go this route, you are very likely to destroy value for your shareholders.

By definition, the transformational deal can't have a clear investment thesis, and evidence from the movement of stock prices immediately following deal announcements suggests that the market prefers deals that have a clear investment thesis. In "Deals That Create Value," for example, McKinsey scrutinized stock price movements before and after 231 corporate transactions over a five-year period. The study concluded that the market prefers "expansionist" deals, in which a company "seeks to boost its market share by consolidating, by moving into new geographic regions, or by adding new distribution channels for existing products and services."

On average, McKinsey reported, deals of the "expansionist" variety earned a stock market premium in the days following their announcement. By contrast, "transformative" deals—whereby companies threw themselves bodily into a new line of business—destroyed an average of 5.3% of market value immediately after the deal's announcement. Translating these findings into our own terminology:

• Expansionist deals are more likely to have a clear investment thesis, while "transformative" deals often have no credible rationale.
• The market is likely to reward the former and punish the latter.
• The dilution/accretion debate. One more side discussion that comes to bear on the investment thesis: Deal making is often driven by what we'll call the dilution/accretion debate. We will argue that this debate must be taken into account as you develop your investment thesis, but your thesis making should not be driven by this debate.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. Simply put, a deal is dilutive if it causes the acquiring company to have lower earnings per share (EPS) than it had before the transaction. As they teach in Finance 101, this happens when the asset return on the purchased business is less than the cost of the debt or equity (e.g., through the issuance of new shares) needed to pay for the deal. Dilution can also occur when an asset is sold, because the earnings power of the business being sold is greater than the return on the alternative use of the proceeds (e.g., paying down debt, redeeming shares or buying something else). An accretive deal, of course, has the opposite outcomes.

But that's only the first of two shoes that may drop. The second shoe is, How will Wall Street respond? Will investors punish the company (or reward it) for its dilutive ways?

Aware of this two-shoes-dropping phenomenon, many CEOs and CFOs use the litmus test of earnings accretion/dilution as the first hurdle that should be put in front of every proposed deal. One of these skilled acquirers is Citigroup's [former] CFO Todd Thomson, who told us:

It's an incredibly powerful discipline to put in place a rule of thumb that deals have to be accretive within some [specific] period of time. At Citigroup, my rule of thumb is it has to be accretive within the first twelve months, in terms of EPS, and it has to reach our capital rate of return, which is over 20% return within three to four years. And it has to make sense both financially and strategically, which means it has to have at least as fast a growth rate as we expect from our businesses in general, which is 10 to 15% a year.

Now, not all of our deals meet that hurdle. But if I set that up to begin with, then if [a deal is] not going to meet that hurdle, people know they better make a heck of a compelling argument about why it doesn't have to be accretive in year one, or why it may take year four or five or six to be able to hit that return level.

Unfortunately, dilution is a problem that has to be wrestled with on a regular basis. As Mike Bertasso, the head of H. J. Heinz's Asia-Pacific businesses, told us, "If a business is accretive, it is probably low-growth and cheap for a reason. If it is dilutive, it's probably high-growth and attractive, and we can't afford it." Even if you can't afford them, steering clear of dilutive deals seems sensible enough, on the face of it. Why would a company's leaders ever knowingly take steps that would decrease their EPS?

The answer, of course, is to invest for the future. As part of the research leading up to this book, Bain looked at a hundred deals that involved EPS accretion and dilution. All the deals were large enough and public enough to have had an effect on the buyer's stock price. The result was surprising: First-year accretion and dilution did not matter to shareholders. In other words, there was no statistical correlation between future stock performance and whether the company did an accretive or dilutive deal. If anything, the dilutive deals slightly outperformed. Why? Because dilutive deals are almost always involved in buying higher-growth assets, and therefore by their nature pass Thomson's test of a "heck of a compelling argument."

As a rule, investors like to see their companies investing in growth. We believe that investors in the stock market do, in fact, look past reported EPS numbers in an effort to understand how the investment thesis will improve the business they already own. If the investment thesis holds up to this kind of scrutiny, then some short-term dilution is probably acceptable.

Reprinted with permission of Harvard Business School Press. Mastering the Merger: Four Critical Decisions That Make or Break the Deal , by David Harding and Sam Rovit. Copyright 2004 Bain & Company; All Rights Reserved.

David Harding (HBS MBA '84) is a director in Bain & Company's Boston office and is an expert in corporate strategy and organizational effectiveness.

Sam Rovit (HBS MBA '89) is a director in the Chicago office and leader of Bain & Company's Global Mergers and Acquisitions Practice.                                              

10. Joe Trustey, telephone interview by David Harding, Bain & Company. Boston: 13 May 2003. Subsequent comments by Trustey are also from this interview.

11. Accenture, "Accenture Survey Shows Executives Are Cautiously Optimistic Regarding Future Mergers and Acquisitions," Accenture Press Release, 30 May 2002.

12. John R. Harbison, Albert J. Viscio, and Amy T. Asin, "Making Acquisitions Work: Capturing Value After the Deal," Booz Allen & Hamilton Series of View-points on Alliances, 1999.

13. Craig Tall, telephone interview by Catherine Lemire, Bain & Company. Toronto: 1 October 2002.

14. Rolf Börjesson, interview by Tom Shannon, Bain & Company. London: 2001.

15. Hans Bieshaar, Jeremy Knight, and Alexander van Wassenaer, "Deals That Create Value," McKinsey Quarterly 1 (2001).

16. Todd Thomson, speaking on "Strategic M&A in an Opportunistic Environment." (Presentation at Bain & Company's Getting Back to Offense conference, New York City, 20 June 2002.)

17. Mike Bertasso, correspondence with David Harding, 15 December 2003.

Mastering the Merger

Learn more about the core decision strategies that help companies win in M&A.

• Financial Services
• M&A Capability
• Mergers and Acquisitions

How We've Helped Clients

Sales and marketing building a more valuable salesforce, sales and marketing bank gets back to basics to protect customer base, strategy strategic refocus for global wealth management company, ready to talk.

We work with ambitious leaders who want to define the future, not hide from it. Together, we achieve extraordinary outcomes.

Contact Bain

How can we help you?

• Business inquiry
• Career information
• Press relations
• Partnership request
• Speaker request

Investment Thesis: Definition, Components and How to Prepare One

Last updated 03/15/2024 by

Fact checked by

Compare Investment Advisors

What is an investment thesis, the role of an investment thesis in investment decision-making, tailoring your investment thesis to your financial goals, components of a strong investment thesis, market research and analysis, target investment criteria, risk assessment and mitigation, expected returns and exit strategy, alignment with your risk tolerance and time horizon, building your investment thesis, conducting comprehensive market research, defining your investment objectives, selecting the right assets or securities, creating a clear investment strategy, addressing potential risks, implementing your investment thesis, portfolio diversification, monitoring and reviewing your investments, adapting your thesis to market changes, tracking progress towards your goals, evaluating the success of your investment thesis, measuring performance against initial projections, identifying key milestones, learning from both successes and failures, what is the difference between an investment thesis and a strategy, how often should i revisit and adjust my investment thesis, can i have multiple investment theses for different investment goals, what should i do if my investment thesis is not yielding expected results, key takeaways.

• An investment thesis is a crucial tool for guiding your investment decisions and achieving your financial goals.
• Building a strong investment thesis involves in-depth research, clear objectives, careful risk assessment, and alignment with your risk tolerance and time horizon.
• Implementing your thesis requires portfolio diversification, monitoring, adaptation to market changes, and tracking your progress.
• Regularly evaluate the success of your investment thesis by measuring performance, identifying milestones, and learning from your experiences.

Community reviews are used to determine product recommendation ratings, but these ratings are not influenced by partner compensation. SuperMoney checks for and removes fake reviews when identified.

Loading results ...

Show Article Sources

You might also like.

• Skip to primary navigation
• Skip to main content
• Skip to primary sidebar
• Skip to footer

The Impact Investor | ESG Investing Blog

Investing for financial return is only part of the equation.

How to Create an Investment Thesis [Step-By-Step Guide]

Updated on June 13, 2023

Our posts may contain links from our affiliate partners. This supports helps support the site as we donate 10% of all profits to sustainability organizations that align with our values. However, this does not influence our opinions or ratings. Please read our Terms and Conditions for more information.

One of the worst mistakes an investor can make is to sink their money into an investment without knowing why. While this may seem like the world’s most obvious mistake to avoid, it happens every day. Look no further than the stock market for plenty of examples of misguided optimism gone terribly wrong.

That’s where the idea of an investment thesis comes in. An investment thesis is a common tool used by venture capital investors and hedge funds as part of their investment strategy.

Most funds also use it on a regular basis to size up potential candidates during buy-side job interviews. But you don’t have to work at a venture capital fund or private equity firm to reap the benefits of creating an investment thesis of your own.

Table of Contents

What Is an Investment Thesis?

Materials needed to create a thesis for your investment strategy, a step-by-step guide to creating a solid investment thesis, step 1: start with the essentials, step 2: analyze the current market, step 3: analyze the company’s sector, step 4: analyze the company’s position within its sector, step 5: identify the catalyst, step 6: solidify your thesis with analysis, free tools to help strengthen your investment strategy.

An investment thesis is simply an argument for why you should make a specific investment. Whether it be a stock market investment or private equity, investment theses are all about creating a solid argument for why a certain acquisition is a good idea based on strategic planning and research.

While it takes a little more work upfront, a clear investment thesis can be a valuable tool for any investor. Not only does it ensure that you fully understand why you’re choosing to put your hard-earned money into certain stocks or other assets, but it can also help you develop a long-term plan.

Should an investment idea not go as planned, you can always go back to your investment thesis to see if it still holds the potential to work out. By considering all the information your thesis contains, you’ll have a much better idea of whether it’s best to cut your losses and sell, continue holding, or even add to your position.

An investment thesis includes everything you need to create a solid game plan, making it a foundational part of any stock pitch.

See Related : Best Socially Responsible Stocks To Invest In Today

One of the benefits of an investment thesis is that it can be as complex or as simple as you like. If you actually work at a venture capital firm , then you may want to develop a full-on venture capital investment thesis. But if you’re a retail investor just looking to solidify your investment strategy, then your thesis may be much more straightforward.

If you’re an individual investor, then all you really need to create an investment thesis is somewhere to write it out. Whether it be in a Google or Word doc or on a piece of paper, just make sure you have a place to record your thesis so that you can consult it down the line.

If you’re developing a venture capital investment thesis that you plan to present to an investment committee or potential employers, then there are plenty of great tools online that can help. Slideteam has thousands of templates that can help you create a killer investment thesis , as well as full-on stock pitch templates.

As mentioned earlier, an investment thesis holds the potential to help you plot out a strategy for pretty much any acquisition. But for the sake of simplicity, we’ll assume throughout the examples in the following steps that you’re an investor interested in going long on a stock that you plan to hold for at least a few months or years.

Venture capitalists looking to invest in companies or startups can also apply the same principles to other investment goals. Investors who are looking to short a certain stock should also be able to use these techniques to locate potential investments. The main difference, of course, is that you’ll be looking for bad news instead of good.

First things first. Before you get into doing the research that goes into an investment thesis or stock pitch, make sure you take the time to write out the basics. At the top of the page, include things like:

• The name of the company and its ticker symbol
• Today’s date
• How many shares of the company you already own, if any
• The current cost average for any shares you may already hold
• Whether the stock pays dividends and, if so, how often. You may also want to include the current ex-dividend and dividend payment dates.
• A brief summary of the company and what it does

See Related : How to Start Investing With Purpose

Now it’s time to take a look at the entire market and the direction it’s headed. Why? As Investors Business Daily points out,

“History shows 3 out of 4 stocks move in the same direction as the overall market, either up or down. So if you buy stocks when the market is trending higher, you have a 75% chance of being right. But if you buy when the market is trending lower, you have a 75% chance of being wrong.”

While the overall market direction is definitely an important factor to keep in mind, what you choose to do with this information will largely come down to your individual investing style. Investors Business Daily founder William O’Neil advised investors only to jump into the market when it was trending up.

Another approach, however, is known as contrarian investing, which revolves around going against market trends. Warren Buffett summed up the idea behind this strategy with his famous quote, “Be fearful when others are greedy, and greedy when others are fearful.” Or as Baron Rothschild more graphically put it, “Buy when there is blood in the streets, even if the blood is your own.”

Most investors who are looking for a faster return will likely be better off waiting to strike until the iron is hot. If you align more with the long-term contrarian philosophy, however, bleak macroeconomic outlooks may actually strike you as an ideal investment opportunity .

See Related: How to Invest in Private Equity: A Step-by-Step

Now that you’ve got a look at the overall market, it’s time to take a look at the sector your company fits into. The Global Industry Classification Standard (GICS) breaks down the entire market into 11 sectors. If you want to get even more specific, you can further break down companies into the GICS’s 24 industry groups, 69 industries, and 158 sub-industries.

Once you identify which group your company belongs to, you’ll then want to take a look at that sector’s performance. Fidelity provides a handy breakdown of the performance of various sectors over different time periods.

But why does it matter? Two reasons.

• Identifying which sectors various companies belong to can help you ensure that your portfolio is properly diversified
• The reason that sector ETFs tend to be so popular is that when a sector is trending, many of the stocks within that sector tend to move in unison. The reverse is also true. When a certain industry is lagging, the individual stock prices of the companies in that industry may be affected negatively. While this is not always the case, it’s a general rule of thumb to keep in mind.

The idea behind working sectors into your investment criteria is to give you an overview of what type of investment you’re about to make. If you’re a momentum trader, then you may want to shoot for companies within the strongest-performing sectors this year or even over the past few months.

If you’re a value investor, however, you may be more open to sectors that have historically experienced high growth, even if they are currently suffering due to the overall state of the economy. Some speculative investors may even be interested in an innovative industry with strong potential growth possibilities, even if its time has not yet come.

See Related : How to Invest in Community [Step-by-Step Guide]

If you want to up your odds of success even more, then you’ll want to compare the company you’re interested in against the performance of similar companies in the same industry.

These are the companies that tend to get the most attention from large, institutional investors who are in a position to significantly increase their market value. Institutional investors tend to have a huge amount of money in play and are far less likely to invest in a company without a proven track record.

When choosing an investment, they’ll almost always go with a global leader over a new business, regardless of its promise. However, they also consider intrinsic value, which considers how much a company’s stock is selling for now, as opposed to how much revenue the company stands to earn in the future. In other words, institutional investors are looking for companies that are stable enough to avoid surprises but that also stand to generate considerable capital in the future.

Why work this into your game plan? Because even if you don’t have millions of dollars to invest in a company, there may be hedge funds or venture capital firms out there that do. When these guys make an investment, it tends to be a big one that can actually move a company’s share price upward. Why not ride their coattails and enjoy a solid growth rate as they invest more money over time into proven winners?

That’s why it’s important to make sure that you see how a company stacks up against its closest competitors. If it’s an industry-leading business with a large market share, it’s likely to be a strong contender with solid fundamentals. If not, you may end up discovering competing companies that make sense to consider instead.

See Related : What is a Triple Bottom Line? Definition & Examples

At this point, hopefully, you’ve identified the best stock in the best sector based on your ideal investing style. Now it’s time to find out exactly why it deserves to become a part of your portfolio and for how long.

If a company has been experiencing impressive growth, then there’s bound to be a reason why.

• Is the company experiencing a major influx of business because it’s currently a leader in the hottest sector of the moment? Or is it a “good house in a bad neighborhood” that’s moving independently of the other stocks in its industry?
• How long has it been demonstrating growth?
• What appears to be the catalyst behind its movement? Does the stock owe its growth to strong management, recent world events, the approval of a new drug, the introduction of a hot new product, etc?

One mistake that far too many beginning investors make is assuming that short-term growth alone always indicates the potential for long-term profit. Unfortunately, this is not always the case. By figuring out exactly why a stock is moving, you’ll be far better positioned to decide how long to hold it before you sell.

A strong catalyst can cause the price of a stock to skyrocket overnight, even if it’s laid dormant for years. Even things like social media hype and rumors can cause a stock’s price to shoot up over the course of a given day. But woe to the investor that assumes these profits will last. Many are often left holding the bag when the price increase turns out to be part of a “ pump and dump .”

While many day traders can make a nice profit by capitalizing on these situations, such trades are best avoided altogether if you plan to hold a stock long-term. That’s why it’s so important to understand whether a stock is “in play” for the day or whether its growth can be attributed to more permanent factors that support the potential for a high return over time.

See Related : How to Become an Impact Investor [Step-By-Step Guide]

If you’re planning on investing a significant amount of capital in any stock, then a little research may be able to save you from a lot of heartache. Keep in mind that the focus of an investment thesis is to formulate a reasoned argument about why adding an asset to your portfolio is a good idea.

While all investments come with some level of risk, research can be an excellent risk mitigation strategy. There’s nothing worse than watching an investment fail due to an obvious factor you could have spotted with closer analysis. Don’t let it happen to you!

Fundamental analysis can help you ensure that your potential investments have the underlying traits that winning stocks are made of. While there’s a bit of a learning curve involved when you’re first starting out, here are some of the things you’ll want to focus on:

EPS stands for “earnings per share.” It’s a common financial indicator that basically tells you how much a company makes each time it sells a share of its stock. In this regard, a higher EPS is a good thing, but it’s important to look for solid EPS growth over time. Ideally, you’ll want to see consistent growth in a company’s EPS over the past three or more quarters.

Sales and Margins

Investing is all about putting your cash into successful companies, which is why sales and margins are key components to finding worthy investments. Sales indicate how much a business has made from (you guessed it) sales. Sales margin, also known as gross profit margin, is the amount of revenue a company actually gets to keep after you factor in overhead and other production costs. Ideally, a good investment will exhibit strong, consistent sales growth in recent years.

Return On Equity (ROE)

ROE is one of the more commonly used valuation metrics and is calculated by dividing the company’s net income/shareholders’ equity. ROE is basically a measure of how efficiently a company is using the capital it generates from equity fundraising to increase its own value. The higher the ROE, the more likely it is that a company operates with a focus on using its cash flow to increase its profits.

See Related : How to Do a Stakeholder Impact Analysis?

While these are just a few examples of various analysis methods to work into your investment thesis, they can go a long way toward locating solid companies worth investing in. Interested in learning more about technical and fundamental analysis? There are now plenty of great sites that can help you master the secrets of the training world.

In our opinion, Tradimo is one of the most underrated, as it provides tons of free classes for investors of all levels. Udemy also has some great classes that can help you learn how to beef up your investment thesis with as much quality information as possible.

But keep in mind that these are only suggestions. The most important part of any personal investment thesis is that it makes sense to you and can serve as a valuable tool to help you along your investing journey.

Related Resources

• Best Impact Investing Online Courses
• Best Green Apps for a More Sustainable Life
• Sustainable Investing vs Impact Investing: What’s the Difference?

Kyle Kroeger, esteemed Purdue University alum and accomplished finance professional, brings a decade of invaluable experience from diverse finance roles in both small and large firms. An astute investor himself, Kyle adeptly navigates the spheres of corporate and client-side finance, always guiding with a principal investor’s sharp acumen.

Hailing from a lineage of industrious Midwestern entrepreneurs and creatives, his business instincts are deeply ingrained. This background fuels his entrepreneurial spirit and underpins his commitment to responsible investment. As the Founder and Owner of The Impact Investor, Kyle fervently advocates for increased awareness of ethically invested funds, empowering individuals to make judicious investment decisions.

Striving to marry financial prudence with positive societal impact, Kyle imparts practical strategies for saving and investing, underlined by a robust ethos of conscientious capitalism. His ambition transcends personal gain, aiming instead to spark transformative global change through the power of responsible investment.

When not immersed in the world of finance, he’s continually captivated by the cultural richness of new cities, relishing the opportunity to learn from diverse societies. This passion for travel is eloquently documented on his site, ViaTravelers.com, where you can delve into his unique experiences via his author profile.

You're reading a free article with opinions that may differ from The Motley Fool's Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

How to Write an Investment Thesis

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources , and more. Learn More

NASDAQ: DUOL

Plus, a look at "one of the most obvious long-term trends out there" and more.

In this podcast, Motley Fool analyst Jason Moser discusses:

• Recognizing short-term catalysts.
• Why home improvement is "one of the most obvious long-term trends out there."
• Travel and return-to-work are two trends worth watching.

Then, using language-learning app Duolingo ( DUOL 0.41% ) as an example, Motley Fool analyst Alicia Alfiere shares key questions to ask when writing an investment thesis, including:

• What are its competitive advantages?
• Who's running the company?
• Will broader trends help or hurt?
• Stocks discussed: BKNG ( BKNG -0.43% ) , HD ( HD 0.55% ) , LOW ( LOW 0.45% ) ,  MSFT ( MSFT -0.61% ) , and DUOL.

To catch full episodes of all The Motley Fool's free podcasts, check out our  podcast center . To get started investing, check out our  quick-start guide to investing in stocks . A full transcript follows the video.

10 stocks we like better than Duolingo, Inc. When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now… and Duolingo, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 3, 2022

This video was recorded on March 7, 2022.

Chris Hill: Tell the DJ to queue up ZZ Top because we're talking about investing trends with legs. Motley Fool Money starts now. I'm Chris Hill joined by Motley Fool senior analyst Jason Moser. Thanks for being here.

Jason Moser: Hey, thanks for having me.

Chris Hill: Everybody loves a good trend, right?

Jason Moser: Sure.

Chris Hill: We're investors, we love a good trend. Lately, I don't know if you've noticed as the market has continued its grim slide of 2022, that doesn't stop potential trends from emerging here or there. I wanted to talk with you about how to figure out which trends have legs and which ones don't. I'll just start with an example of one that I think for me anyway, doesn't really have legs, and it goes under the umbrella of because of reasons, this industry has sold off tremendously. Therefore, it presents an opportunity for investors because it's trading below where it should be. The one that leaves to mind for me that's come up several times over the past two plus years is the Cruise Industry, and that may be a good short-term opportunity for some people. I'm not interested in that.

Because it's not an industry that I think has great long-term tailwinds behind it, I don't mean to pick on the Cruise Industry, but you know what I'm talking about. There are some trends that get a lot of attention, but it's for short-term reasons.

Jason Moser: Yeah, I'm glad you said short-term reasons because I agree with what you're saying. I think the way I typically try to break this down in my own mind, and I've talked before about the way that I invest. As a long-term investor, someone who typically like to be a net buyer of stocks, I'd like to buy, I don't really like selling. Typically I am looking for companies that I feel they're going to be relevant for decades. Figuring out and following the long-term trend in differentiating that between what I would call a short-term catalyst, and so I think that the Cruise example there is a good example of something where there's a short-term catalyst. Before 2020, I don't know that Cruise ships were really a place where I was interested in investing, it sounds you feel the same way. It's just not an industry that you're all that interested in. I think that's how I start to at least look at this, because you could look at the Cruise liners for example, and say, "well, I'm not all that interested." But by the same token, it does feel there's a short-term catalysts in place that could result in value for shareholders if things continue to improve. The travel industry in general has been shellacked, but things are starting to come back.

There were a lot of questions early on in 2020 as to whether these major Cruise liners would even survive. They did a good job, I think of figuring out ways to survive and keeping their balance sheets in working order there, but I think for me, you see the benefit of a reopen and then say, alright, Cruise liners could benefit from that, the stock's been may start to reflect that optimism. But beyond that short-term catalyst, is there something there? Do you see more people clamoring to go on cruises as the years go by? I'm not convinced that's the case. I think it's a relevant industry. I think there are people who love to take cruises, but I think there are also a lot of risks that come with something like that. For me, it's trying to think about what direction the world is headed and I'll be honest with you, I'm sure you probably can relate to this as a parent. I looked at my kids, I have two daughters, they're are at sophomore junior and high school. I looked at them and their friends and what they're doing, what they're watching, the apps that they're using, ways that they're conducting their business, that to me starts to tell a little bit more about consumer behavior, trends that may be forming, things that matter to younger generations that will continue to matter even as they get older. I typically try to break it down between looking at a long-term trend versus a short-term catalysts in figuring out ways to discern between the two.

Chris Hill: If you think back to last year in the late spring, one of the big trends getting a lot of attention was what was referred to as the great reopening.

Jason Moser: Yeah.

Chris Hill: It seems we're at that point again, as Omicron levels continue to drop, vaccines continue to rise, more and more businesses, we talked about this last Friday on Motley Fool Money about some of the biggest tech companies in America opening up their offices, mask mandates coming down. You were talking to the folks at Cheddar, and I'm happy to share Jason Moser as a resource our with media outlets. [laughs] You're welcome Cheddar. But seriously, you were talking to them about this trend, weren't you?

Jason Moser: Yeah, we were talking about reopening, and to me it feels like reopening 2.0. We did go through a reopening before, where I think a lot of us are starting to get back out there and resuming somewhat normal behavior. This is the next iteration of that, where I think the wall start to come down and even more people start to go out and really get their lives back to normal. We were talking about ideas, investments, companies that will benefit from this next phase of reopening, and then what future they may have even beyond that, because I would look at reopening as definitely a short-term catalyst. This is not something where the long-term trend is for our economy to reopen, and so for me that doesn't mean that there aren't great ideas out there, that doesn't mean there's no money to be made, but by the same token, and I think, we said this a lot when we were talking about the stay at home stock, theme that we were delving into a couple of years ago. 

You want to make sure that regardless, these are businesses that you feel will continue to do well even beyond the short-term catalysts. Because this short-term catalyst will end, and then you want to make sure that you're not left holding the bag with the business that maybe isn't going to continue to benefit beyond just that catalyst. For me, there are a lot of different ways you can look at the companies that will benefit from this. I mean, you're talking about incremental traffic in all places, people going back to work, office buildings getting busier, the areas around the office buildings getting busier, malls getting busier, so what companies can you expect a benefit there? To me, there are a lot of different ways you can look at it. I think travel is one that stands out immediately just because so many people are ready-to-go do something. We saw some of the snap-back in travel earlier through the course of this last couple of years, but it does look things continue to get even better. 

I was looking through Booking Holdings, for example their most recent earnings call, they were talking about the fact that they are seeing the trends continuing to move in the right direction. They said the first half of February they saw meaningful improvement across all of their regions compared to January, but then they made this reference to gross bookings. They said gross bookings for the summer are higher than they were at this time in 2019, so that's encouraging for a number of different reasons and it sounds a lot of people are planning trips. I know that we are both planning to get a trip and I'm going to be going a few places here over the summer as well looking forward to that. But when you think about just the fact that gross bookings for the summer are higher than they were at this time in 2019, that's really encouraging. The nice thing about travel is it's truly a global opportunity. I think travel is going to continue to be a long-term trend that investors can benefit from, so Booking Holdings stands out as one way to look at this reopen 2.0.

Chris Hill: It is interesting. The difference, as you said, the long-term trend versus the short-term catalysts, because ultimately there has to be something sustainable. There has to be something about an underlying business that we as investors can see a pathway for growth. Which, and this may be just my preference, I always prefer organic growth as opposed to growth through acquisition. It's not to say that that doesn't work, there are plenty of businesses that have rewarded shareholders by going the route of acquisition. But to me, it's just preferable to see a business like I've talked before about Home Depot and Lowe's, and not that they do a tremendous amount of increasing their store count year-over-year, but you look at the way that they've grown out their online presence, their deliveries, that sort of thing, that's just easier for me to wrap my head around.

Jason Moser: Well, yeah. I think Home Depot and Lowe's, two very good examples of businesses that I think could certainly benefit here over the next several months as consumer traffic continues to pick up. We've seen the strength in the housing market over the past couple of years, and the neat thing about housing is whether you own or you rent, home improvement maintenance, all that stuff is always on the table. That's to me one of the most obvious long-term trends out there, because everybody needs a roof over their head. You look at Home Depot and Lowe's, the quarters that they just chalked up, to be able to maintain their gross margins in a time like this when inflation really is front and center, Lowe's actually expanded their gross margin very modestly. Home Depot, a little bit of pressure, but overall they've really been able to maintain prices very well and passes these costs along to consumers.

I think part of that is just due to the nature of the market that it serves, it's a necessary market. Then they love to throw the statistics out there, 50 percent of the homes here in the US are over 40 years old. A lot has changed in 40 years. The ways that we build houses, the ways that we've repair our homes and update and improve our homes. What that ultimately means is you get this massive installed housing base out there just in this country alone, that really requires a lot of what Home Depot and Lowe's are selling. They may not be the sexiest names in the world, and they may not like the world on fire in the near-term, but when you stretch the chart out, if you look at the way these companies performed through the years, 3, 5, 10 years, they are just tremendous performers. Lowe's in particularly, you look at what Marvin Ellison has done there, that has been just nothing short of spectacular. I think what we've got now is really two businesses there in Lowe's and Home Depot that you and I have likened before to MasterCard and Visa . It's almost like a which one should I pick? Why bother choosing? You could actually own both and get away with it just fine. It's not a bad idea, actually.

Chris Hill: Not a bad idea at all. Last thing and then I'll let you go. When you think about long-term trends, I suppose there are a couple of different ways you can think about them. One is to try and predict where the future is going and be right, not only about the direction, but the timing of how soon we're going to get there. I was on David Gardner's Rule Breaker investing podcast recently and on an episode that were set in the year 2052 and one of the jokes we made on that was that self-driving cars, still not a thing [laughs] and it may not be by the way. That's one way to do it, like OK, this is where the world is going. But another way to do it is to look at trends right now and say, OK, do I think this is going to be here in 20 years? You can say that about individual products, you can also say that about industries. It's why whenever someone has a new baby and he's like, I want to buy a stock for them. My answer is always Starbucks. Because I know that the way we drink coffee in 50 years is going to look a whole lot like the way we drink it now.

Jason Moser: [laughs] If it looks any different, Starbucks is probably going to be one of the companies that is innovating and iterating there. So you probably win either way. Yeah, I think to me, one of the trends that I think it's front and center right now for a lot of people is work, exactly how we're going to be working. We're talking about stay at home, now we're talking about reopen. It's been a weird two years. There're offices that never closed down and then there are other offices that just have closed down completely and you wonder what exactly the future holds. I look to a business like Microsoft, for example, and I think it's very telling that you've got a lot of these big tech companies that are reopening their offices. They're eager and excited to do that, and I think that's for a number of reasons. I think that you've seen some of the CEOs of these businesses, Twitter for example, they're talking about the fact that, yes, remote work is available, but it is harder. It makes things a lot more difficult. I'm sure probably you run into some challenges where remote work does make things harder. 

But by the same token, there are a lot of folks that like that, convenience in being able to go do what they want to do when they want to go do it, it certainly expands that work schedule. For me, I look at the absolutes as being probably what you want to avoid. If you're saying, well, we're just going to be a virtual-only company, you're probably leaving something on the table there. But if you say that, well, everybody has to be at the office all the time, well, you're leaving some talent out there that you might not be able to get otherwise. To me, the hybrid work environment, that's what seems like the future holds. You look at a company like Microsoft , a company that's responsible for getting so many of those tools that we've been able to use, whether you're Slack or Zoom or Microsoft Teams, Microsoft Teams and all of the tools that Microsoft provides, they help enable what ultimately I think we're going to see is the hybrid work environment where a lot of folks have the opportunity to do it however they want to do it, but companies still have a process and a philosophy in place that leaves everybody feeling included. I think that's probably one of the bigger challenges. I think that's going to be one of the things that companies will figure out as time goes on, is managing the remote and the physically present workforce together. Not saying that's an easy thing to do, but I think that's going to be something that companies are going to have to do. Because to me, again, it feels like you've take it to the extreme, if you go absolutes one way or the other, that to me seems to open up more challenges of opportunities the longer you play that out.

Chris Hill: Jason Moser, thanks for being here.

Jason Moser: Thank you.

Chris Hill: Remember back in high school when your English teacher taught you how to write a thesis statements, it's the main idea of your essay and you are not going to get an A without a strong thesis statement. It turns out that's one of those skills that comes in handy for investors like you and me. Here to talk through the nuts-and-bolts of an investment thesis is Motley Fool Senior Analyst, Alicia Alfiere. Thanks for being here.

Alicia Alfiere: Thanks for having me.

Chris Hill: Before we get into some of the key questions that can go into an investment thesis. Why do you think an exercise like this is helpful for us as investors?

Alicia Alfiere: First, when we think of an investment thesis, it's really a summary of what you think of the company and why you think it makes a good investment case, as well as some of the risks. It's really important, particularly now when we are seeing a lot of market volatility. The idea here is that I will help you cut through all the noise of that market volatility and focused on signals for your company and hopefully stop you from selling a company that's actually pretty good.

Chris Hill: I know that you've been using Duolingo, let's use that as an example here, and some of the key questions that people can ask when they are looking to build an investment thesis for any business, for any stock and it starts with really knowing the company.

Alicia Alfiere: This one sounds like a no-brainer, but there are actually companies out there that require a little bit extra time and research to be able to answer questions like, what does this company sell? Do? What problem are they solving? Who are their customers? How do they make money? That's really fundamental to understand. If we use Duolingo as an example here, Duolingo is a global mobile learning platform with the mission to develop the best educational content in the world and make it universally available. They offer a gamified approach to learning over 40 languages and they offer a lot of different solutions here. They have their flagship Duolingo Learning Language App, which is free. They have Duolingo Plus, which is a subscription. Duolingo English Test, which is a proficiency exam, and Duolingo for Schools. Essentially the problem that they're solving here, is making education accessible to the mobile generation and their lessons are pretty effective. According to their internal study, users with five Duolingo units were as proficient in reading and listening as students with four college semesters of language classes. Then in terms of how do they make money, again really important to understand. They make most of their money from their subscription products. The rest comes from the Premium Apps, so those are based revenues and revenues from their English tax.

Chris Hill: Every business has competition, so obviously it is worth spending a minute or two when you're putting together an investment thesis thinking about competitive advantages that a business might have.

Alicia Alfiere: Look at the competition within the industry. Is there a product or service sticky? Does the business have network effects? When we talk about network effects, think of a platform like Facebook. Where you have this virtuous circle of data which makes your users use it more, which brings in more data, which allows you to get more insights, [laughs] which again makes that product even more valuable. In terms of Duolingo they are in a highly competitive industry. Lots of options to learn new languages, whether it's a virtual or in-person classes, other apps and websites and there is substitution items that you could use as well like translator apps. But what advantages does Duolingo have? They have a strong brand, they have had over 500 million downloads and their flagship app is the top grossing app in the education category on Google Play and the Apple App Store. This strong brand recognition really helps to drive organic growth for them. 

They also have strong network effects so 41.7 million monthly active users, which includes a US contingent that actually out numbers. Total US high school foreign language learners which a massive amount here. They have over a half billion exercises completed daily on the platform and as a result of that strong network, Duolingo beliefs, they have the largest collection of language learning data, and they feed this virtual cycle of their network by using their collection of data, to make learning experiences more efficient and differentiated for its users. In terms of platform stickiness, over 50 percent of daily active users have used the app for more than seven days in a row, and one million users have an active stretch of longer than 365 days. Pretty impressive there, but there are some tricky parts here for paid subscribers, it's a bit more complicated. About 40 percent of annual subscribers renew their subscriptions after a year or about nine percent of monthly subscribers renew their subscription after one year. They got some work to do here.

Chris Hill: At the Motley Fool, we're not just interested in the business, we're interested in the management as well. It's worth spending time figuring out, hey, who are the people running this business?

Alicia Alfiere: Absolutely. Take a look at who are the co-founders, who is leading the Company? Do they have a long-term vision? What's their culture like? Remember their employees are what make a vision come to life. If employees don't buy in, it's going to be really hard for a company to grow. For Duolingo, it was founded by Luis von Ahn and Severin Hacker, two engineers who met at Carnegie Mellon. Luis is the CEO and Director, Severin is the CTO and Director. They're both heavily involved in the company, which we really like. For Luis growing up in Guatemalan, he saw how access to education can truly transform lives and when he met his kindred spirit in Safran the two embarked are creating an accessible, effective, and intelligent learning solution. While they started with languages, their long-term goal is to have language learning be just one of the education solutions that they offer. They've already started along this path. They have their Literacy App, Duolingo ABC, which teaches children how to read and they're working on an app to teach elementary school math. For culture, I like to look at website like Glassdoor to see what employees think. Do they like working there? Are they dedicated to vision? On Glassdoor, 93 percent of employees would recommend Duolingo to a friend and 97 percent approve of the CEO, so pretty solid results here.

Chris Hill: We say all the time investing is about the future. At some point when you're putting together an investment thesis, you got to check a couple of boxes in terms of what does the future look like for this business?

Alicia Alfiere: Yes. Think about the future. What's the market opportunity for them? Can they grow? How can they grow? Are there any broader trends that can help or hurt the company in the future? For Duolingo, they're a player in a growing market, the mobile learning space. Preferences for convenience, an on-demand services have driven a lot of consumers toward mobile solutions. Whether it's shopping or learning, and COVID accelerated the usage for mobile learning. Though the growth will probably edge away from some of that COVID highs, it's still expected to grow. Global language learning spending both online and offline, reached 61 billion in 2019 and is projected to grow to 115 billion by 2025. Within this market, online learning is growing fast. From 12 billion in 2019 to 47 billion in 2025. Perhaps the convenience and flexibility of mobile learning, as well as smartphone adoption overall, is broadening the demand for that language learning products. Since Duolingo's annual revenues were about 161 Million in 2020, they're only about 1.3 percent of the current market for online language learning, which gives them a ton of room to grow. They have a plan to grow, which is really important. They think that they could grow by increasing the number of users, converting free users to those paid subscription users, increasing subscription stickiness, which we already talked about, and expanding their solutions, beyond that language learning.

Chris Hill: We want to be bullish when we're thinking [laughs] about stock that we're considering adding to our portfolio. But at some point you have to put on the bare hat and think about what are the risks to this business?

Alicia Alfiere: Because every investment has risks, that's the nature of the beast and if you can't find one, you need to research more. Be curious, play the part of the skeptic and ask, what could go wrong. This is especially important in times of market volatility. For Duolingo, we already talked about some of the issues that they have here. Operating in a highly competitive environment and subscription retention numbers that could be better. But there's also another issue we didn't talk about, and that's low switching costs. What that means that it doesn't really cost a lot of money and it's not a huge hassle for users to simply change apps, or take in person costs instead and so that is another risk.

Chris Hill: You've clearly put in some work on Duolingo, tell me how the story ends. Is this stock you're adding to your portfolio or is it on your watchlist for right now?

Alicia Alfiere: Well, right now it's more on my watchlist. At the end of this process, what I like to do is summarize and actually, hey, what would the investment thesis look like? In this case, I would say Duolingo has gamified approach to learning, which has helped the company build a strong brand and benefit from strong network effects in some platform stickiness. With these competitive advantages, strong tailwinds from online education trends, a large market to expand into, and a plan for expansion, Duolingo is an intriguing company by subscription retention statistics and those low switching costs give me a bit of a pause for right now. I'm going to continue to follow them and research them because I find this company fascinating and a really value leadership's vision and plans for the future.

Chris Hill: Do you've more information about putting together your own investment thesis in our show notes. So check those out when you get a chance. Alicia Alfiere, thanks so much for being here.

Chris Hill: That's all for today, I will be coming up tomorrow, three analysts share some of the biggest investing lessons that they've learned over the past 20 years. As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.

Alicia Alfiere owns Microsoft. Chris Hill owns Home Depot, Lowe's, Microsoft, Starbucks, and Visa. Jason Moser owns Booking Holdings, Mastercard, Starbucks, and Visa. The Motley Fool owns and recommends Booking Holdings, Home Depot, Mastercard, Microsoft, Starbucks, Twitter, and Visa. The Motley Fool recommends Lowe's and recommends the following options: short April 2022 $100 calls on Starbucks. The Motley Fool has a disclosure policy .

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.

• Investment thesis

What is an investment thesis?

Why you need a solid investment thesis, how to write an investment thesis , step one: determine your minimum viable fund size, step two: pinpoint your investment focus, step three: portfolio construction , how to present your fund thesis to lps, investment thesis example.

Breaking into the venture capital ecosystem is both challenging and competitive. Having a great investment thesis is key to running a successful VC fund. Without a clear investment strategy and effective portfolio construction , your fund won’t get very far.

In this article, we’ll cover how you can develop a strong investment thesis.

In private equity and venture capital , an investment thesis (sometimes called a fund thesis or fund strategy) outlines how you plan to use invested capital to generate returns. Your investment thesis clarifies how you’ll make money for the investors in your fund—it’s a definition of what your fund will do. 

Your investment thesis may include:

Your fund size

The number of companies in your portfolio

The stages and industries of those companies

The geographies those companies are located in

The differentiated way your fund will support your portfolio companies

Your average check size

The amount of capital reserved for follow-on investments

The return profile for your fund, based on the size of the stakes you’re trying to take in each company and your estimated success rate

How the fund will set itself apart from similarly sized or focused funds

An investment thesis tells a story by describing how each of these elements work together. 

Your fund’s investment thesis explains how you’ll cooperate with, compete with, and differentiate from other venture funds. An effective fund investment thesis is realistic and sustainable. It aligns with your investment team’s network of professional contacts (which provides access to deals), untapped opportunities in new and existing markets, and your LPs’ investment interests. 

Your fund thesis also supports compliance with the “ venture capital fund ” definition under the Investment Advisers Act of 1940 , which is important if you plan to rely on the related regulatory exemption for private funds. 

Creating your own fund investment thesis involves determining fund size, investment focus, and portfolio construction. 

The size of your fund influences almost every element of your investment strategy: The number of companies in your portfolio, your check size, the amount of reserve capital you have, and the return profile for your fund. Fund size also affects the types of LPs you attract and helps determine your fund’s portfolio management fees, which then dictate the operational expenses you can realistically support. 

Competitive research

To determine your ideal fund size, start by researching funds with goals and benchmarks like yours to see how they’re faring. You may also want to research successful funds across a handful of different industries and sectors to see what works. You can learn more information about funds by subscribing to trade publications, reading press releases from funds when they close, or on social media.

Once you’ve settled on a fund size, the next step is to outline the stage, industry, and location you’ll invest in. Articulating your investment focus helps narrow your aim and convince limited partners (LP) with interests in these sectors and stages to get on board with your strategy. It also makes it easier for founders who meet your parameters to identify your fund as a potential investor—and discourages founders who aren’t a good fit from pitching your firm.

At what point in a company’s life cycle do you want to invest and offer guidance? If you’re interested in being a sounding board for early-stage companies who are just getting started, you might want to invest at the pre-seed , seed , or Series A stages. However, if you prefer to work with companies that already have steady revenue and an established business model, you’ll probably want to focus on a later stage. 

Ultimately, the stage where you can focus your investments will be a function of your fund size and the anticipated number of companies in your portfolio. So keep this top of mind when building out your minimal viable fund size.   

Which sectors are you interested in? Do you plan to target a specific industry—like healthcare, fintech, or real estate—or focus on companies across a handful of different industries? 

Where are the companies you’ll be investing in? What particular challenges and assets do they have because of where they operate? You may choose to invest in local companies if you already have a deep network of contacts nearby. On the other hand, if you’re open to traveling, or want to capitalize on emerging, international, or underserved markets, you may want to expand your reach. This may also apply if your fund’s investment thesis is based on industry, for example, so you may be agnostic to geography. 

Other considerations

Depending on your investment goals, you might have other criteria to look at, like a company’s social impact, environmental influence, or commitment to diversity, equity, and inclusion. 

A thoughtful portfolio is critical to running a successful fund and shaping your overall investment thesis. Your strategy for portfolio construction signals to LPs how you plan to allocate their capital across investments. Your fund’s investment portfolio is essentially the roadmap for the life of the fund. It spells out the number of companies you’ll invest in, the amount of capital you’ll pour into each company, your target ownership for each company, how much you’ll set aside for initial investments, and how much you’ll reserve for follow-on investments.

Portfolio construction is made up of the following elements: 

Investment focus

Diversification: Types of companies you’ll invest in and what percent of the fund will be for non-qualifying investments or investments outside the thesis

Check size: The amount you’ll invest in each company

Investment horizon: How long you have to allocate the capital and how long you’ll hold each investment

Expected returns: How much you expect to return on the capital invested

Investor requirements: Maximum or minimum contributions

A good rule of practice is to ensure that your investments align with your portfolio construction model before making each investment decision, and then actively thereafter. Set aside time to regularly evaluate whether your investments align with your model, and where to course-correct. If your investments deviate from your original thesis, you’ll need to adjust your model or reset your focus. This is particularly important to track if you include a specific investment thesis in your fund’s legal documents.

Learn more about how to create a portfolio construction strategy

Most VCs prepare versions of their fund thesis that go into different levels of detail, ranging from a one-sentence elevator pitch, like the example below, to a full pitch deck.

You should be able to sum up your fund strategy in one or two straightforward sentences. Here’s an example investment thesis from a hypothetical venture fund:

“Krakatoa Ventures is raising a $25 million seed fund to back U.S.-based startups focused on climate technology and earth sciences. The fund will capitalize a highly specialized network of climate scientists the general partners developed during their two decades of academic study in volcanology and climatology.”

→Ready to make a full pitch deck for LPs? Prepare for your next meeting with investors using our free pitch deck template and example pitch decks .

This example highlights a key aspect of a great fund strategy: It shouldn’t be a thesis that just anybody can go out and execute. Your edge, such as your personal experience and network, are integral parts of the plan. Articulate why you’re better positioned than anyone else to execute your investment thesis.

Related Content

• Job Seekers

Investment Thesis: An Argument in Support of Investing Decisions

October 29, 2023 by Abi Tyas Tunggal

An investment thesis is a well-reasoned argument that supports a specific investment decision, playing a vital role in the strategic planning process for individual investors and businesses alike. It comprises detailed research and analysis to evaluate an investment's potential profitability. A good investment thesis serves multiple purposes, including helping in the decision-making process, providing a comprehensive framework for monitoring and assessment, and offering a structured approach to identifying potential opportunities.

There are different types of investment strategies, such as venture capital , private equity, and long-term value investments. The core of an investment thesis involves identifying key parameters for evaluating an investment, understanding the unique market dynamics and competitive landscape, and realizing how to create value through strategic planning. To ensure a comprehensive and detailed investment thesis, it is crucial to involve thorough research, considering emerging trends and opportunities, and incorporating industry case studies for better understanding. Ultimately, financial statements and valuation metrics play a significant role in determining a well-suited investment decision.

Key Takeaways

• An investment thesis is a well-reasoned, research-based argument supporting a specific investment decision
• There are several types of investment strategies, and a well-structured investment thesis addresses market dynamics and competition to create value
• Research, valuation metrics, and understanding emerging trends are crucial in crafting a compelling investment ideas

Defining an Investment Thesis

An investment thesis is a well-structured, logical argument that justifies a particular investment decision, based on thorough research and analysis. It is essential for investors, as well as financial professionals in the domains of investment banking, private equity, hedge funds, and venture capital funds . A confident and knowledgeable investor will build out clear investment criteria to successfully navigate the investment landscape.

The primary purpose of an investment thesis is to outline the reasons and expected outcomes of a proposed investment, often focusing on the potential for growth and profit. This document offers a roadmap for investors, guiding them through their decision-making process, and helping to ensure that they arrive at rational and informed conclusions. A comprehensive investment thesis should consider various aspects, such as market conditions, competitive landscape, and financial performance of the targeted asset or company.

A strong investment thesis is built on rigorous market research and analysis. This involves evaluating historical and current financial information, as well as scrutinizing industry trends and the overall economic environment. Skilled investors will also incorporate their expertise in the industry to better assess the merits of an investment opportunity. This level of thoroughness creates a confidently expressed thesis, allowing investors to remain steadfast in their investment decisions, even amid market volatility.

In summary, an investment thesis plays a pivotal role in the investing process. It presents a well-reasoned argument, grounded in extensive research and clear analysis, that supports an investment decision. Crafting a robust investment thesis is crucial for both individual and institutional investors as it provides a solid foundation for investment choices and ensures the alignment of investment strategies with long-term objectives.

Importance of Research in Crafting an Investment Thesis

Thorough research is a crucial aspect of creating a solid investment thesis. It allows investors to gather vital information and insights that will help guide their investment decisions. There are several elements to consider while conducting this research, with data analysis, understanding risks, and returns being essential components.

Data Analysis

Data analysis forms the backbone of any research conducted for crafting an investment thesis. It involves collecting, organizing, and interpreting various types of data, such as financial statements, market trends, and industry forecasts, to identify patterns and make informed predictions about a potential investment opportunity. A comprehensive data analysis can help investors make confident choices based on reliable information, which is essential for a successful investment strategy.

Some key data analysis techniques used in crafting an investment thesis include:

• Comparative analysis: Comparing the performance of different companies within the same industry to identify investment opportunities.
• Trend analysis: Monitoring historical data to determine patterns and potential future developments.
• Financial statement analysis: Examining the financial health of a company through its balance sheets, income statements, and cash flow statements.

Understanding Risks and Returns

One of the primary goals of research in developing an investment thesis is to assess the risk/reward profile of a potential investment. This involves evaluating the potential risks associated with the investment and weighing them against the expected returns. A sound investment thesis should demonstrate a clear understanding of these risks and offer a rationale for why the investment’s potential returns make it a worthwhile addition to a portfolio.

Some common risks to consider when crafting an investment thesis include:

• Market risk: The risk of an investment losing value due to fluctuations in the market.
• Credit risk: The risk that a company or issuer of a financial instrument may default on its obligations.
• Operational risk: The risk of losses arising from failed internal processes, systems, or personnel within a business.

Evaluating these risks requires investors to develop a deep understanding of the investment opportunity, its industry, and the factors that may impact its performance. A diligent and systematic approach to research can help investors identify potential risks and gains, leading to informed and confident decision-making in crafting a strong investment thesis.

Types of Investment Strategy

When it comes to crafting an investment thesis, selecting an appropriate investment strategy is crucial. In this section, we will discuss two popular strategies: Value Investing and Growth Investing.

Value Investing

Value investing is a strategy that focuses on identifying undervalued stocks or assets in the market. These investments typically have lower valuations, which are reflected in their price-to-earnings ratios or book values. The central idea behind value investing is that the market may sometimes undervalue a company or asset, presenting an opportunity for investors willing to do thorough research and analysis.

The process of value investing involves:

• Fundamental analysis : Evaluating a company's financial health, management, and competitive advantages
• Value metrics : Identifying various valuation metrics, such as price-to-earnings, price-to-book, and dividend yield
• Margin of safety : Discovering investment opportunities with a built-in cushion to reduce the risk of loss

Famous investors, such as Warren Buffett and Benjamin Graham, have implemented value investing strategies to achieve long-term success.

Growth Investing

On the other hand, growth investing centers on companies that are expected to grow at an above-average rate compared to their industry. Growth investors seek opportunities in businesses they believe will offer substantial capital appreciation through rapid expansion or market-share gains. They prioritize the potential for future profit over the stock's valuation.

Features of growth investing include:

• High expectations : Companies targeted by growth investors typically have a history of robust revenue and profit growth
• Momentum : Investors seek stocks with upward price momentum, as increasing demand for these stocks may drive prices even higher
• Risk tolerance : Growth stocks can be volatile, and investors must be prepared to weather price swings

Renowned growth investors like Peter Lynch and Phil Fisher have demonstrated the effectiveness of growth investing throughout their careers.

Both value and growth investing strategies have their unique advantages and require different levels of risk tolerance. Investors should carefully consider their investment thesis and select a strategy that aligns with their objectives and risk appetite.

Venture Capital and Private Equity Investment Theses

When considering investments in private companies, venture capital (VC) and private equity (PE) firms each have their own unique strategies encapsulated within their respective investment theses. These theses provide guidance on the focus of investments, the sectors or geographies of interest, and the stage of the target companies.

Learn more about the differences between private equity and venture capital .

Venture Capital Investment Thesis

A venture capital investment thesis outlines how a VC fund aims to make money for its investors, typically referred to as Limited Partners (LPs). This strategy identifies crucial factors such as the stage of companies the fund will invest in, commonly early-stage companies, the targeted geography, and specific sectors of focus.

The thesis may vary depending on a venture capitalist's unique specialization, with some firms concentrating on a specific vertical and stage, while others invest more broadly without a core thesis driving their decisions. The underlying objective of a VC investment thesis is to outline how the firm will achieve high returns on investment by supporting and nurturing the growth of portfolio companies.

Private Equity Investment Thesis

In contrast, a private equity investment thesis is an evidence-based case in support of a particular investment opportunity. It usually begins with a concise argument illustrating how the potential deal supports the fund's general investment strategy. The thesis then provides details that substantiate this preliminary conclusion.

Private equity firms often target more established companies compared to venture capital firms, focusing on businesses with a proven track record. The PE investment thesis may identify areas where operational improvements, strategic mergers, or better capital structures could enhance value, ultimately generating a good return for the firm and its investors.

Overall, both venture capital and private equity investment theses serve as critical frameworks guiding investment decisions. They not only help align these decisions with a firm's specialized strategy but also provide a basis for evaluating potential deals to ensure they contribute to the firm's goals and long-term value creation.

Key Parameters for Evaluating an Investment

When assessing the viability of an investment, it is essential to examine various key parameters to make informed decisions. By analyzing these factors, investors can gain a deeper understanding of a company's financial health and its potential for growth.

One vital metric to consider is earnings per share (EPS) , which represents the portion of a company's profit attributed to each outstanding share of its common stock. A higher EPS indicates higher earnings and suggests that the company may be a lucrative investment opportunity.

Another fundamental metric is the return on assets (ROA) , which measures the effectiveness of a company in using its assets to generate profit. The higher the ROA, the better the company is at utilizing its assets to generate earnings. Similarly, return on equity (ROE) is a measure of financial performance that calculates the proportion of net income generated by a company's equity. A higher ROE demonstrates the efficient usage of shareholders' investments.

Conducting a thorough analysis of the company's financial statements is crucial. This includes reviewing income statements, balance sheets, and cash flow statements. By doing so, investors can gain insights into the company's profitability, liquidity, and solvency.

Another important factor to consider is a company's cash position. Adequate cash reserves enable a company to meet its short-term obligations and invest in growth opportunities. On the other hand, a lack of cash can leave a company vulnerable to market fluctuations and financial stress.

It is also essential to evaluate a company's capital structure, which refers to the proportion of debt and equity financing it uses to fund its operations. A balanced capital structure ensures financial stability, while excessive debt may lead to financial distress.

Examining a company's debt level is crucial, as it can directly impact the company's financial flexibility and risk profile. A high level of debt can hinder a company's ability to grow and adapt to changes in the market, making it a less attractive investment option.

Assessing a company's assets and how they're managed plays a significant role in evaluating an investment opportunity. This includes tangible assets, such as property and equipment, and intangible assets, such as patents and trademarks. Effective asset management contributes to a company's ability to generate profit.

Finally, it is important to scrutinize a company's costs associated with its operations, such as production costs and overhead expenses. A company that efficiently manages its costs will likely generate higher profitability and provide better returns for investors.

Creating Value through Strategic Planning

Strategic planning plays a crucial role in creating value for investors and businesses. It serves as the foundation for effective decision-making and guides companies towards achieving their goals. Through strategic planning, management teams can identify and focus on core competencies that contribute to a company's competitive advantage.

One way to create value is to prioritize revenue growth. By identifying key growth drivers, such as product innovation or market expansion, companies can allocate resources accordingly to boost earnings. Such targeted investments in growth engines allow firms to capture a larger market share and drive long-term profitability.

Another aspect of strategic planning involves optimizing a company's holdings. By assessing the existing portfolio, management can decide whether to divest underperforming assets or make strategic acquisitions that align with their investment thesis. The right combinations and adjustments can significantly enhance a company's overall performance and shareholder value.

Risk management is also an essential aspect of strategic planning. Companies must assess potential risks and incorporate suitable mitigation measures in their plans. This ensures that organizations are prepared for unforeseen circumstances, which can safeguard profits and protect the company's assets.

Furthermore, creating value requires continuous improvement and adaptation to market trends. Companies should routinely reevaluate their strategies to identify both internal and external factors that may impact their current position. By setting clearly defined objectives and quantifiable financial targets, management teams can measure their progress effectively and adjust their strategic plans as needed.

In summary , creating value through strategic planning involves a combination of focusing on core competencies, prioritizing revenue growth, optimizing holdings, managing risk, and continuously reassessing the company's strategic direction. This holistic approach can help businesses enhance their profitability, strengthen their market position, and ultimately deliver strong value creation to investors.

Understanding the Market and Competition

Before developing an investment thesis, it is crucial to have a deep understanding of the market and its competition. The stock market is influenced by various factors such as economic supercycles, bear markets, and secular trends. Analyzing these elements will provide a solid foundation to recognize potential investment opportunities.

An economic supercycle is a long-term pattern that occurs over several decades, during which the economy undergoes periods of growth and contraction. Investors need to be aware of the current phase and how it may impact their investment decisions. For instance, during a growth period, certain industries tend to outperform, while others may underperform during a contraction phase.

In addition to analyzing these market conditions, investors must also pay heed to the competitive landscape of the sector in which they plan to invest. Examining the competitors within the industry enables one to identify companies with competitive advantages, which may lead to superior performance. These advantages can stem from factors such as lower costs, innovation, or a dominant market share.

A bear market occurs when the stock market experiences a prolonged decline, typically characterized by a decrease of 20% or more from recent highs. In such environments, it becomes even more crucial for investors to understand the competitive dynamics within an industry to identify resilient companies that can withstand market downturns.

A secular trend is a long-term movement in a particular direction that can last for several years or even decades. Identifying secular trends within industries is essential to spotting opportunities for long-term growth. For example, investors may capitalize on sectors benefiting from a shift towards clean energy usage or the increasing importance of artificial intelligence.

In summary, understanding the market and competition requires a deep analysis of the stock market, economic supercycles, bear markets, and secular trends. By researching industry trends, evaluating market opportunities, and assessing the strengths and weaknesses of competitors, investors can develop a robust investment thesis that increases the likelihood of achieving long-term returns.

Industry Case Studies

In the investment world, the importance of an investment thesis cannot be overstated. By examining various industry case studies, we can gain insight into how businesses make strategic investments to enhance their value. In this section, we'll discuss notable examples from companies such as DuPont, General Motors, Rexam PLC, and Clear Channel Communications.

DuPont is a leading science and innovation company with a focus on agriculture, advanced materials, and industrial biosciences. During its acquisition of Dow Chemical, DuPont developed a robust investment thesis to justify the merger. Their investment case relied on the belief that the combined entity would benefit from increased operational efficiencies, new market opportunities, and enhanced innovation capabilities. This approach provided a strong rationale for the deal, which has created a more competitive company in the global market.

General Motors (GM) , a multinational automobile manufacturer, crafted its investment thesis in response to evolving trends in the automotive industry, such as the increasing importance of emissions reduction, electrification, and autonomous technology. GM's investment case centered on embracing these trends, focusing on innovation, and expanding its product offerings through strategic M&A, investments, and partnerships. For example, GM has made significant investments in electric vehicles and autonomous driving technology, positioning the company for future growth in these areas.

Next, we have Rexam PLC , a former British packaging manufacturer that was a leading producer of beverage cans globally. When Ball Corporation sought to acquire Rexam, they developed an investment thesis based on the value derived from combining the two companies' strengths. This thesis outlined the strategic fit between both companies, synergies from combining production capabilities, and projected growth, particularly in developing markets. The successful acquisition helped Ball Corporation consolidate its position as a global leader in the packaging industry.

Lastly, Clear Channel Communications is a media company specializing in outdoor advertising. As the company sought to expand its presence in this sector, it created an investment thesis centered around leveraging its core competence in outdoor advertising and acquiring strategic assets. One example is Clear Channel's acquisition of crucial billboard locations to solidify its competitive edge in the outdoor advertising market. This targeted growth strategy has allowed Clear Channel to remain a dominant player in the industry.

In conclusion, these industry case studies demonstrate the value of a well-crafted investment thesis. Effective investment theses provide a roadmap for companies to pursue strategic acquisitions and investments that create long-term value, while also helping investors evaluate the viability of proposed deals. By understanding how companies like DuPont, General Motors, Rexam PLC, and Clear Channel Communications have strategically invested in the market, we can better appreciate the importance of a well-structured investment thesis.

Long-Term Investment Strategies

A long-term investment strategy refers to an approach where investors hold onto their investments for an extended period, typically more than one year. This type of strategy aims to achieve the investment goal by allowing assets to grow through market fluctuations and capitalizing on the power of compounding interest. Diversification and patience play pivotal roles in ensuring the success of a long-term investment strategy.

Portfolio managers often use various techniques and methods to craft long-term investment portfolios. Some of these techniques include targeting undervalued sectors or stocks, dividend reinvestment plans, dollar-cost averaging, and asset allocation. By employing these strategies, portfolio managers increase chances of achieving their clients' investment goals over time.

In order to develop long-term investment strategies, investors should first define their investment goal . This could include objectives such as saving for retirement, funding a child's college education, or purchasing a home. Clear investment goals help in designing an appropriate investment strategy, taking into account factors like the investor's risk tolerance, time horizon, and available capital.

One key aspect of a successful long-term strategy is diversification . Diversifying across asset classes and industries allows investors to spread risks and potentially achieve higher risk-adjusted returns. A well-diversified portfolio will typically consist of a mix of stocks, bonds, and other asset types, with variations in investment size, industry sector, and geographical location. This diversified approach minimizes the impact of underperforming investments on the overall portfolio.

Another crucial element in long-term investing is patience . Market fluctuations can be tempting for investors to react to their emotions and make impulsive decisions, which could derail a well-thought-out investment strategy. Maintaining a disciplined approach and sticking to one's investment plan, even during periods of market volatility, is paramount to achieving long-term success.

In conclusion, long-term investment strategies require investors to define clear goals, diversify their portfolio, and exercise patience in the face of market fluctuations. By adhering to these principles, investors and portfolio managers can steer a course towards achieving their investment objectives.

Emerging Trends and Opportunities

In recent years, various emerging trends have presented attractive opportunities for investors. Among these trends, renewable energy, megatrends, and the coffee shop market stand out as sectors with significant potential for growth.

Renewable energy has gained considerable attention and investment as a response to the global push for addressing climate change and reducing emissions. Solar, wind, and hydroelectric power are some of the most prominent technologies in this sector. With an increased interest in clean energy from both governments and consumers, companies in this space are poised to experience substantial growth.

Megatrends such as urbanization, aging populations, and technological advancements are also influencing investment opportunities. These large-scale shifts provide a backdrop for businesses to tap into new markets and adjust their strategies to capitalize on these changes. For instance, companies working in healthcare and biotechnology may benefit from catering to the needs of an aging population, while businesses focused on artificial intelligence (AI) and automation may find increased demand due to technological advancements.

The coffee shop market, too, presents investment opportunities. This industry has experienced robust growth in recent years as consumers increasingly seek out unique, high-quality coffee experiences. Independent and specialty coffee shops are at the forefront of this trend. Niche coffee shops that offer novel and authentic experiences have seen success by catering to the specialized preferences of today's consumers. As the demand for artisanal and premium beverages continues to rise, businesses operating in this space can expect to have ample opportunities for growth.

In conclusion, current emerging trends such as renewable energy, megatrends, and the coffee shop market offer a wealth of investment opportunities. As these sectors continue to develop and evolve, investors with well-informed investment theses stand to benefit from the potential rewards in these growing industries.

Role of Financial Statements and Valuation Metrics

Financial statements play a vital role in the investment thesis by providing crucial information about a company's financial health and performance. They consist of the balance sheet, income statement, and cash flow statement, which offer insights into the company's assets, liabilities, revenues, expenses, and cash flows. Investors use these statements to assess the company's past performance, current financial condition, and potential for future growth.

Valuation metrics, on the other hand, are vital yardsticks that investors use to compare different investment opportunities and make informed decisions. These metrics include price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, price-to-book (P/B) ratio, dividend yield, and return on equity (ROE), among others. By analyzing these ratios, investors can gauge a company's value relative to its peers and make better investment choices.

Analysts and investors scrutinize financial statements to identify growth trends, profitability, and financial stability. For instance, they may calculate the gross margin, operating margin, and net profit margin to determine the company's profitability across different stages of its operations. Additionally, they examine liquidity ratios, such as the current ratio and quick ratio, to assess the company's ability to meet its short-term obligations.

Valuation metrics provide a quantitative basis for comparing investment opportunities within the same industry or across different sectors. For example, a lower P/E ratio may indicate that a stock is undervalued, while a high P/E ratio might suggest overvaluation. Moreover, the P/B ratio can help investors determine if a stock is undervalued by comparing its market price to its book value.

Another key valuation metric is the dividend yield, which measures the annual dividend income per share relative to the stock's price. A higher dividend yield may attract income-oriented investors, while a lower yield might be more appealing to growth-focused investors. Furthermore, the ROE ratio, which measures a company's profitability in relation to its equity base, is an essential metric for evaluating the efficiency of management in creating shareholder value.

In conclusion, financial statements and valuation metrics are indispensable tools for investors to evaluate a company's financial health and investment attractiveness. By analyzing these data points, investors can make well-informed investment decisions that align with their risk tolerance and investment objectives.

Concluding Thoughts on Crafting a Compelling Investment Thesis

Crafting a compelling investment thesis is crucial for informed investing decisions, as it helps investors thoroughly analyze a potential opportunity. A well-researched investment thesis demonstrates the investor's conviction level and reinforces their confidence in the investment choice. This process involves a deep understanding of the business, its value drivers, and its potential growth trajectories.

A strong investment thesis should be definitive, clearly articulating the reasoning behind the opportunity and the expected returns. This allows investors to stay focused on their goals and maintain their conviction, even when the stock's price movement does not align with their expectations.

By adopting a confident, knowledgeable, and neutral tone, investors can effectively communicate their investment thesis to others. Clarity in presenting the investment case is essential for persuading potential partners or stakeholders to support the opportunity. Utilizing formatting tools such as tables and bullet points can aid in conveying essential information efficiently and ensuring the investment thesis is easy to understand.

In summary, crafting a compelling investment thesis enables investors to make well-informed decisions that align with their financial goals. By developing a thorough understanding of the investment opportunity and maintaining a strong conviction level, investors can better navigate the market and achieve long-term success.

Frequently Asked Questions

How do you develop a strong investment thesis.

A strong investment thesis begins with thorough research on the company or asset in question. This may include looking at the financials, competitive position, management team, industry trends, and future prospects. It's essential to critically analyze the available information, identify potential risks and rewards, and establish a clear rationale for the investment based on this analysis. Staying focused on the long-term outlook and maintaining a disciplined approach to the investment process can also contribute to developing a robust investment thesis.

What are the key elements to include in an investment thesis?

An investment thesis should include the following key elements:

• Overview of the company or asset: Provide a brief background of the company or asset, including its market, size, and competitive positioning.
• Investment rationale: Detail the reasons for investing, such as attractive valuation, strong revenue growth, or a unique business model.
• Risk assessment: Identify potential risks and how they could impact the investment returns.
• Expected return: Estimate the potential financial return based on the identified growth drivers or catalysts.
• Time horizon: Indicate the investment period, typically long-term, during which the thesis is expected to play out.
• Fund size: Specify the amount of invested capital that will be allocated to this particular investment, considering its impact on portfolio construction, liquidity, and potential returns within the overall portfolio strategy

How can one evaluate the success of an investment thesis?

Evaluating the success of an investment thesis involves tracking the progress of the company or asset against its initial expectations and underlying assumptions. This may involve measuring financial performance, analyzing key developments in the industry and the company's position within it, and monitoring potential changes in overall market conditions. It is helpful to revisit the investment thesis regularly to assess its validity and make adjustments as necessary.

What's the difference between an investment thesis for startups and publicly traded companies?

An investment thesis for a startup often focuses on the growth potential of a new or emerging market, considering the innovative products or services the startup offers in that market. Here, the focus may be more on the potential for long-term value creation, the management team's ability to execute on their vision, and market fit.

For publicly traded companies, the investment thesis may include analysis of current financial performance, valuation multiples, and overall market trends. Publicly traded companies have more historical data and financial performance information available, allowing investors to make more informed decisions based on these factors.

How does an investment thesis guide decision-making in private equity?

In private equity, the investment thesis helps guide the selection of companies to invest in, as well as the structuring of deals to acquire those companies. It provides a blueprint for how the private equity firm aims to create value, including plans for operational improvements, financial engineering, or growth strategies. This thesis serves as a basis for monitoring the progress of an investment and helps make decisions on the timing of potential exits.

How can real estate investment theses differ from other sectors?

Real estate investment theses may focus on factors such as location, property type, market dynamics, and demographic trends to identify attractive investment opportunities. The analysis may also take into account macroeconomic factors, such as interest rates and economic growth, which can influence real estate markets. Additionally, real estate investments may be structured as either direct property investments or through financial instruments like Real Estate Investment Trusts (REITs), affecting the underlying investment thesis.

What considerations should a first-time fund manager have when developing a fund's investment thesis?

For a first-time fund manager, crafting a compelling and robust fund's investment thesis is paramount for attracting investors. Given their lack of a track record, these managers need to lean heavily on the research, clarity, and vision articulated in their investment thesis. The thesis should detail how the fund aims to identify ideal investments, especially those in industries with high margins. It should also benchmark the strategies against industry standards to highlight the manager's acumen and awareness of market norms.

How is a stock pitch related to an investment thesis and what role does a target price play in it?

A stock pitch is essentially a condensed, persuasive form of an investment thesis, often presented to stakeholders to advocate for investing in a particular publicly-traded company. A key element of any stock pitch is the target price, which is an estimation of what the stock is worth based on projections and valuation models. This target price serves as a quantitative anchor for the investment thesis, giving stakeholders a specific metric against which to measure potential returns and risks.

Investment Thesis: What It Is, How To Write One & Examples

An investment thesis formulates the characteristics and criteria that define a potentially profitable investment. It outlines the reasons behind the investment decision, including various criteria, financial outcomes, and strategies to manage risks. Essentially, it serves as a detailed plan for investors.  

What is an Investment Thesis?

An investment thesis serves as a strategic blueprint for investors, guiding their decisions and actions by providing the rationale behind their investment choices. Typically crafted by financial analysts, portfolio managers, or investment professionals, the process begins with a thorough assessment of market potential. This involves scrutinizing trends, growth forecasts, and demand dynamics to identify opportunities. The investment thesis validates the significance of these opportunities by highlighting unmet needs or areas of dissatisfaction within the market.

Furthermore, it quantifies potential gains through meticulous financial scrutiny, including revenue forecasts and return on investment assessments. Beyond identifying opportunities, the investment thesis also plays a crucial role in managing risks by employing risk management tactics such as diversification and contingency plans, helping investors navigate market fluctuations and operational hurdles effectively.

Key Takeaways

• An investment thesis defines the criteria for profitable investments, providing a detailed plan and rationale for investors.
• An investment thesis serves as a guiding framework for investment decisions, enhancing comprehension and facilitating well-informed choices.
• Key components of an investment thesis include identifying the investment opportunity, clarifying goals, evaluating viability and risks, and assessing growth potential.

Understanding the Investment Thesis

An investment thesis is akin to a detailed plan for potential investments, often formulated by finance experts. It entails extensive research and analysis to articulate investment ideas effectively. While typically authored by professionals such as venture capitalists or private equity firms, individuals may also develop their own. This document holds significant importance in facilitating well-informed investment decisions, aiding both investors and companies in evaluating opportunities such as stocks or acquisitions.

By elucidating the reasons for investment, the thesis serves as a guiding framework for investors’ decisions. It streamlines decision-making processes, enhances comprehension of underlying rationales, and provides a means for investors to gauge the performance of their investments. Moreover, an investment thesis functions as a roadmap, charting the course toward successful investments.

Navigate Investment Crowdfunding

Browse, discover & track platforms and campaigns. Unlock all the filters of the investment search engine and discover over €50 million in active investment-based crowdfunding campaigns. Gain unique insights and analyze platforms with your personal P2PMarketData account.

How to write an Investment Thesis

Crafting an investment thesis is essential for all investors, whether individuals or professionals. An investment thesis serves as a guide for making choices, explaining the reasoning behind decisions, and providing a framework for assessing investment opportunities. Here is a simple guide with the most important steps for crafting a good investment thesis:

Examples of an Investment Thesis

Portfolio managers and investment companies frequently share their investment strategies on their websites. Here are three examples from prominent investors:

Andreessen Horowitz

Andreessen Horowitz, often referred to as a16z, is a prominent venture capital firm established in 2009 by Marc Andreessen and Ben Horowitz. Active in the private markets, the firm invests in various sectors including AI, healthcare, consumer goods, cryptocurrency, enterprise solutions, fintech, and gaming.

Their investment strategy revolves around observing consumer trends and investing where AI intersects with consumer products. They stress the importance of developing the right AI applications to attract funding, particularly in areas like productivity enhancement and specialized tasks.

In this example, the firm explores how Moore’s Law contrasts with Eroom's Law in healthcare costs. They propose leveraging AI to cut costs and enhance outcomes by gradually integrating it into workflows. Combining AI with life sciences advancements offers transformative opportunities, advocating for a gradual transition to revolutionize healthcare and life sciences. [1]

Goldman Sachs

Goldman Sachs is a global financial powerhouse operating in major financial hubs worldwide, offering services in investment banking, IPO underwriting, securities trading, wealth, and asset management.

The bank’s investment thesis has resulted in a $1 billion investment in companies led by diverse individuals through the “Launch With GS” program aimed at supporting diverse leadership. [2] Goldman Sach collaborates with clients to invest in diverse General Partners across various strategies and offers the Entrepreneur Cohort for growth, reflecting their commitment to diversity and inclusion for achieving strong investment returns and driving industry innovation. [3]

ARK Invest provides  ETFs focused on disruptive innovation like AI and blockchain. The firm remains committed to long-term growth, leveraging innovative strategies and deep research across various sectors, including cryptocurrencies.

The Ark Invest thesis revolves around disruptive innovation, targeting transformative technologies nearing tipping points. They focus on five innovation platforms: AI, Robotics, Energy Storage, DNA Sequencing, and Blockchain. Ark Invest’s approach blends top-down and bottom-up research for early innovation capture and long-term value creation. Emphasizing high-conviction bets, long-term investment, and industry focus, Ark Invest anticipates exponential growth to benefit from technological disruptions. [4]

What should be in an investment thesis?

As an important document, an investment thesis explains why an investment opportunity is expected to be profitable. It should include key components to thoroughly analyze and guide decision-making effectively. These 7 pieces of information are indispensable:

• The Investment in Question: Identify the reason and the investment opportunity under consideration.
• Investment Goal(s): Clarify the investment's aims and aspirations by defining its objectives and goals.
• Viability of the Investment: Evaluate the investment's potential, considering any favorable trends or factors.
• Potential Downsides and Risks: Address and analyze the risks associated with the investment, highlighting any potential challenges or drawbacks.
• Costs and Potential Returns: Evaluate the financial aspects of the investment, including costs, expected returns, and potential losses.
• Alignment with Intended Goals: Ensure that the investment aligns with the overall investment objectives and strategies.
• Growth Potential: Assess the growth prospects of the investment opportunity.

What is the difference between investment thesis and investment mandate?

An investment thesis is the reasoning behind an investment strategy, based on research and analysis, helping investors make informed decisions. Conversely, an investment mandate is a set of instructions given by an investor to a manager, guiding how to manage funds according to the investor’s goals, risk tolerance, and desired outcomes. Here are the key differences:

What is a trade thesis?

A trading thesis is essentially an idea or argument made by a trader or investor about a particular financial instrument, market or asset. This process explains the reasoning behind a trading decision, considering things like market trends, economic indicators, and technical or fundamental analysis. This thesis acts as a plan for understanding the reasons behind a trade and what factors are likely to influence its outcome, aiding in making informed decisions in financial markets. Having a clear trading thesis helps traders and investors clarify their strategy and evaluate the possible risks and rewards of a trade.

Article Source

• Andreessen Horowitz: “ AI at the Intersection: The a16z Investment Thesis on AI in Bio + Health ”
• Goldman Sachs: “ Launch With GS ”
• Goldman Sachs: “ Goldman Sachs Research ”
• Ark Invest: “ Big Ideas 2022 ”  

Writing a Credible Investment Thesis

by David Harding and Sam Rovit

Every deal your company proposes to do—big or small, strategic or tactical—should start with a clear statement how that particular deal would create value for your company. We call this the investment thesis . The investment thesis is no more or less than a definitive statement, based on a clear understanding of how money is made in your business, that outlines how adding this particular business to your portfolio will make your company more valuable. Many of the best acquirers write out their investment theses in black and white. Joe Trustey, managing partner of private equity and venture capital firm Summit Partners, describes the tool in one short sentence: "It tells me why I would want to own this business." 10

Perhaps you're rolling your eyes and saying to yourself, "Well, of course our company uses an investment thesis!" But unless you're in the private equity business—which in our experience is more disciplined in crafting investment theses than are corporate buyers—the odds aren't with you. For example, our survey of 250 senior executives across all industries revealed that only 29 percent of acquiring executives started out with an investment thesis (defined in that survey as a "sound reason for buying a company") that stood the test of time. More than 40 percent had no investment thesis whatsoever (!). Of those who did, fully half discovered within three years of closing the deal that their thesis was wrong.

Studies conducted by other firms support the conclusion that most companies are terrifyingly unclear about why they spend their shareholders' capital on acquisitions. A 2002 Accenture study, for example, found that 83 percent of executives surveyed admitted they were unable to distinguish between the value levers of M&A deals. 11 In Booz Allen Hamilton's 1999 review of thirty-four frequent acquirers, which focused chiefly on integration, unsuccessful acquirers admitted that they fished in uncharted waters. 12 They ranked "learning about new (and potentially related) business areas" as a top reason for making an acquisition. (Surely companies should know whether a business area is related to their core before they decide to buy into it!) Successful acquirers, by contrast, were more likely to cite "leading or responding to industry restructuring" as a reason for making an acquisition, suggesting that these companies had at least thought through the strategic implications of their moves.

Not that tipping one's hat to strategy is a cure-all. In our work with companies that are thinking about doing a deal, we often hear that the acquisition is intended for "strategic" reasons. That's simply not good enough. A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value.

This point needs underscoring. Justifying a deal as being "strategic" ex post facto is, in most cases, an invitation to inferior returns. Given how frequently we have heard weak "strategic" justifications after a deal has closed, it's worth passing along a warning from Craig Tall, vice chair of corporate development and strategic planning at Washington Mutual. In recent years, Tall's bank has made acquisitions a key part of a stunningly successful growth record. "When I see an expensive deal," Tall told us, "and they say it was a 'strategic' deal, it's a code for me that somebody paid too much." 13

And although sometimes the best offense is a good defense, this axiom does not really stand in for a valid investment thesis. On more than a few occasions, we have been witness to deals that were initiated because an investment banker uttered the Eight Magic Words: If you don't buy it, your competitors will.

Well, so be it. If a potential acquisition is not compelling to you on its own merits, let it go. Let your competitors put their good money down, and prove that their investment theses are strong.

Let's look at a case in point: [Clear Channel Communications' leaders Lowry, Mark, and Randall] Mayses' decision to move from radios into outdoor advertising (billboards, to most of us). Based on our conversations with Randall Mays, we summarize their investment thesis for buying into the billboard business as follows:

Clear Channel's expansion into outdoor advertising leverages the company's core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements. Second, similar to the radio industry twenty years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to "roll up" a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.

Note that in Clear Channel's investment thesis (at least as we've stated it), the benefits would be derived from three sources:

• Leveraging an existing sales force more extensively
• Using the balance sheet to roll up and fund an undercapitalized business
• Applying operating skills learned in the radio trade

Note also the emphasis on tangible and quantifiable results, which can be easily communicated and tested. All stakeholders, including investors, employees, debtors, and vendors, should understand why a deal will make their company stronger. Does the investment thesis make sense only to those who know the company best? If so, that's probably a bad sign. Is senior management arguing that a deal's inherent genius is too complex to be understood by all stakeholders, or simply asserting that the deal is "strategic"? These, too, are probably bad signs.

Most of the best acquirers we've studied try to get the thesis down on paper as soon as possible. Getting it down in black and white—wrapping specific words around the ideas—allows them to circulate the thesis internally and to generate reactions early and often.

The perils of the "transformational" deal . Some readers may be wondering whether there isn't a less tangible, but equally credible, rationale for an investment thesis: the transformational deal. Such transactions, which became popular in the exuberant '90s, aim to turn companies (and sometimes even whole industries) on their head and "transform" them. In effect, they change a company's basis of competition through a dramatic redeployment of assets.

The roster of companies that have favored transformational deals includes Vivendi Universal, AOL Time Warner (which changed its name back to Time Warner in October 2003), Enron, Williams, and others. Perhaps that list alone is enough to turn our readers off the concept of the transformational deal. (We admit it: We keep wanting to put that word transformational in quotes.) But let's dig a little deeper.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. In search of effective transformations, people sometimes cite the examples of DuPont—which after World War I used M&A to transform itself from a maker of explosives into a broad-based leader in the chemicals industry—and General Motors, which, through the consolidation of several car companies, transformed the auto industry. But when you actually dissect the moves of such industry winners, you find that they worked their way down the same learning curve as the best-practice companies in our global study. GM never attempted the transformational deal; instead, it rolled up smaller car companies until it had the scale to take on a Ford—and win. DuPont was similarly patient; it broadened its product scope into a range of chemistry-based industries, acquisition by acquisition.

In a more recent example, Rexam PLC has transformed itself from a broad-based conglomerate into a global leader in packaging by actively managing its portfolio and growing its core business. Beginning in the late '90s, Rexam shed diverse businesses in cyclical industries and grew scale in cans. First it acquired Europe's largest beverage-can manufacturer, Sweden's PLM, in 1999. Then it bought U.S.–based packager American National Can in 2000, making itself the largest beverage-can maker in the world. In other words, Rexam acquired with a clear investment thesis in mind: to grow scale in can making or broaden geographic scope. The collective impact of these many small steps was transformation. 14

But what of the literal transformational deal? You saw the preceding list of companies. Our advice is unequivocal: Stay out of this high-stakes game. Recent efforts to transform companies via the megadeal have failed or faltered. The glamour is blinding, which only makes the route more treacherous and the destination less clear. If you go this route, you are very likely to destroy value for your shareholders.

By definition, the transformational deal can't have a clear investment thesis, and evidence from the movement of stock prices immediately following deal announcements suggests that the market prefers deals that have a clear investment thesis. In "Deals That Create Value," for example, McKinsey scrutinized stock price movements before and after 231 corporate transactions over a five-year period. 15 The study concluded that the market prefers "expansionist" deals, in which a company "seeks to boost its market share by consolidating, by moving into new geographic regions, or by adding new distribution channels for existing products and services."

On average, McKinsey reported, deals of the "expansionist" variety earned a stock market premium in the days following their announcement. By contrast, "transformative" deals—whereby companies threw themselves bodily into a new line of business—destroyed an average of 5.3 percent of market value immediately after the deal's announcement. Translating these findings into our own terminology:

• Expansionist deals are more likely to have a clear investment thesis, while "transformative" deals often have no credible rationale.
• The market is likely to reward the former and punish the latter.

The dilution/accretion debate . One more side discussion that comes to bear on the investment thesis: Deal making is often driven by what we'll call the dilution/accretion debate . We will argue that this debate must be taken into account as you develop your investment thesis, but your thesis making should not be driven by this debate.

Simply put, a deal is dilutive if it causes the acquiring company to have lower earnings per share (EPS) than it had before the transaction. As they teach in Finance 101, this happens when the asset return on the purchased business is less than the cost of the debt or equity (e.g., through the issuance of new shares) needed to pay for the deal. Dilution can also occur when an asset is sold, because the earnings power of the business being sold is greater than the return on the alternative use of the proceeds (e.g., paying down debt, redeeming shares, or buying something else). An accretive deal, of course, has the opposite outcomes.

But that's only the first of two shoes that may drop. The second shoe is, How will Wall Street respond? Will investors punish the company (or reward it) for its dilutive ways?

Aware of this two-shoes-dropping phenomenon, many CEOs and CFOs use the litmus test of earnings accretion/dilution as the first hurdle that should be put in front of every proposed deal. One of these skilled acquirers is Citigroup's [former] CFO Todd Thomson, who told us:

It's an incredibly powerful discipline to put in place a rule of thumb that deals have to be accretive within some [specific] period of time. At Citigroup, my rule of thumb is it has to be accretive within the first twelve months, in terms of EPS, and it has to reach our capital rate of return, which is over 20 percent return within three to four years. And it has to make sense both financially and strategically, which means it has to have at least as fast a growth rate as we expect from our businesses in general, which is 10 to 15 percent a year. Now, not all of our deals meet that hurdle. But if I set that up to begin with, then if [a deal is] not going to meet that hurdle, people know they better make a heck of a compelling argument about why it doesn't have to be accretive in year one, or why it may take year four or five or six to be able to hit that return level. 16

Unfortunately, dilution is a problem that has to be wrestled with on a regular basis. As Mike Bertasso, the head of H. J. Heinz's Asia-Pacific businesses, told us, "If a business is accretive, it is probably low-growth and cheap for a reason. If it is dilutive, it's probably high-growth and attractive, and we can't afford it." 17 Even if you can't afford them, steering clear of dilutive deals seems sensible enough, on the face of it. Why would a company's leaders ever knowingly take steps that would decrease their EPS?

The answer, of course, is to invest for the future. As part of the research leading up to this book, Bain looked at a hundred deals that involved EPS accretion and dilution. All the deals were large enough and public enough to have had an effect on the buyer's stock price. The result was surprising: First-year accretion and dilution did not matter to shareholders. In other words, there was no statistical correlation between future stock performance and whether the company did an accretive or dilutive deal. If anything, the dilutive deals slightly outperformed. Why? Because dilutive deals are almost always involved in buying higher-growth assets, and therefore by their nature pass Thomson's test of a "heck of a compelling argument."

Reprinted with permission of Harvard Business School Press. Mastering the Merger: Four Critical Decisions That Make or Break the Deal , by David Harding and Sam Rovit. Copyright 2004 Bain & Company; All Rights Reserved.

[ Buy this book ]

David Harding (HBS MBA '84) is a director in Bain & Company's Boston office and is an expert in corporate strategy and organizational effectiveness.

Sam Rovit (HBS MBA '89) is a director in the Chicago office and leader of Bain & Company's Global Mergers and Acquisitions Practice.

10. Joe Trustey, telephone interview by David Harding, Bain & Company. Boston: 13 May 2003. Subsequent comments by Trustey are also from this interview.

11. Accenture, "Accenture Survey Shows Executives Are Cautiously Optimistic Regarding Future Mergers and Acquisitions," Accenture Press Release, 30 May 2002.

12. John R. Harbison, Albert J. Viscio, and Amy T. Asin, "Making Acquisitions Work: Capturing Value After the Deal," Booz Allen & Hamilton Series of View-points on Alliances, 1999.

13. Craig Tall, telephone interview by Catherine Lemire, Bain & Company. Toronto: 1 October 2002.

14. Rolf Börjesson, interview by Tom Shannon, Bain & Company. London: 2001.

15. Hans Bieshaar, Jeremy Knight, and Alexander van Wassenaer, "Deals That Create Value," McKinsey Quarterly 1 (2001).

16. Todd Thomson, speaking on "Strategic M&A in an Opportunistic Environment." (Presentation at Bain & Company's Getting Back to Offense conference, New York City, 20 June 2002.)

17. Mike Bertasso, correspondence with David Harding, 15 December 2003.

• Opportunities
• Alternative Assets
• Investment Themes
• Corporate Investing
• How to Invest
• Funded Portfolio
• Startup Application
• About OurCrowd
• Our Partners
• Startup News
• Our Co-Investors
• Knowledge Center
• Social Impact
• 2023 OurCrowd Global Investor Summit
• OurCrowd Virtual Events
• OurCrowd Jobs
• Portfolio Jobs

Investment Thesis: The Roadmap for Successful Investing

6 min Read June 18, 2024 at 12:47 PM UTC

An investment thesis provides a structured framework to guide the decision-making process of investors, whether individual or institutional.

An investment thesis is a well-reasoned argument that serves as the foundation for making investment decisions.

It is a written document that outlines an investor’s goals, market analysis, risk tolerance, and the specific criteria they will use to evaluate potential investment opportunities.

Essentially, an investment thesis provides a structured framework to guide an investor’s decision-making process.

Why Every Investor Needs an Investment Thesis

An investment thesis is crucial because it helps investors avoid impulsive or emotionally driven investment choices that may not align with their overall objectives.

By establishing clear principles and guidelines, an investment thesis mitigates the risks associated with poorly informed or hasty investment decisions.

Developing a robust investment thesis encourages investors to thoroughly research and analyze the market, industry, and company-specific factors that could impact an investment’s potential for success.

This due diligence process can reveal potential risks or issues that might otherwise be overlooked, ultimately protecting the investor’s capital.

Also Read: Becoming an Investor: Do it Yourself or via a Venture Fund?

Components of an Investment Thesis

While the specific components of an investment thesis may vary depending on the investor’s strategy and preferences, most comprehensive theses include the following elements:

• Investment Goals: Clearly defined objectives that the investor aims to achieve through their investments, such as capital appreciation, income generation, or a combination of both.
• Risk Tolerance: An assessment of the level of risk the investor is willing to take, which can range from conservative to aggressive.
• Market Analysis: A thorough evaluation of the market conditions, trends, and potential opportunities that could impact the investment’s performance.
• Industry Analysis: An examination of the specific industry or sector in which the investment opportunity exists, including competitive landscape, regulatory environment, and growth prospects.
• Company Analysis: A detailed assessment of the company’s financials, management team, competitive advantage, and growth prospects.
• Exit Strategy: A plan for how and when the investor intends to exit the investment, whether through an initial public offering (IPO), acquisition, or other means.

At Daba, we work alongside institutional and individual investors to help develop or refine their Africa-focused investment thesis, providing in-depth market analysis, industry insights, and company-specific assessments. Click here to learn more.

Types of Investment Theses

Investment theses can be categorized into different types, each with its own set of criteria and principles. Some common types include:

• Value Investing: This strategy focuses on identifying undervalued companies with strong fundamentals, with the expectation that the market will eventually recognize their true value, resulting in share price appreciation.
• Growth Investing: Growth investors seek companies with exceptional growth potential, often in emerging or rapidly expanding industries, to capitalize on their future earnings and revenue growth.
• Income Investing: This strategy prioritizes investments that generate consistent income streams, such as dividend-paying stocks, bonds, or real estate investment trusts (REITs).
• Socially Responsible Investing: Investors with a socially responsible investment thesis prioritize companies that demonstrate strong environmental, social, and governance (ESG) practices, aligning their investments with their ethical and moral values.

Evolving the Investment Thesis

An investment thesis should not be set in stone; it should be a living document that evolves over time as market conditions, industry trends, and the investor’s goals change.

Regular reviews and updates to the investment thesis are necessary to ensure that it remains relevant and effective.

Developing Investment Theses for Africa

Investing in Africa presents unique opportunities and challenges that require a deep understanding of the continent’s diverse markets, cultures, and regulatory environments.

At Daba, we specialize in helping investors navigate these complexities and develop robust investment theses tailored to the African context.

Our team combines on-the-ground knowledge with rigorous data analysis to provide comprehensive market insights, industry assessments, and company evaluations.

By leveraging our expertise, investors can make informed decisions and build investment theses that are well-aligned with their goals and risk tolerance for African markets.

At Daba, we work with investors to continuously monitor and assess the validity of their investment thesis for African markets. Click here to discover how our analysis and updates can help you make informed investment decisions.

Examples of Investment Thesis

Orange Cote d’ivoire (BRVM: ORAC)

Mobile money is transforming financial inclusion across West Africa. The BRVM-listed company Orange CI is at the forefront of this mobile money revolution through its subsidiary Orange Money.

While traditional banking struggles to reach rural areas, Orange Money’s mobile money services provide easy access to financial tools like payments, transfers, and savings via basic mobile phones. It is a major player in the mobile money market in Africa, operating in 18 countries as of 2020, and is the leader in multiple WAEMU markets.

Orange’s strong brand reputation, widespread mobile network coverage, and strategic partnerships with banks position it well to capitalize on the booming demand for mobile financial services across the region. The company has a stable balance sheet and consistent revenue growth from its core telecom business.

Given this pioneering role in mobile money, powerful market position, and solid financials, the company can deliver attractive returns by riding the mobile money wave sweeping West Africa. Any near-term stock price dips would present an opportune entry point. An investment thesis is not limited to stocks .

Xty Developments (Fictional)

Urbanization is rapidly accelerating across the African continent, creating massive demand for affordable housing solutions, especially in fast-growing cities. Xty Developments is an innovative property company focused on addressing this urban housing crunch.

By using modern construction techniques and embracing a scale model, Xty can construct high-quality yet affordable apartment complexes quickly and cost-effectively. Their standardized designs optimize for efficient building and operational costs.

While new property companies face execution risks, Xty’s founder has over 15 years of proven experience delivering successful projects across multiple African markets. Their current pipeline already includes lucrative developments underway in three major cities.

With rapid urbanization an unstoppable megatrend, Xty’s compelling value proposition, and the founder’s seasoned track record, we have high conviction this venture can generate outsized returns for early investors backing its expansion across key African urban centers.

Also Read: Building a Winning Fund: Portfolio Strategies and Tips

Getting Your Investment Thesis Right

An investment thesis is a critical tool for investors seeking to make well-informed and disciplined investment decisions.

By establishing clear objectives, conducting thorough research and analysis, and defining specific criteria for evaluating opportunities, an investment thesis helps mitigate risks and increase the likelihood of achieving desired returns.

Whether you are an institutional investor, fund manager, or individual investor, partnering with Daba can help you develop or refine your investment thesis for the African market, positioning you for success in this dynamic and rapidly evolving region.

This material has been presented for informational and educational purposes only. The views expressed in the articles above are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses. Articles do not reflect the views of DABA ADVISORS LLC and do not provide investment advice to Daba’s clients. Daba is not engaged in rendering tax, legal or accounting advice. Please consult a qualified professional for this type of service.

Share this post

Get weekly insights, and latest news on African Public Markets, Startups, and Economy

Take action.

Partner with us.

An Investment Thesis: The Key To Making More Money Long Term

In general, the longer you stay invested, the greater your chance of making money. To help you maintain a long-term investment approach, it's imperative to develop an investment thesis.

Drawing from my experience in investing since 1995, it's sometimes easy to get shaken out of a particular investment. Or it’s easier for some people to just keep their money sitting in cash out of fear of financial loss. I get it. I’ve lost plenty of money before because there are no guarantees when you take risk.

I observed panic selling during the 2000 dot bomb and 2008 global financial crisis, affecting both stock and real estate sellers. More recently, I witnessed panic selling at the beginning of the global pandemic in 2020. The events lead me to try and allay fears with the post, “ How to Predict the Stock Market Bottom like Nostradamus .”

Having a solid investment thesis, as long as it remains intact, will provide you with the courage and confidence to hold on for the long term.

The Importance Of Developing An Investment Thesis When Investing

Let me go through some examples of how having an investment thesis has helped me hold long-term and make more money overtime. Coming up with an investment thesis also helped me make a significant decision on a recent dilemma. At the end of this post, I'll also share what makes a good investment thesis.

If you are just starting out and are fearful of investing your hard-earned money, developing an investment thesis will help you take action. To beat inflation , you must continuously invest over the long term. If you don’t overcome your fear of investing, then you will likely fall way behind over time.

Please know that you don't have to be a great investor to make money. You just need to be a good-enough investor to significantly outperform a large part of the population that does not save and invest aggressively.

1) Heartland Real Estate Investment Thesis

In 2016, I published my post titled “ Focus on Trends: Why I'm Investing in the Heartland of America .” My investment thesis was based on the anticipation that more people would relocate to lower-cost areas of the country due to advancements in technology and the increasing ability to work from home. Additionally, I believed that Trump's victory would contribute to increased interest, funding, and expansion in red states.

Given the uncertainty of which specific real estate investment deal to pursue, I opted to invest in a couple of funds that focused on acquiring real estate in the heartland of America. Now, eight years and $954,000 later, I have generally witnessed positive returns on my investments. Texas properties, in particular, have performed quite well since 2016. However, as I shared in my post on private real estate investing after eight years , there have also been some duds as well.

Investing for such an extended period has been relatively straightforward. In the realm of private funds , the expected distributions typically span between 5-10 years.

Based on my investment thesis of a demographic shift to the heartland, I logically looked for real estate investment firms that had the same investment thesis. And I found one in 2016 in Fundrise. Fundrise predominantly invests in the Sunbelt region where valuations tend to be lower and rental yields tend to be higher.

2) San Francisco Real Estate Investment Thesis

When I arrived in San Francisco in 2001, I was amazed by the affordability of real estate compared to New York City. Properties were priced 20 to 30% lower, offering more space for the same cost or a similar property for less.

At that time, compensation in the finance industry was comparable between the two cities at my level. My investment thesis was that prices in SF would catch up to prices in Manhattan due to a better quality of life and the growth of technology.

Didn’t Want To Miss Out On The Tech Boom

My firm played a role in taking Facebook and Google public in the early 2000s. As a result, I anticipated a resurgence in Web 2.0. Lacking the skills or connections to enter the tech industry, I opted to invest in tech stocks and acquire rental properties instead.

Overall, San Francisco property prices have shown positive performance. The excitement of living in a big city attracts billions of people. However, the city's reputation suffered post-pandemic due to hesitancy by officials to address criminal activities and remove drug dealers downtown.

Thankfully, to stay in power, politicians must address corruption, tackle crime, clean up the city, and provide tax incentives for businesses to thrive. Citizens discontented with criminal activities are likely to vote out ideological politicians and judges who harm the community. Consequently, there is potential for the city's image to be restored post 2024 election, leading to a recovery in real estate prices.

Deja Vu With Artificial Intelligence

Since 2023 there has been an extraordinary surge in tech stock prices. Fueled by substantial bonuses and robust portfolios, I anticipate that a portion of this wealth will flow back into San Francisco Bay Area real estate. Redfin reports that luxury home prices are reaching all-time highs , attracting a significant number of all-cash buyers .

The rise of artificial intelligence (AI) is evoking a sense of déjà vu, reminiscent of 25 years ago when the internet promised to revolutionize the world. Today, it is equally apparent that AI will shape the world in the next two decades.

Despite the likelihood that most of us won't secure lucrative AI jobs due to intense competition, there's an opportunity for ordinary individuals to invest in AI companies. Beyond public companies like Nvidia, Microsoft, Google, and Facebook, private investments can be made through open-ended venture capital funds like the one offered by Fundrise.

Fundrise launched its venture capital product at the end of 2022, which was great timing given private company valuations had corrected. The investment minimum is only $10, so everybody can participate. You can see the holdings, and the fees are much lower than closed-end venture capital funds.

I am personally adopting this approach by investing in both public and private AI-related companies. My goal is to allocate $500,000 to these companies over the next five years. This strategy not only positions me for potential gains but also serves as a hedge against the challenges AI might pose for our children in terms of job opportunities.

AI Facilitated My Property Decision

In my previous post, “ Rent out, sell, or create a wellness center, ” I detailed my dilemma regarding what to do with my old house. At 46 years old, with two young children and already managing four rental properties, the prospect of overseeing another rental didn't appeal to me.

Being a landlord can be burdensome, particularly when dealing with challenging tenants or constant maintenance issues. Such responsibilities take away time that could be better spent on more enjoyable activities, like playing tennis or spending quality moments with my kids.

After reading through the comments on my post, which provided diverse opinions on the course of action, I weighed the options and arrived at a decision to rent out the house and hold it for the long term. The deciding factor was the formulation of an investment thesis.

Why Renting Out Is Better For Now

My investment thesis revolves around the belief that owning a single-family home on the west side of San Francisco is a sound decision. Local economic catalysts, including the opening of a large school in the fall of 2024 and the $4 billion renovation of the UCSF Parnassus Hospital by 2030 (expected to create 1400 new jobs), indicate a positive trajectory for real estate on the west side.

Remote work is here to stay. In addition, there is a demographic transition from downtown on the east side to the west side. The final catalyst for my decision to rent out is the anticipated wealth generated by Artificial Intelligence (AI) for employees and investors. As a result, I will suck it up as a landlord for the next 3-5 years and then reevaluate. The earliest I'd relocate to Honolulu, Hawaii is in 2030.

I spoke to Ben Miller, CEO of Fundrise , and he believes we're past the real estate market as do I. As a result, holding onto my property and renting it out makes even more sense.

3) The Vision Pro Investment Thesis For Apple

I've owned Apple stock since 2012 and it has done well. With the S&P 500 surpassing 4,900, I've faced increasing challenges in finding compelling stock investments. However, when the Vision Pro was unveiled on February 2, 2024, my interest was piqued.

At that time, Apple had just reported somewhat soft quarterly results, causing a dip in the stock. I contemplated whether this could be the opportunity to further invest in the company. After dedicating several hours to researching the Vision Pro, I concluded that the answer was affirmative.

Apple's new Vision Pro is a significant accessibility tool for the visually impaired . Approximately 2.2 billion people worldwide experience some form of visual impairment. While an estimated 237 million face moderate to severe impairment. Among them, 40 million are considered legally blind or completely blind. This figure is expected to rise to 115 million by 2050.

Consequently, I believe the Vision Pro holds the promise of greatly assisting a substantial portion of the global population in enhancing their vision and interaction capabilities. Considering the critical importance of sight, the demand for this product should be relatively inelastic for the visually impaired. Furthermore, Apple is likely to enhance the product over time and reduce its retail cost. I can’t wait for version 2 and 3.

An Example Of How The Vision Pro Can Help The Visually Impaired

If you have regular sight or can correct your myopia or hyperopia with glasses or contact lenses, then you might take for granted your vision. Seeing a small screen on your phone or the 10-point font size on a menu is usually not a problem. For for those with visual impairments, it can be.

This Vision Pro commercial succinctly captures one of its many benefits for the visually impaired.

Apple is already an outstanding company with intelligent employees and an impressive product line. Further, it is cash flow positive with substantial cash reserves and a dividend payout. My confidence in investing in Apple stock aligns with my confidence in the S&P 500. However, I anticipate additional upside potential, particularly with the introduction of the Vision Pro and how Apple with integrate artificial intelligence with all its products.

Note: The definition of legally blind means the inability to correct your visual accuity to at least 20/200 with corrective lenses. Most people can correct their visual acuity to 20/20 to 20/40 with glasses or contacts. Legally blind usually does not mean complete blindness, as many people who are legally blind still have some vision.

America The Great: The Ultimate Investment Thesis

I harbor a home country bias as an American patriot. I've resided in this country since 1991 and have payed six figures in taxes annually since 2003. My children were born on American soil. In addition, I've crafted over 2300 personal finance posts aimed primarily at aiding Americans in achieving financial freedom sooner. These experiences have fostered my deep connection and commitment to this nation.

I envision my final days in America, leaving behind a positive legacy . Consequently, my long-term outlook is bullish and biased on owning American assets.

The greatness of America, in my belief, stems from:

• Entrepreneurial spirit
• Strong work ethic
• A stable democratic government
• A robust legal system safeguarding intellectual property and individual rights
• A formidable defense industry ensuring citizens' protection
• A stable world currency
• Generally thoughtful and kind people aspiring to assist others globally in attaining freedom
• A history of unity during times of crisis, exemplified by events like 9/11 and the pandemic

While acknowledging America's challenges—crime, poverty, socioeconomic injustices—I consider it unwise to bet against its long-term excellence. The collective willpower of our nation, I believe, will drive ongoing positive improvements.

I advocate that everyone, globally, should find a way to own a piece of America . You can do so by buying the S&P 500 or U.S. physical real estate or private real estate.

In 50 years, when our grandchildren become adults, they will appreciate our foresight in investing in America today. Despite inevitable economic fluctuations, with a well-defined investment thesis, we stand to accumulate wealth beyond our current imagination.

What Makes A Good Investment Thesis

A good investment thesis is a well-researched and articulated rationale behind an investment decision. It serves as a comprehensive guide that outlines the reasons and expectations for choosing a particular investment. Here are key characteristics of a good investment thesis:

• Clear and Concise: The thesis should be easily understandable and to the point.
• Supported by Research: Ground your thesis in thorough research, including fundamental analysis, technical analysis, and an understanding of relevant economic and market trends.
• Alignment with Goals: Clearly state how the investment aligns with your overall financial goals and objectives. Whether it's capital appreciation, passive income generation , or risk mitigation, the thesis should reflect your goals.
• Identifies Investment Opportunity: Specify the investment opportunity or opportunities you have identified. This could involve a specific asset class, industry, sector, or individual securities.
• Analysis of Risks: Acknowledge and assess the risks, challenges, and uncertainties associated with the investment.
• Time Horizon: Clearly define your time horizon for the investment. Specify whether it's a short-term trade, a long-term hold, or something in between.
• Competitive Advantage: Understand what sets it apart from competitors and how it plans to sustain or enhance that advantage.
• Financial Metrics: Include relevant financial metrics supporting your investment decision. This may include valuation ratios, growth rates, profitability, and other key financial indicators.
• Scenario Analysis: Consider different scenarios and outcomes. A well-thought-out thesis anticipates how the investment might perform under various circumstances.
• Adaptable and Dynamic: Recognize that market conditions can change. A good investment thesis is adaptable and allows for adjustments based on new information or changing circumstances.
• Exit Strategy: Clearly outline your exit strategy. Know under what conditions you would sell or reduce your position.
• Communication: Share your thesis with others to find any blind spots, like I am with this post. Others should be able to understand your rationale and analysis.

Keeping updating your investment thesis over time

Having a good investment thesis won't guarantee success, but it's like a roadmap for your investments. Keep updating it based on what's happening in the market, and make sure you invest for the long term.

For example, after the failed assassination attempt on July 15, 2024, Trump will likely become the 47th president of the United States. As a result, there may be further upside with your investments in 2025 and beyond. Here's a detailed article on what Trump's presidency means for your money .

Investment theses can vary in quality, and sometimes you might get the investment right with the wrong thesis. The main thing is to have a good reason why you're investing, so you stick with it over time.

In 10 years, you'll probably end up with more money who keeps investing for the long haul, compared to someone who doesn't invest or tries to time the market. Decide which situation you want to have in the future.

Invest In Private Growth Companies

If you believe artificial intelligence will be an important economic driver, check out Fundrise . Fundrise invests in the following five sectors:

• Artificial Intelligence & Machine Learning
• Modern Data Infrastructure
• Development Operations (DevOps)
• Financial Technology (FinTech)
• Real Estate & Property Technology (PropTech)

Roughly 90% of Fundrise's venture capital product has exposure to artificial intelligence. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI.

The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. You can see what Fundrise is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.

Fundrise is a long-term sponsor of Financial Samurai and Financial Samurai is an investor in Fundrise.

About The Author

Financial Samurai

35 thoughts on “an investment thesis: the key to making more money long term”.

Folks investing should have an Investment Policy Statement (IPS).

Scope & Purpose: “The investment policy statement (IPS) will govern how the financial assets of ____________ are to be invested.”

RESPONSIBILITIES:

“__________ is responsible for coordinating updates to the IPS and responsible for monitoring the application of the IPS and shall notify ETFguide of the need for updates to the IPS and/or violations of the IPS implementation. _________ shall be responsible for approving the IPS and all subsequent revisions of it.

Changes in life circumstances including the birth of a child, retirement, disability, divorce, or family death will impact all future adjustments and responsibilities to this document.”

Research the subject and find a Financial Advisor (RIA) firm that prepares such IPS reports and go over your situation with them. Ron Delegge at ETFguide can prepare an IPS for you for a reasonable fee. You can find his firm online.

your quote sums up our last 40+ years of heavy real estate investing vs investing in equities.

“Since 1996, I’ve discovered that having a well-defined investment thesis increases the likelihood of consistently investing and holding onto investments during challenging periods. As the old saying goes, ‘time in the market is more important than timing the market.’ This lesson came to me the hard way during the first 10 years of my investing career.”

We were told many times that we would lose it all, go bankrupt, have to grovel to return to work & suffer the never ending torment of bad tenants & damages. We could write a book on it all, as it definitely was not easy, but since 1998 (& retired) we have been free & clear on every property since, have no debt since & live comfortably between three homes during the year after selling our 4th, a FL home of 31 years, just before H. Ian hit. love your articles & financial insight.

My California real estate thesis is this:

Despite numerous rent control efforts and the State’s (and most coastal counties’) hostility towards landlords, I think California residential real estate will be very lucrative for landlords assuming they have sufficient cash on hand to withstand vacancies, evictions, cash for keys, etc.

This is because rent control decreases landlord and developer participation in providing housing and thus leads to fewer units on the market. Fewer units on the market will increase rental prices.

Hi, like you I own and manage a few rental properties in the city, which is our primary income. Although the rental market here isn’t great, at least it’s stabilized. It’s like survive until 2025 and hopefully things will turn around in SF. These upcoming city elections, with a swell of moderate candidates will hopefully make a tangible difference in quality of life issues, which of course have hurt SF’s reputation worldwide.

I’m also bullish on the potential for the AI industry. But work from home is pervasive and I think downtown and soma are going to be challenged for several years. Also tech firms are less concentrated in the Bay Area now and getting more distributed in 2nd tier cities. The saving grace for SF is that many local neighborhoods are now more cleaned up and also have thriving foot traffic, if it’s the mission, inner sunset, etc. So I feel good about the future of good and established SF neighborhoods, which is where I own properties.

SF has roughly doubled in value every 10years, which is amazing. The first chart in this report is a good visual, https://www.bayareamarketreports.com/trend/3-recessions-2-bubbles-and-a-baby The main thing I need to wrap my head around is that I think the next 5-10 years will not have the amazing appreciation that we’ve had since the mid-late 90’s when I started investing. I honestly got used to that phenomenal rate growth, but I’m trying to set more modest expectations going forward.

How bullish are you on future SF appreciation? Do you think it will be anything like the last 30 years?

The market may simmer this year. But I think it’ll eventually go up again by a rate of 3.5 to 5% a year. If you look at the historical cycles, there’s generally about 4 to 5 years of flat lining.

Given we’re already at a high base, the growth rate of appreciation won’t be as high as in the past. That said, I think there’s gonna be another renaissance of Wealth being created over the next 10 to 20 years with new tech / AI.

What the cost of building materials, labor, and restrictive building should help push real estate prices higher.

Yeah 3.5-4.5% SF real estate returns over the next 5-10 years is probably realistic. 7% is unlikely, which is what we’ve gotten used to :) Without that outsized 7% equity return, and holding my properties debt free (no leverage), keeping them long term vs selling and going into the stock market becomes a much closer call.

My cash on cash on my RE is 3.5-4%, plus 3.5-4.5% expected appreciation totals 7-8.5% total returns, which is roughly in line with s&p 500 long term returns. Tax treatment favors RE, but then again with stocks you don’t need to deal with tenants and repairs. But of course the main issue is transferring my RE equity into stocks is bloody expensive, with sales expenses and capital gains of about 37%. So I’m still better off holding the RE. My only issue is that I’m heavily RE weighed, with only a small stocks portfolio. My plan has been to dollar cost average excess RE profits into stocks to better balance my portfolio.

I’ll just have to see what transpires over the next 2-3 years to our fair city, plus evaluate the macro economic picture. I guess this “sell RE, buy stocks” dilemma isn’t such a bad problem to have. But nevertheless it’s nice to have a “safe space” (sic) such as this blog where wealthy people can freely cry about their problems…IRW anytime I bring this up to people it’s like, “wait, let me get the worlds smallest violin to play for you” :)

Innovation Fund vs going after AI public companies like the following that are already established and surging YTD. Thinking the latter might be more attractive and with less risk.

Nividia TSMC Arm SoundHound

I don’t have thesis, only several points: -Only buy S&P 500 index with lowest fee. -No trading, hold for LONG time. – Maximize all tax deferred accounts. – No investment in a single company since I have no control over management. I bought and didn’t look at my account for years . I just recently checked and saw that it has 13% compounding interest making me millionaire.

Well done. Don’t forget to capitalize on your investments by selling on occasion to buy things you want and improve the quality of your life. Otherwise, there’s really no point to investing in stocks.

Is there a fundrise equivalent for non-US citizens? Thanks in advance. Dave

Hi Dave, I’m not aware of one. You can just invest in a public real estate ETF like VNQ or one of the publicly-traded REITs like O. Just know they are more volatile.

Just to clarify, Innovation Fund is not currently open to new investors but has a “waitlist.”

Also what is happening with publically traded companies in the AI thesis seems to me to mean that not really necessary to take on added risk of start-ups. just look at recent performance of ARM SMCi and NVDA. and that is just a few. i will continue inverting in a broad 10-12 public stocks and sure to gain solid and not massive returns. i look at it this way, if a start up here or there will do 10x and some will bust, leaving you with overall 3-4 times return, then i am likely to better with the established companies in a sector where the revolution has just begun. smci is up 3x in just a month.

That’s weird. I just checked with Fundrise and the Innovation Fund is open to investors.

“The Innovation Fund is OPEN to new investors. It is possible this person is unable to make a direct investment into the fund if they are an existing investor who is not a Pro member. This is something we’re working on.

But to reiterate the fund is open to new investors.

If you select the Venture Capital investment plan during signup you can invest in the Innovation Fund.”

I’m an existing investor and don’t believe I’m a pro member. I’m able to invest in the Innovation Fund.

i’m an existing investor but not a pro member and i am not able to invest in Innovation fund so must fall into that segment. it is not provided as an option when i select “browse investments” in my account. i then read a review of the fund from late 2023, i will try to post, and it did say that it wasn’t open to all yet. it did said all you needed was $10 to start.

You should reach out to them and let them know.

ASH01 – What are the 10-12 AI public companies you are targeting besides Nividia, smci and ARM? Thoughts on TSMC & SoundHound? I tend to agree with your thesis. Why take on the private risk when the public companies should still be in their infancy in terms of AI growth.

As discussed earlier, here is my investment thesis which could be quite controversial:

1. A portfolio of 50/50 real estate vs. stock. The stock portion should not be lower but could be much higher. Holding real estate is mostly for pleasure/need and rent. Rental properties are all places i would want to live. Once pleasure part of real estate is no longer needed, should graduate to stocks or to rental units.

2. Stocks is a mix of SP500 and Tech i.e. Nasdaq 100, XLK, VOOG and also exposure to single high performing stock. No international stock. No bonds. Mostly automated invested to cost average. Real estate rental income is the security in case stock market crashes.

3. Flexible and nimble approach. Whenever the market is down, try investing more and don’t withdraw funds.

4. No investment in private funds, real estate funds, bitcoin and other cryptos which i dont understand and have no transparency. No need to complicate.

Sounds good. What’s your investment thesis though for your tech stocks?

It’s a good mantra to not invest in what you don’t understand.

I really enjoy investing private funds (VC, VD, real estate) as it forces me to invest for the long term ~10 years. The capital calls also keep me investing even when I might not want to.

I am excited about building out, my artificial intelligence exposure, and I have one from the invested in Ripple, which has turned out to be maybe a 20-40X return. Maybe I can cash out just in time to buy a new car in 2027, when my current car is 12 years old.

Here’s an example of an AI company one of my private funds (Kleiner) is investing in. I’m pumped! https://techcrunch.com/2024/02/06/ambience-healthcare-raises-70m-for-its-ai-assistant-led-by-openai-and-kleiner-perkins/

I’m also excited about the AI investments in the Fundrise Innovation Fund , like Databricks.

Sounds good. As for tech, i have a single stock exposure due to my employment which is doing better than market and is a great company that does good work. So thesis for that is don’t fix what is working. As for the rest, my strategy is similar to most here – i Invest in 15-20% of stock portfolio in QQQ and lesser to XLK and VOOG which are Apple, Microsoft heavy – i believe i get enough AI and other exposure through these since i dont know what the next big thing will be.

One last point. I am very bullish about US Stocks for the following reasons:

1. European markets are not performing. On surface, it appears cheap to buy however not a single tech company in the top 100 European companies. 2. China stock market is not performing. Significant decline and volatility. Could be the beginning of a Japan like deflation and decline. 3. US is the center of AI and innovation. 4. Stock ownership, although at historical highs is still low among Americans being at approx 56%.

In couple years, i think everyone will want a piece of the US companies. Already evidenced by the fact that Shiller CAPE after 80s is much higher than historically has been. Could this lead to a bubble? Definitely – but it could well last 10-20 years and the fundamentals could also catch up in the meanwhile either due to AI generated earnings or something else and optimism pays when investing!

My best thesis was investing in semiconductor stocks. Roughly 5 years ago I noticed how almost everything needed a chip. My thesis proved itself out during the pandemic. You couldn’t get a car, dishwasher or any smart device because chips weren’t available. I bought AMD, NVDA, and Intel. 2 of them worked out pretty good. I was banking on the cloud and data centers to boom. That part worked out okay. I didn’t see any of the AI craze coming which has been hugely beneficial. Decent thesis and a ton of luck!

Nice! But what about the future?

Take a little profit and hold the rest for another 5 years. I realize we’re right in the middle of AI mania but everything I read and watch tells me we’re still in the early days of AI.

No matter what happens we’re still going to need more chips to power all our future ambitions

so interesting how almost nobody but nvda saw the AI craze coming. that one earnings report by them set this whole thing off about a year ago. such an interesting phenomenon. AI has been talked about for many years but then suddenly companies decide to try to make a product of it in a massive scale. nvda explosion in earning was because companies suddenly ordered their chips.

Yup, I spend hours a day watching cnbc, reading blogs and doing research and I truly didn’t know what AI could do or how much money companies could make off it. Luck is definitely a factor.

VTI + VXUS + long haul = chill

Agree, but it’s hard to retire earlier by just investing in the total stock market. There are two levels of wealth , the top-tier wealth did not get there by investing in ETFs or index funds.

100% agree with you on that front! BUT I do personally believe that 95% of people will accumulate more wealth through regular and automated index investing over time vs. active investment strategies such as picking 1:1 stocks. I would guess you also have a sizable audience base that loves the content but also leans toward simple investing strategies over the long haul and not constantly stressing about achieving the top tier of wealth. The content here can sometimes make you feel behind, overly stressed that you’ll never have enough, and stuck stressing about the future. I personally have to step back and remember it’s really about regular investing (in your strategies of choice) + time in the market and not timing the market. Which I personally think is a sound investment thesis! Love the content though to be clear. It’s really helped me think about allocation percentages and mortgage payoff strategies.

Yes, good points. For most people, buying a primary residence and regularly investing in an S&P 500 index fund is a great long-term strategy.

Personally, I like to always be challenged bc it’s fun. Even if I fail, I will likely have accumulated more than if I hadn’t pushed myself.

From my coaching days, the players who advance the most are pushed the hardest.

But good reminder to press the easy button once in a while for readers who may be burning out or feeling behind.

I love your clear and specific convictions in your investment thesis. That’s something I need to work on. Very cool on the Apple Vision Pro. I don’t have anything specific in my own investments. Although I do believe in long term real estate, stock, and tech exposure. Thanks for the list of steps on creating an investment thesis.

I’ve been investing since the mid-1980s. Every time I’ve evaluated my portfolio against a portfolio of index funds using backtesting of 5 years and more, the index funds (with expenses deducted) have beaten my portfolio’s performance over a 5+ year time horizon. I’ve finally realized that I have a lot more money today if I’d purchase a mix of three low-cost, passively managed index funds. My latest lesson occurred during the latest 5 year period in which my portfolio performed well. It did what it was designed to do (mitigate losses during down markets like 2022). I was only down 2% that year. Unfortunately, if I had invested in a mix of SCHD (50%), SCHG (25%), and SWPPX (25%), that portfolio would have crushed my performance by a wide margin. Yes, it lost more money in 2022 (around 14.75%) but dramatically exceeded its performance in the other four years. I’m done trying to be smart. I’m buying a mix of passive ETFs and accepting the market risk.

Thanks for posting that. You basically stated my “investment thesis”:

1. My assets must grow in order for me to keep up with long term inflation 2. Over the long haul it’s very difficult for me to outperform the market 3. Figuring out my my risk tolerance and indexing accordingly is probably my best bet

No different than you, it’s taken since the mid 1980’s for this reality to really set in…

Those are great points Vaughn. Keep the focus and stay invested for the long term!

Active funds underperform their benchmark passive index >95% of the time after 10 years. With retail investors its over 99% with average underperformance by 4% *annually*. The 1% that crush due to lucky pick with concentration are the reason people still do it, but I’d rather have a 99x higher chance to have a +4% CAGR *and* barely think about it.

Leave a Comment Cancel Reply

Your email address will not be published. Required fields are marked *

Sign up for the private Financial Samurai newsletter!

interpretive economics

• Feb 27, 2023

How to Write the Perfect Investment Thesis

For investment managers, finding investment opportunities is only half the challenge. Often the harder part is raising funds. To do this they need to create the perfect investment thesis to set out a convincing argument as to why their investment strategy will generate a return on investment for their clients. In this article, we’ll explore the importance of crafting a perfect investment thesis and provide insights into how to write one.

What is an Investment Thesis?

An investment thesis outlines a fund manager’s investment strategy and rationale for investing in a particular market or niche. It’s a crucial document that investment managers use to provide investors with the information and data they need to decide whether or not to invest in a fund. It can be turned into a variety of marketing materials for the fund including white papers, one-pagers, and investment decks.

The investment thesis should be concise and articulate the investment logic and framework for why a particular market or niche presents an attractive investment. It should outline the investment strategy and how it aligns with the fund manager’s hypothesis. The thesis should also address potential risks and benefits to investors.

Successful investment theses typically include an analysis of market trends, an assessment of the competitive landscape, and an explanation of why the investment opportunity presents an attractive opportunity.

In 2013, Ron Baron, a fund manager, invested in Tesla. At the time the stock was trading at $25 per share. However, Baron believed that electric cars were the future , and he was convinced that Tesla would become the leader in the EV industry. Ten years later, Tesla’s stock is trading at over $200 per share, making it one of the most successful investments in recent years.

Step-by-Step Guide to Writing the Perfect Investment Thesis

Crafting the perfect investment thesis is not an easy task. It requires a great deal of research, analysis, and writing skills. Follow our step-by-step guide to write a perfect investment thesis.

Step 1: Define Your Investment Strategy

Determine your investment goals and objectives.

To define your investment strategy, you need to first need to understand your investment goals and objectives. Are you looking to invest in high-growth companies or established companies that generate a stable return? What is your investment horizon? What is risk profile? How much capital do you need to raise?

Identify investment opportunities

Once you have defined your investment goals and objectives, you need to identify your target market and investment opportunities in that market.

Define your investment strategy

Having determined your goals, risk tolerance and capital requirements you need to create a high-level investment strategy. This is a set of principles that will help the fund achieve its investment goals and guide investment decisions. This can be refined as you conduct market research and receive feedback from investors and industry-peers.

Step 2: Conducting Market Research

An investment thesis that is not backed by data is just opinion. To write the perfect investment thesis you need to conduct market research. This includes analyzing market trends, identifying potential risks and benefits, and conducting competitive analysis.

How to analyze market trends using data

To analyze market trends, you need to collect and analyze data. Data can come from a variety of sources including industry reports, financial statements, and news articles to identify trends in the market. You can also use tools such as Google Trends to identify search trends for specific keywords. There are also opportunities to use official data to back up claims, for example census data to prove an investment thesis based on demographic trends.

A variety of alternative data sources are available. these include:

Web scraping : Scraping data from online sources including social media sites, e-commerce or news stories. This data can be analyzed using natural language processing techniques (categorization, sentiment analysis).

Open data : There is a growing trend of organizations making data freely available. Good examples include traffic patterns on metro networks such as TFL in London .

Sensors and satellites : A growing industry of data providers is providing access to alternative data sources. From satellite data showing agricultural production to IoT sensor devices.

Polls and Surveys : Surveys provide insights into the collective consciousness. From tangible economic behaviors such as buying and shopping habits, customers expectations, information on personal finances, to social and political views.

Identifying market opportunities and potential risks

Having analyzed market trends, you need to identify market opportunities and potential risks. Investors need to be aware of different types of investment risks, such as market risk, credit risk, and liquidity risk associated with your investment thesis. A thorough analysis of potential risks helps investors make informed decisions and ensure that the investment is aligned to their risk appetite. The analysis should cover both systematic and unsystematic risks, There are a variety of statistical methods than can be used to measure risk and volatility including standard deviation, Sharpe ratio, beta, value at risk (VaR), conditional value at risk (CVaR), and R-squared.

Conducting competitive analysis

You may also want to include a competitive analysis. This looks at the competition in your target market. Who are the main players in the industry, their strengths, weaknesses, and competitive advantage.

Step 3: Developing Your Investment Hypothesis

The best investment theses include a well structured investment hypothesis. An investment hypothesis summarises why an investment opportunity exists in a given market. It should be based on your research and analysis and articulated in a clear and concise manner.

What is an investment hypothesis?

An investment hypothesis is a proposed explanation for a specific investment opportunity. It’s a statement that describes the investment opportunity and how it aligns with the investment manager’s investment goals and objectives.

Formulating an investment hypothesis based on your research and analysis

To develop a strong investment hypothesis, you need to review the data and information collected during your market research. Using this you need to identify key trends, opportunities, and risks and determine an investment strategy that allows you to achieve investment goals and objectives. This is the time to revisit and critique your initial investment strategy.

H4: Articulating the investment thesis in a clear and concise manner

Once you have developed your investment hypothesis, you need to articulate it in a clear and concise manner. This includes a clear investment logic and analytical framework for why a particular market or niche presents an attractive investment. You should also outline the investment strategy and how it aligns with your hypothesis.

Step 4: Writing the Investment Thesis

Having created the perfect investment thesis you need to structure the thesis and include key elements to make it persuasive.

The structure and format of a successful investment thesis

A successful investment thesis typically follows a structure that includes an executive summary, market analysis, investment hypothesis, investment strategy, and potential risks and benefits. The thesis should also include data and visual aids, such as graphs and charts.

Key elements to include in your investment thesis

To make your investment thesis persuasive, you need to include key elements such as a clear articulation of the investment opportunity, a detailed explanation of the investment hypothesis, an overview of the investment strategy, and describe the risks and benefits for potential investors.

Writing with clarity and brevity

To make your investment thesis easy to read and understand, you need to write with clarity and brevity. Use simple language and avoid jargon. Keep the thesis concise and to the point.

What type of resources and marketing materials do you need to create

Having defined your investment thesis you know need to create a variety of marketing materials in order to present to potential investors. These will vary depending on the type of investors and the regulatory framework you operate under. Some common investor marketing materials include:

Investor decks

An investor deck is a summary of your investment thesis. It should include a summary of your investment hypothesis, market opportunity with data, investment strategy, expected outcomes, risks, and benefits to investors. The investor deck should be concise and easy to understand. Avoid lengthy text and present the opportunity using relevant data points. Employing a professional designer will maximize the impact of your investment thesis.

The structure of an investment deck forces you to focus only on the key points, consequently a clear analytical framework or investment logic is essential.

White papers

A white paper is a more detailed description of your investment thesis. It should include an in-depth analysis of the market trends, competitive landscape, and investment opportunity. The white paper should also include an overview of your investment strategy and potential risks and benefits.

Investment one-pager

An investment one-pager is a brief summary of your investment hypothesis, market opportunity, and risks and benefits. It should be a one-page document that investors can quickly review to understand your investment opportunity.

Step 5: Refining and Perfecting Your Investment Thesis

The final step in writing a perfect investment thesis is to refine and perfect it. You need to continuously refine and improve your thesis to ensure it’s persuasive and effective.

Revising and editing your investment thesis

Once you have written your investment thesis, you need to revise and edit it. Review the thesis for grammar, punctuation, and spelling errors. Ensure that the thesis is clear, concise, and persuasive. Nothing will damage your credibility more than easily fixed errors or incorrect data.

Seek feedback from peers and industry experts

You should seek feedback from peers and industry experts to ensure that your investment thesis is persuasive and effective. Aim to get feedback from colleagues, mentors, or industry experts all of whom can offer a unique outside perspective.

Continuously refining and improving your investment thesis

Investment managers should continuously refine and improve their investment thesis. They should review the thesis periodically and update it as needed to reflect changes in the market or investment strategy.

Crafting a perfect investment thesis is a crucial task for investment and fund managers. The investment thesis is a document that outlines the investment strategy and rationale for investing in a particular market or niche. A good investment thesis provides investors with a clear understanding of the investment opportunity, the risks and benefits, and the potential return on investment.

To write a perfect investment thesis, investment managers need to define their investment strategy, conduct market research, develop an investment hypothesis, craft the thesis, and refine and perfect it. They should also create marketing materials such as an investor deck, white paper, and investment one-pager to summarize their investment opportunity. Investment managers should continuously refine and improve their investment thesis to ensure it’s persuasive and effective.

How Interpretive Economics can help you write the perfect investment thesis

At Interpretive Economics, we help investment managers, asset managers, venture capital, family offices and other investment professionals create a variety of investment marketing materials including investment white papers, investor decks and investment one-pagers. We are experts at economic analysis, sourcing and analyzing data and crafting investment hypotheses. Get in touch to see how we can help you create the perfect investment thesis.

• B2B Marketing

Recent Posts

The Top 6 Lessons For B2B Marketers in 2023!

Measure Everything! A Complete Guide to Digital Marketing KPIs for B2B Success

Digital Marketing Costs: Cost ranges for SEO, SEM/PPC, Content Marketing and More

bunch Raises $15.5M Series A

Book a demo

Get started

Join the 2,500+ fund managers, investors, & founders who love and trust bunch.

Thank you! ‍ ‍

Blog article

July 29, 2024

How to Develop a Strong Investment Thesis in Early Stage

Johannes Gebendorfer

Join 2200+ readers and receive bunch of news , our monthly wrap-up on everything Private Markets in Europe, delivered straight to your inbox.

A well-crafted investment thesis can help investors clarify their goals and evaluate potential investments, ultimately leading to a successful performance of the fund.

What exactly is an investment thesis, and why is it so important?

An investment thesis is a concise statement that outlines an investor's belief about the potential returns and risks of a particular investment. It is a framework that helps investors make decisions about what to buy, sell, or hold in their portfolio, and it is based on a thorough analysis of a company's financials, market conditions, and competitive landscape.

A well-crafted investment thesis can serve as a valuable guide for investors to focus on their long-term goals and avoid making impulsive or reactive decisions based on short-term market fluctuations. By clearly defining their investment goals and criteria, investors can avoid being swayed by emotions or biases and instead make rational and thoughtful decisions.

How can private investors develop a strong investment thesis? 

Here are eight steps to follow:

1. Start by identifying the specific industry or market that you want to invest in. This should be based on your own interests, expertise, and goals as an investor.

2. Research the current state of the market , including trends, challenges, and opportunities. This will help you identify potential investment opportunities and develop a more informed investment thesis.

3. Evaluate the potential investment opportunities in the market, including the founding team, product, and business model of the startups. Look for startups that have strong potential for growth and differentiation in the market.

4. Develop a set of hypotheses or assumptions about the potential returns and risks of investing in early stage startups in the chosen market. This should be based on your research and analysis, and should include both the potential upsides and risks of the investment.

5. Test your hypotheses by gathering additional information and data, and by seeking the perspectives of other experienced investors. This may involve conducting interviews, attending industry conferences, or seeking out expert opinions.

6. Refine your thesis as needed based on the information and insights you gather. Be prepared to adjust your assumptions and expectations as new information becomes available.

7. Communicate your investment thesis clearly and concisely to others, including potential partners or investors. This should include a detailed explanation of your reasoning and a solid plan for realizing the potential returns of the investment.

8. Monitor the performance of the startups you invest in closely, and be prepared to adjust your thesis or exit the investment if it no longer aligns with your goals or if the underlying assumptions change.

Take the next steps with the bunch SPV or fund

Once you have developed your investment thesis, the bunch OS allows you to open standardized investment entities that are a) easy to understand, b) can be managed fully digitally and c) have significantly lower setup and management costs. We are on a mission to enable those who dare to take risks. Talk to us about how to get started with bunch .

We are excited to keep you posted throughout our journey to build the operating system for private market investors . While public markets have come a long way from the time when stock investments were made on costly phone calls, private markets are lagging behind. We want to take out the friction and free up time for fund managers, investors, and founders, allowing them to focus on the projects tackling the challenges of tomorrow. ‍ Subscribe to our newsletter here .

Disclaimer: The content presented herein is solely for informational and discussion purposes only. It is not intended to serve as legal, tax or financial advice or as an endorsement of any investment strategy. bunch does not provide legal, tax or financial advice. Readers should not base their investment decisions on the content presented herein or any other bunch-generated content alone and should seek appropriate professional advice. Nothing contained herein shall constitute or imply an offer to sell, purchase or enter into any transaction in respect of securities. The content contained herein is subject to change without notice. While we aim to present accurate and up-to-date information as part of bunch’s content, we undertake no obligation to update our content from time to time.

Strategic Projects Lead

Johannes is leading strategic projects at bunch with a particular focus on the German market and the offerings around funds. Prior to joining bunch, he worked for one of Europe's largest and most active Venture Capital funds, building a portfolio of FinTech companies before switching to the operator side.

Connect on Linkedin

You might also like

Press release

bunch Raises $15.5M Series A to Build The Backbone of Private Markets

Educational

August 24, 2023

A Comprehensive Guide to Startup Funding (Sources and Options)

How to Leverage Your Business/Technical Background in Angel Investing

Start building on bunch.

• Intapp DealCloud

How to create a clear private equity investment thesis

Ben Harrison

President, Industries

Table of contents

Detail macroeconomic factors, detail microeconomic factors, establish and describe the trade setup, summarize your investment thesis, examples of investment thesis summaries, what to do with your new investment thesis.

For every dozen private equity deals, only one or two generate significant returns to their investors, according to Investopedia. The biggest reason why deals either fail to deliver or fall through altogether : Firms often neglect to deal with red flags early on in an agreement. To help determine whether a deal will be profitable, private equity firms must first establish a clear, concise investment thesis.

A private equity investment thesis is an evidence-based case built in favor of a particular investment opportunity. It opens with a two- to three-sentence argument showing how the potential deal supports a general partner’s fund investment strategy, then provides details that support that conclusion.

An investment thesis is required for all buy-side dealmakers. Beyond fulfilling a requirement, the detailed proposition serves to:

• Crystallize the group’s tactical plan, putting strategy into action
• Inform intermediaries, investors, and fellow partners what’s at stake if the firm does — or doesn’t — invest
• Answer the variety of questions that arise throughout a typical transaction

Follow these next steps to create a winning private capital markets investment thesis and identify the best opportunities for your firm.

To create a successful investment thesis, firms must first answer global and niche-agnostic economic questions. This will help set the stage for the acquisition target to shine against a macro backdrop.

Start by listing any relevant current headlines , political and social developments, and even consumer trends that are affecting investments across the board. These news stories will remind investors what they and your potential portfolio companies (portcos) are facing today.

For example, you might list the U.S. Securities and Exchange Commission’s most recent proposals, e-commerce adoption, or European political volatility as factors that are affecting investments. Detail the way these factors are helping or hindering the private capital markets in general.

You should also list headlines that affect the acquisition target’s industry, sector, and subsector, and explain whether these developments favor growth for your private company. For example, if a general partner’s acquisition target was in the durable goods manufacturing space, the principal would include the U.S. freight transportation services index (TSI) as a macroeconomic factor in his investment thesis, and would describe how its recovery predicts smoother supply chains to ease investor worries. Similarly, you can explain in your investment thesis how your portco will be positioned competitively among its sector rivals.

Risks aren’t traditionally included in investment theses, but you can include them if they strengthen your macroeconomic analysis . You may want to include factors such as whether global or national conditions oppose the potential portco’s growth or the investment’s performance. You can also describe how your acquisition target would sidestep or weather those pitfalls.

Bain & Co. experts recently declared that macroeconomic instability is dealmaking’s number-one enemy . Position your investment thesis to shine by having a good handle on macroeconomic factors.

The macroeconomic information you gather can help you drill down into more granular information about an investment opportunity . Narrow your proposed direction by including microeconomic details about company-level questions to your investment thesis. Try to answer questions such as:

• Why do you believe the target’s founder or owner will lead the company to growth? Describe ways the current CEO demonstrates innovative, creative problem-solving and strong leadership.
• What do the company’s financial statements reveal about the business’s record-keeping? Are the reports straightforward and easy to read? Before due diligence, investigate the business’s financials to uncover thesis-supporting insights.
• What do the company’s financial statements reveal about the viability of the business? Are there clues as to how leadership has handled finances at key inflection points? How much variance does each metric — such as return on equity, profit, return on assets, and earnings per share — exhibit?
• How has the company navigated cash flow surprises in the past? Surprises can include headwinds and windfalls, and an event like a spike in the company’s quick ratio must be handled with as much finesse as a cash shortage. What proof is there that the business keeps growing sustainably amid short-term volatility ?
• How has the company used seed money? James W. Frick, former Vice President of Public Relations at the University of Notre Dame, famously said, “Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.” When you look at previous injections , don’t just analyze the company’s capital efficiency. Draw conclusions about what the team prioritizes, such as growth over client retention.
• What opportunities are there for better cost management? Are there areas where the business is spinning its wheels and expending resources without gaining effective traction? Could certain actions — such as managing talent differently, renegotiating vendor agreement terms, or terminating a failed market expansion — efficiently address these areas ?
• What’s the company’s reputation like? Consider hiring a market research firm to perform an exploratory branding assessment. Take it to the next level by gathering observations from clients, employees, and vendors. If any quotes prove highly relevant, include them in your investment thesis.
• In what ways are competitors excelling or lagging? The ideal investment is in a market where rivals are failing to innovate. Does your target acquisition have what it takes to exploit market conditions faster and better than competitors?
• What could go wrong? The best investment theses don’t deny risks but instead address them at an early stage. As you list potential pitfalls, identify ways the private equity firm’s management team can dodge or defuse these hazards .

Consider the professionals at Morgan Stanley , who use three questions to formulate the microeconomic portions of their investment theses.

• Agility and defensibility — Is the company a disruptor or is it insulated from disruptive change?
• Financial viability of the business — Does the company demonstrate financial strength with high returns on invested capital, high margins, strong cash conversion, low capital intensity, and low leverage?
• ESG (environmental, social, and governmental) and the responsibility to do no harm — Are there environmental or social externalities not borne by the company, or are there governance and accounting risks that may alter the investment thesis?

Once you’ve compiled a substantial body of information to use in your investment thesis, sort the details by order of importance. Each deal’s details should be arranged differently since each investment is unique.

The final component of a good investment thesis answers the question, “So what?” It offers bold implications of the micro- and macroanalysis you just performed, and reveals what your next steps should be .

To describe the proposed trade, explain how the micro and macro factors will work together to increase carry for partners and returns for limited partners. Propound an entry point or “ setup price ,” and describe how you arrived at your proposed acquisition’s target price. Industries — and different private equity firms within those spaces — vary in how they calculate reasonable prices.

Keep in mind that the industry standard expects your firm to find the product of estimated earnings and your expected multiple. For example:

• Estimated earnings × EV/EBITDA = target price
• Estimated earnings × FCF/market capital = target price
• Estimated earnings × Price-to-earnings (P/E) ratio = target price

In your investment thesis, explain why your firm uses a particular multiple and how it came to estimate future earnings . Be sure to include these details as a footnote or sidenote for more curious readers.

Once you’ve proposed a purchase price, describe why the buy side should value the business at that entry point. You may need to briefly repeat what you’ve stated in your micro- and macroeconomic research findings, but within the context of your financial investment.

You should also outline what will happen if you choose not to invest in a particular business. Will the current owners keep their stake, or will a rival scoop them up ? Will a competitor fumble the operational improvements or liquidate too early or late? Or will the competitor execute brilliantly, generate alpha, and solidify or even expand its limited partner pool?

Finally, you must weave in a capital plan to detail how your investors’ committed capital will improve company profits for either returns or reinvestments. The capital plan outlines some of the strategic moves and operational improvements you believe will generate short-term wins and future sustainable growth. It should include no more than three or four actions; for example, you could include initiatives like increasing dividends or paying down debt to put free cash flow to work.

To wrap up the investment thesis, discuss how the deal would work into and support the fund’s overall investment strategy. Detail ways your firm brings a competitive advantage to the deal. Have your partners demonstrated acumen with similar deals? List the reasons why you’re the company’s best bet for making above-market returns.

Now that you’ve built a complete — but also quite complex — investment thesis, it’s time to develop a clear, effective presentation . General partners distill their investment theses into bite-size, portable overviews that are more memorable and digestible for their audiences. Concisely summarizing your thesis will:

• Help busy readers better understand your thesis. For skimmers and scanners who want to skip around your thesis, a synopsis gives them a starting and ending point.
• Steer future investments, further defining your role in your niche. If, for example, a particular investment thesis persuades limited partners and intermediaries to commit to an event-based investment, you may become a firm known for that type of strategy.
• Provide you with a successful deal that you can use as an example during events like employee training, marketing, and roadshows. Imagine one of your vice presidents attends a trade event and meets an esteemed limited partner who expresses interest in your firm’s most recent deal. A quick investment thesis summary is the perfect way to explain the deal and further the partner’s interest.
• Set up a memorial to look back on. As the investment’s time horizon approaches, your team should reflect on how the deal began and what twists and turns you and your portco navigated along the way. This exercise will help prepare your team for future scenarios and investment opportunities.

Authors David Harding and Sam Rovit highlighted a summary of Clear Channel’s merger-specific investment thesis. The media company had decided to expand into outdoor advertising sales and needed to build its case and present it to stakeholders. Note the three concrete benefits the company describes in detail:

Clear Channel’s expansion into outdoor advertising leverages the company’s core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements . Second, much like the radio industry 20 years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to ‘roll up’ a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.

This summary explains that the acquiring executives planned to generate returns by:

• Using existing talent and preventing costs usually associated with successful deals
• Applying skills and processes from one sector to improve the newly added operation
• Combining assets or “ rolling up ” to share costs and benefits through a newly formed industry rather than fragmented sectors

Best of all, the summary uses a single paragraph to get the job done.

Here are a few examples from dealmakers in other private capital markets:

• Private equity — Read the overviews of investment theses from Arcspring , Sun Capital Partners , WestView Capital Partners , and Safanad , a team that clearly communicates its commitment to private equity with real estate incorporated.
• Real estate private equity (REPE) — CrowdStreet articulately summarizes how and why the firm invests, and it states its intentions by asset class and sector. The synopsis covers hospitality, industrials, health care, multifamily, office space, retail, self-storage, senior care, student housing, and life sciences.
• Impact investing — The FSIG and Creatella investment thesis summaries are clear and give a high-level flyover of the model deal’s macro- and microeconomics.
• Venture capital — Wavemaker Partners , Chloe Capital , and La Poste Ventures substitute corporate language with simpler and more digestible terms.

An investment thesis is more than a report: It’s the developing narrative of a successful deal. You’ll likely need to update your thesis and presentation more than once, and in a variety of ways, throughout the lifecycle of the investment.

Publish the investment thesis in your team’s internal deal management system, and assign permissions to those who refer to the plan often. Set up notifications so that you receive alerts whenever someone comments or edits the investment thesis. If your current deal management system doesn’t support this level of effective collaboration, contact DealCloud to request a demo today.

Remember: Successful deals start with successful investment theses. Don’t let investors wade into a transaction before taking the steps above to identify red flags and create an evidence-based plan that everyone can buy into.

Our website uses cookies to give you the most relevant experience by remembering your preferences and repeat visits.

By clicking Accept, you consent to the use of all cookies.

Privacy overview

• Recently Active
• Top Discussions
• Best Content

By Industry

• Investment Banking
• Private Equity
• Hedge Funds
• Real Estate
• Venture Capital
• Asset Management
• Equity Research
• Investing, Markets Forum
• Business School
• Fashion Advice
• Presentation and Case Study Templates

Investment Thesis Template

Create your own investment thesis slide with this free template

Prior to becoming a Founder for Curiocity, Hassan worked for Houlihan Lokey as an Investment Banking Analyst focusing on sellside and buyside  M&A , restructurings, financings and strategic advisory engagements across industry groups.

Hassan holds a  BS  from the University of Pennsylvania in Economics.

Currently, Adin is an associate at Berkshire Partners, an $16B middle-market private equity fund. Prior to joining Berkshire Partners, Adin worked for just over three years at The  Boston Consulting Group as  an associate and consultant and previously interned for the Federal Reserve Board and the U.S. Senate.

Adin graduated from Yale University, Magna Cum Claude, with a Bachelor of Arts Degree in Economics.

This template allows you to create your own investment thesis slide detailing your overall strategy.

The template is plug-and-play , and you can enter your own text or numbers. The template also includes other slide pages for other elements of a financial model presentation.

According to the WSO Dictionary ,

"An investment thesis aims to take an abstract idea and turn it into a functional investment strategy. An investment thesis helps investors evaluate investment ideas, ideally guiding them in selecting the best ideas that can help meet their investment objectives."

A screenshot below gives you a sneak peek of the template.

Free Hedge Fund Pitch Template

The Only Program You Need to Land in High Finance Careers

The most comprehensive curriculum and support network to break into high finance.

More Resources:

We hope this template helps you excel at your job! Please check out the following additional resources to help you advance your career:

• McKinsey Case Template
• Company Drivers PowerPoint Template
• Company Overview PowerPoint Template
• Industry Analysis PowerPoint Template
• DCF Output PowerPoint Template

Everything You Need To Break into Hedge Funds

Sign Up to The Insider's Guide on How to Land the Most Prestigious Buyside Roles on Wall Street.

Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.

or Want to Sign up with your social account?

S T R E E T OF W A L L S

Building an investment thesis.

Now that you understand what characteristics make up attractive long and short ideas, it is time to explain how to formulate an investment thesis. Being able to construct a real and actionable investment idea is in the heart and soul of an analyst’s work in the hedge fund industry. Building a successful thesis begins with (1) rigorous due diligence at the Micro level, (2) aligning that view with the Macro environment, and (3) understanding the overall trade setup.

Good Company Qualities

• High return on capital
• Barriers to entry
• Growing industry
• High margins relative to competition

Good Management

• High insider ownership
• Well respected
• Clean accounting
• Infrequent restating of earnings
• Not overly promotional
• Good allocators of capital

All of these qualities are obvious and won’t differentiate your pitch, but they are qualities you will have to talk about, so make sure you understand them well.

Target Price = Your Earnings Estimate × Multiple

Company Earnings

• Will the company beat earnings expectiations in the next quarter or in the next year?
• If so, what are the catalysts that will cause the Company to beat earnings (e.g., higher revenue, higher margins, lower interest expense, share buybacks, etc.)? Paint the picture of how, when, and why there will be a catalyst that supports your view. Providing an opinion without fully understanding and explaining the relevant value drivers will be a recipe for failure.
• What’s your confidence the company will beat earnings? What’s the probability?
• What’s your margin of safety? What can go wrong?
• Does your pitch rely on multiple expansion? Why? Where is the company trading relative to its historical multiple? Should the multiple trade at a premium or discount given how the company has changed over the years, and where we are now in the business cycle?
• Where is the company trading relative to its peer group? If the entire market has seen multiple expansion, then is it fair that this company should too? In other words, is it expensive or cheap relative to itself historically and/or its peers, and can you explain why this might be wrong?
• What catalyst is going to cause this multiple to start expanding? Again, paint the picture of how, when, and why there will be a catalyst that supports your view.
• What is your confidence in multiple expansion? What’s the probability?

Target Price:

Your target price is the product of a forecasted earnings metric multiplied by the expected multiple. This multiple can be P/E, EV/EBITDA, EV/Sales, FCF/Market Cap, or any other reasonable metric. Some metrics are industry-specific and more valuable for those industries than the aforementioned general ones.

Regardless, if you provide a target price, you need to explain how you arrived at this target, and the stages of your thought process to get there. for example, if you claim that a stock is going to have +50% upside, but feel they won’t beat consensus earnings, then you are calling for +50% multiple expansion, pure and simple.

Although not ideal, stocks in industries with bleak macroeconomic outlooks can still be good investments. It is important to understand what is taking place at the company level, sub-sector level, industry level, and national level. This approach will help you determine whether you are investing in a “good house in a bad neighborhood.”

• How has the stock performed heading into the catalyst, i.e, before you put the trade on? If it has already gone up 10% recently, for instance, it will be much harder to outperform on the catalyst.
• How crowded is the trade? Are a lot of hedge funds already invested in the name? One easy way to determine this is to speak to a sell-side research analyst and ask whether they are getting a lot of calls from other funds regarding the company.
• Is the general public bullish or bearish? If you are researching a short pitch, it is key to check for existing short interest (SI function on Bloomberg). If it is a long, you should review the list of major holders of the stock (HDS function on Bloomberg). If the top holders are several hedge funds, then the stock pitch is likely overcrowded and may not be actionable. One of the biggest mistakes in a hedge fund interview is to pitch a stock that every hedge fund has already heard of and evaluated.

Crowded names can still work, but investors must tread lightly. When the market sells off or there is a change in sentiment, crowded names typically perform the worst. To check this, there is an index on Bloomberg of high hedge fund ownership stocks; you can use it to see whether your idea is on that list to make sure it isn’t already an overcrowded trade idea.

Other technical tools that can help evaluate the setup for a stock include RSI (relative strength index) and moving averages. The RSI is a momentum indicator—below 30 is considered oversold and above 70 is considered overbought.

Ideally, you want a stock that has recently underperformed its peers, is lightly owned by hedge funds, and is heading into a catalyst that you think will have a positive surprise . By contrast, a crowded name that has already outperformed based on the expectation of a positive catalyst will likely get a limited reaction if and when the catalyst does occur. For example, it is very common for companies to beat earnings expectations but not to experience an increase in their stock prices, because the general public or hedge funds are already expecting the earnings surprise. In today’s hyper-competitive market, one needs a truly different variant perception in order to outperform the market.

Other Investing Thoughts

• What constitutes a good investment idea? What does that phrase even mean? The answer is that it means something different to every person–that is what provides opportunities in a market. That is why some investors own a stock and others short it. If everyone agreed on what makes a good investment then everyone would own the same stocks.
• How much should you make per idea? Investors do not even agree on this principle. Developing frameworks for investing will help you follow a set of guidelines that you can refine over the years through experience, and as part of that, you will learn to determine what the expected profit and acceptable risk for a particular investment are.

Value Investing Framework

• Benjamin Graham defined the first basic tenant of value investing as follows: when the price of a security diverges from its intrinsic value (its corresponding cash flows), a value investor should work to exploit that divergence.
• The second basic tenant of value investing is the margin of safety: a security should preferably be purchased at a deep discount to its intrinsic value, to help limit the amount of downside risk the investment has.

Street of Walls Investing Framework

• It is very easy to get ideas from other investment professionals, but it will be very obvious in your pitch whether you have done the analytic work yourself or not.
• This is typically discovered when you are questioned on your assumptions in the model. If you built the model yourself, you can likely defend the assumptions much more intelligently.

Industry Analysis

Market size and growth.

Study the market size and growth of the company’s core industry. Even though you may be studying the beverage industry, the manufacturing companies and distribution companies have very different dynamics. The beverage manufacturers may not be growing much faster than CPI, but the distributors may be going through a massive consolidation period and therefore have earnings that are growing at a much faster pace.

Historical Industry Returns

A security may be cheap and look attractive, but that may be because the returns of the company and the industry are not attractive. For example, the stock Owens Corning (OC) traded at 8x earnings for a long time. This sounds inexpensive, but it was ultimately justified because operating margins were in the single digits. Eventually, however, industry did consolidate and operating margins expanded to 20%. Thereafter, the company’s earnings multiple expanded into the low teens.

Unit Economics

Most bottom-up, fundamental analysis is used to study the unit economics of a company. For example, what does it cost to make and sell one unit of output, and what is the profit on that unit? What are the pricing and volume trends? It is important to understand the value drivers clearly in order to build a detailed operating model for your pitch.

Competitive Positioning

• Do certain companies control industry pricing?
• How sustainable is the company’s competitive advantage?
• Are there high or low switching costs?
• Does branding matter
• Are there regulatory protections, such as tariffs?
• What important considerations are there with respect to the company’s customers and suppliers?

Cyclical / Seasonal

An industry may be in a strong growth period and look very attractive, but it may also be at the peak of a cycle that is possibly about to turn substantially negative. For example, the housing industry looked extremely attractive in the early 2000s, but crashed and was extremely unattractive into the late 2000s and beyond. This is due to both an economic downturn and a systematic overbuilding of homes that collapsed in the middle of the decade. In addition to the economic/business cycle, certain industries have drivers of cyclicality that are very specific. One example of this is the Oil & Gas industry—the price of oil alone can have a huge impact on a Oil & Gas company’s earnings potential.

It is also important to understand the seasonality of the business. Retailers tend to sell more product during the fourth quarter of the year, because of the holiday shopping season. Therefore, it may be wrong to extrapolate a trend in March and April if the majority of the company’s sales take place in the later months.

Investment Considerations

When you start working for a hedge fund you will quickly learn that each fund has their own unique investment style. Some hedge funds simply will not invest in companies that have weak management teams. It does not matter how attractive the opportunity or valuation is—the fund simply won’t invest. This principle often results from an investor getting burned from a bad management decision, such as a bad acquisition, or a focus on short-term earnings at the expense of long-term objectives. After gaining experience analyzing companies, you will eventually develop your own philosophy. Still, bear in mind that other investors may have an opinion on this topic that differs from yours, and you need to consider the philosophies of your teammates when evaluating an investment idea.

In studying management teams, you should look at the management team’s track record and understand both the buy-side and sell-side opinion on the management team. Study the company’s internal philosophy: how do they allocate capital? Is the current management team following what the company has always done? Another key to understanding how a management team will probably act is to study how the members are compensated. Is their compensation tied to revenue or earnings, return on capital, or some other metric? How much stock does the management team currently own? How much risk are they taking? Are they buying or selling stock? How many options do they have outstanding?

Study both relative and absolute valuation. A stock may appear cheap when compared to a stock in another sector, but very expensive against its peers. Thus, different investment situations call for different valuation metrics to be used.

One example of this principle is that it is completely unhelpful to use P/E if the company has no earnings (or negative earnings). You should also study the rate of growth of the earnings metric you chose. A company may look expensive at 30x earnings, but if it is doubling revenue every year and tripling earnings, it may not be so expensive after all. In fact, if you believe that this trend can continue, it may be an excellent long investment idea.

• Is there a difference between your earnings estimates and those of the street?
• If not, is your thesis really interesting, or is it just a “consensus trade”?
• What are the key events that the street will care about? Is it an earnings release, a new product release, or something more unusual?
• Does the street care about what happens next quarter or are they more focused on the potential signing of a big contract that could take place at any time?

Donald Rumsfeld once said there are “Known unknowns and unknown unknowns.” Some risks are riskier than others. How does the company control for this? How do you as the investor assess the downside risk from this?

• What has to happen for the downside case to play out?
• What has to happen in order to lose some benchmark amount, say 20% or more?
• If that event plays out, what will happen to the multiple? Will it go down or actually expand?
• All in all, what is the probability of a downside event and what is the maximum potential loss you might face in such a scenario?

Catalysts are extremely important in identifying when you are going to “get paid.” This is a crucial factor in sizing positions. If a catalyst is expected to take place in the near future, you probably want to have your position fully sized immediately. If not, it may make sense to taper into a position.

Framework for Investing: Large Market Movements

Rising Markets: The typical reaction to a rising stock price is to “chase” the returns. That means when a stock continuously goes up, day after day, the investor feels like he or she is missing an opportunity, and will be inclined to buy the stock. This pile-on mentality causes more investors to become a part of the action. This is a classic, human reaction to a strongly outperforming stock, and it can often lead to poor returns due to an undisciplined approach and the fickle nature of the market.

The same thing can happen when a stock continues to drop in price. Investors tend to panic and sell at exactly the worst time. During the heat of the battle, people tend to get emotional and sell their best stocks out of fear.

• Tell yourself it is normal to react this way when you are losing a lot of money. Fear is normal: both the fear of missing an opportunity and the fear of continuing to lose more money.
• Ask yourself, “Has my investment thesis changed?” If it has, then sell, but if it has not, then ignore your fears and hold the position.
• Have strict target prices in place. This will help you exit a position once your target has been achieved, and thereby avoid the trap of trying to “ride a winner.”

Here is a related excerpt written by Benjamin Graham, from The Intelligent Investor:

• “Imagine that in some private business you own a small share that costs you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects, as you know them. Often, on the other hand, the value he proposes seems to you a little short of silly.
• If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.”

Trading Considerations

The liquidity of a single stock is not a reason for a fundamental investor to buy a stock, but it can definitely be a reason for an investor not to buy a stock. The less liquid a stock is, the riskier the position becomes, as it is difficult to exit an illiquid position—especially during turbulent market conditions, when liquidity is often demanded.

In order to determine how liquid a stock is, you need to see how many shares trade on a regular basis. For example, if the average daily volume of a $10 stock is 1 million shares, then the stock trades $10 million per day. If you have a $1 million hedge fund, and you want to take a 10% position, you will need to buy $100,000 worth of stock, or 10,000 shares. If you wanted to buy all of that stock in 1 day you could, as you would only account for 1% of the daily volume ($100,000 in stock to be purchased ÷ $10,000,000 daily volume = 1%). A reasonable rule of thumb is that you do not want to account for more than 10-15% of a stock’s daily trading volume if you do not want to influence its price. So in this example, you could buy up to $1,500,000 worth of stock per day without moving the share price. If you were to buy $2,000,000 of stock in 1 day, or 20% of the daily volume, you would likely cause the stock price to increase (at least temporarily). If your desired position is much larger, then it could take many days to accumulate the desired position – and similarly, it could take a long time to unwind the position when you want to exit. This makes the investment much more risky.

Therefore, a stock may have fantastic management, excellent earnings growth, and an attractive price, but if there is no liquidity you probably simply cannot buy it.

Shareholder Base

You may think that you have found a gem: a rare and precious investment opportunity that no other hedge fund is talking about. Fortunately, that notion is relatively easy to confirm or disprove. To check and see whether other sophisticated investors are involved in the company you’re researching, you can pull up the company’s quarterly holdings report on Bloomberg and see who the largest shareholders are.

For example, suppose that W.R. Grace (GRA) offers an exciting investment opportunity, according to your analysis. However, looking at the holders list, you determine that other hedge funds are well aware of this opportunity, as the top shareholders include large hedge funds such as Lone Pine, York Capital, TPG Axon, and Hound Partners.

It may not be a bad thing that other hedge funds are involved. You will probably be invested in a good company in this case, as large hedge funds rarely get involved in unsound investment ideas. That being said, crowded trades can, again, be very risky. First, if the market is already anticipating good news, it may be that the good news is already baked into the stock price. Second, if bad news comes out, then everyone will likely be forced to run for the exits at the same time. This will lead to adverse price movement that could destroy your holding.

Hedge funds in general tend to be short-term focused, so it could turn into a situation where one investor exits swiftly and triggers a domino-effect panic, crushing other investors in the wake.

Looking at charts can be very deceiving and can create misleading signals. For example, the stock chart below shows a quickly rising stock price, but that does not mean it is expensive. It may be cheap relative to its own history, the rest of the sector, or the market as a whole. The entire stock market might have been going up rapidly, or the sector as a whole might have had a big rally, and relative to the sector the stock underperformed, so it may actually be cheap on a relative basis.

You may also want to compare several valuation metrics simultaneously. For example, a company may look expensive on a Price/Earnings basis but cheap on an EV/EBITDA basis.

In the graph below, you can see that Factset Research Systems (FDS) is trading at 20x P/E. Relative to the market that is high, but relative to its own history, that is a normal trading ratio.

Business Model Questions

It is just as important to understand the industry in which a company operates as it is to understand the company itself. For example, if you are studying a homebuilder, it is important to understand the companies the homebuilders buy supplies from. If the building products companies are raising their prices and the homebuilder cannot raise prices, the builders are going to see their margins compress. Therefore, it is important to scan what is happening with related companies across the industry and sector to get a sense of the overall dynamic affecting the company’s earnings potential.

Homebuilding Industry: Related Participants

• Building Materials – USG, EXP, VMC, SHW
• Home Builders – LEN, DHI, KBH
• Building Products – WHR, MAS
• Furniture – TPX, LZB, ETH
• Extensions – Lawn care – SMG
• Mortgage Originator – BAC, C
• Insurance Provider – PRU, MET

A change by the mortgage originator will likely have an impact on the entire industry. If Bank of America (BAC) tightens its origination standards, then people will buy fewer homes; homebuilders will buy less carpet to go inside the homes; fewer beds will be sold; etc. Therefore, before considering an investment in a homebuilder or related entity, it would behoove you to perform checks to see what else is occurring in related industries and sectors across the value chain.

Business Model Advantages

Barriers to entry.

Companies with barriers to entry have a huge advantage relative to companies that do not. These barriers can occur for a variety of reasons, but some of the most common include economies of scale, substantial investment requirements, technological innovation, favorable government regulation, and networking effects. eBay, for example, is an extremely difficult company to compete against, because the company has established a formidable position as the largest Internet-based auction site available. Both buyers and sellers are unlikely to go to other sites, because both realize that eBay offers more individuals on the other side of the aisle to transact with. This makes it hard for new auction companies to compete with eBay effectively.

Companies in most industries will claim that they have high barriers to entry, but time will often show that a company earning significantly higher than its cost of capital will attract competitors. Put simply, if the company is earning outsized returns on the capital it invests, then it will attract competitor investment seeking to earn comparable returns. This competitive investment will result in increased production and sales competition, and diminished profit-earning potential will surely follow in the future.

Cost Advantages

The low-cost producer can have a huge advantage over its competition. In industries with large legacy assets, such as cement or coal production, the players with the newest assets are typically the lowest cost providers, and that allows for lower pricing often results in greater market share.

Alternatively, there is also a learning curve that can create the reverse effect, wherein the older industry participants have lower costs as the newer players are still “figuring it out.”

Customer Habits

Repeat purchase items, such as paper or office supplies, can create a strong advantage for the producer. The more entrenched companies become within their customer bases, the higher the switching costs for those customers. For example, a large technology roll-out may effectively lock a customer in to the provider’s products, as it costs too much to execute a complete technology overhaul to switch to a different vendor.

Economies of Scale

Companies with large fixed costs need scale in order to make a profit. The larger the fixed costs, the larger the scale needs to be. Incremental margins can be very high once a company crosses a certain threshold and is able to sufficiently leverage its cost base. This can make a company highly attractive and cause a company to trade at a high multiple, once the threshold production level has been achieved. This phenomenon is sometimes referred to as “operating leverage.”

Oligopolies, or Monopolistic Competition

Functioning oligopolies can act similar to monopolies, in terms of locking in outsized profit margins from its business. These situations should not take place for long according to basic economic theory, but they can and quite often do. For example, the roofing industry has greatly consolidated in recent years, so that four players currently control 80% of the roofing shingle manufacturing market. When one of the four manufacturers raises its prices, the other three can easily follow. For the past five years, none of the players has broken from the pack and tried to steal market share from the other three by offering a lower price. As a result, the industry has seen its operating margins grow from 8% to 20% in recent years. Whether this increase in margin is sustainable over the long term remains to be seen.

Expected Return

What is a “good” return for a portfolio? How do you know? What is a good return for an individual investment?

The Academic Approach

Expected Rate of Return = Risk-free return + Beta × (Expected Market Return – Risk-free return)

This is the equation from the Capital Asset Pricing Model (CAPM), which you will learn in school—but try pitching this to a portfolio manager at a hedge fund. He or she will likely tell you to get lost!

Theoretically this makes perfect sense, but most hedge funds don’t use this as a hurdle rate. Most funds target a 20% return—though very few are capable of actually achieving that return consistently.

The Practical Hedge Fund Approach

A more practical approach is to study what percentage of the time you will make money and lose money on your investments. From there, you need to understand how much you make when you are right and how much you lose when you are wrong. Here is an example of this framework:

As you can see:

Average Return per Idea = (% Right × Avg. Return When Right) + (% Wrong × Avg. Loss When Wrong)

% Right is often referred to as your “Hit Rate,” and Average Return When Right is often referred to as your “Slugging Rate.” The magnitude of your wins relative to that of your losses is referred to as your “Win/Loss Ratio.”

The best analysts are right about 60% of the time. Most people think they will be right closer to 75%, but the sad truth is that most investors will not do much better than 50%. You can still make money being right only 50% of the time, but you have to be very disciplined about cutting your losses. That is why maintaining a 2-to-1 Win/Loss ratio is so important.

Here is what is so troubling about the example given above: a fantastic analyst who is right 60% of the time, makes a 30% return when right, and maintains a 2-to-1 Win/Loss ratio, will only earn an average return of 12% per idea. However, as we noted, most hedge funds try to earn 20%, so how can they do this?

One possible solution is to employ leverage, but from an analyst’s perspective, he/she typically does not have control over this. So how can an analyst generate a higher return per idea?

A higher Hit Rate is very difficult to achieve. Also, achieving greater than a 2-to-1 Win/Loss ratio is also not realistic, as it would require tighter stop-loss controls that may result in the premature exit of lucrative investments simply because they took an initial “hit” before panning out.

Therefore the only real area to control is the Slugging Rate. If this is the lever, then the analyst cannot afford to invest in stocks that will only earn 10%, 20%, or even 30%. It is just not a high enough annualized return. At a 40% Slugging Rate, the analyst can get closer to the elusive 20% total return hurdle.

40% thus tends to be a “sweet spot” for many hedge fund analysts, as a minimum hurdle rate of return for putting on a position. If the investment only has a 6-month duration, then the return only needs to be 20%, which is roughly 40% on an annualized basis.

Searching for 40% Returns

What needs to happen in order for a stock price to increase? Either earnings need to expand, or the multiple needs to expand, or a combination of the two. The first step is to look at where the sell-side estimates are for the current year and two years into the future. If AAPL is trading at $611 today and is expected to earn $54 in 2013 and $63 in 2014, it is trading at 11x P/E and 10x P/E in 2013 and 2014. In order for the stock to reach $855, or 40% higher, you might project earnings to be 20% higher than the street in 2013 at ~$65, and for the multiple to expand by 20% to ~13x. Or, you might predict stronger earnings growth and less multiple expansion, or vice versa.

As you can see, it pays to think through different scenarios needed to achieve your target return.

A common mistake analysts make is to say that they believe a stock will appreciate by an amount but have earnings expectations that equal or are very similar to those of sell-side earnings estimates. That means that for the investment thesis to prove correct, the stock must increase entirely due to multiple expansion. That is generally viewed as a “low-quality” thesis, as expansion in a valuation multiple is more difficult to predict and gain confidence in than is growth in earnings.

UnitedHealth Group: The 2025 Investment Thesis

• UnitedHealth Group is positioned as a leader in the health services industry despite setbacks from a cyberattack and industry headwinds in 2024.
• The company's 2025 investment thesis is optimistic, with expectations of market share gains, margin improvements, and recovery for Optum Insight.
• UNH is expected to outperform in 2025, with the potential for revenue growth above estimates, leading to a price target of $640 per share.

JHVEPhoto/iStock Editorial via Getty Images

In a year defined by headwinds for the health services industry and significant setbacks caused by a cyberattack, UnitedHealth Group Incorporated ( NYSE: UNH ) is showing why it's the one and true leader in the space.

As we're getting closer to 2025, I think the setup for UNH is becoming increasingly attractive.

Following the recent upswing, it's time to look ahead and discuss our 2025 investment thesis.

Nothing Easy In 2024

I think it's safe to say that 2024 has been (and still is) as far from smooth sailing as it can be.

As we've discussed extensively in my previous articles , five key forces are pressuring the industry: (1) Increasing utilization trends, helped by pent-up demand from COVID-19; (2) Misalignment between CMS rates and said utilization trend, pressuring medical care ratios, primarily in Medicare and Medicaid; (3) Medicaid redeterminations, as members joined under the looser COVID-19 criteria are losing eligibility; (4) Rising competitive pressure, as aggressive pricing and benefits from companies like CVS Health Corporation ( CVS ) and Humana Inc. ( HUM ) results in either membership losses or lower margins; (5) Regulatory scrutiny, specifically on PBMs.

On top of that, Optum's Change unit suffered from a major cyberattack, which is garnering management's focus, costing a lot of resources, and putting a halt to several of the company's plans. In addition, UNH is going through the divestiture of its international businesses.

Despite all of the above, UNH is second only to The Cigna Group ( CI ) on the yearly chart, with the latter benefitting from lower exposure to Medicare and Medicaid, which are the key headwind segments for the industry.

I think it's safe to say, it can only get better from here, right? So let's dive into our 2025 investment thesis.

UnitedHealth Group 2025 Investment Thesis

UnitedHealth Group has been a market-beating investment for the past decade, driven by consistent double-digit growth and market share gains.

The underlying driver is the secular growth in U.S. health expenditures. UnitedHealth, with its diversified divisions across key healthcare services segments, is capturing a meaningful portion of that growth trend and shall continue to do so.

While that is the basis of my long-term investment thesis in UNH, I believe that 2025 is shaping up to be particularly positive for UNH due to lower competitive pressures, expected recovery in Optum Insight, and easing industry headwinds.

Easing Competitive Pressures Should Result In Market Share Gains & Margin Improvements

In the past couple of years, we've seen competitors like CVS trying to replicate UnitedHealth's formula by acquiring care providers and care enablers, as well as trying to accelerate growth in insurance members through aggressive pricing and benefits.

On paper, this seemed like a great plan, and I too thought this would work. As it turns out, however, operating a powerhouse like UNH is extremely, extremely difficult. It requires best-in-class proficiency across every pillar of the healthcare chain, as well as decades of learning and data.

Perhaps the clearest demonstration of the difference in management expertise is that UNH maintained its initial guidance for the year (and effectively raised it). Meanwhile, many of its peers had to decrease their guidance multiple times as they continued to encounter "unexpected" pressures from utilization and rates. That is, despite all the company-specific problems, which primarily include the cyberattack.

As a result of their struggles, competitors are forced to change their strategy. Here are a few quotes from recent conferences:

Karen Lynch, CVS President and CEO, at Bernstein's recent conference:

Our sole goal is margin recovery. So one of a couple of things that we've done is we have reduced benefits. We said we were going to exit counties. We are going to, in some counties, pull products and refile. And then, we took a view that the elevated trends will continue in 2025. So we've taken the entire kind of organization to look around the operations, and then we took an intense review of our pricing.

James Rechtin, Humana President and CEO, Q2 Earnings Call:

If there's a place that we're going to have to be more disciplined over the coming years, it's really in how we're measuring and evaluating the return on the expenses, whether it's capital or whether it's operating expense that we have in any given year. So that we're optimizing those decisions and then making sure that we've got the processes, that we're not just operating with discipline in one year period of time, but we're driving the accountability over years two, three, four and five that go back to that investment you made in year one.

I think this paints a clear picture. Both companies were too aggressive in their assumptions, either when assuming utilization trends, care costs, or CMS rate increases, and that might have resulted in membership gains, but those are unprofitable membership gains.

Created by the author using data from UnitedHealth Group financial reports.

The crucial thing to understand here is that UNH continued to gain members while protecting margins, and in 2025, while its peers are going to have to cut benefits and raise prices, UNH will be able to gain even more market share.

In the words of John Rex, UNH's CFO:

You can expect us to continue to prioritize balanced and durable performance over transitory market share gains.

Recovery Year For Optum Insight

Optum Insight is the group's enablement arm. It has a diversified portfolio of businesses in payments, analytics, and other IT services to healthcare institutions and professionals. One of those businesses is Change, which suffered from the cyberattack.

UNH has a payer-agnostic strategy, meaning each of its divisions and their separate subdivisions are operating independently with no preference for each other. Still, there's significant integration and synergies between them, and when a big part of the system, in Change, suffers, they all do.

Accordingly, 2024 is shaping up to be a low point for Optum in terms of revenue growth, margins, and backlog buildup. In the funny game of comps, one bad year is the next year's tailwind.

More fundamentally, I expect that the new and improved Optum, following the attack, will have a meaningful runway for growth, especially in 2025, with the industry becoming increasingly digital and UNH's top leadership giving a lot of their focus to the division.

Normalized Utilization Rates & Improved Medical Care Ratios

Fingers crossed, but it seems like 2025 is set to be the first truly normal year for the industry since 2019. In 2020-2022, we had Covid. Then, in 2023-2024, the industry is dealing with post-Covid repercussions, which we've talked about extensively already.

With competitive pressures easing and pent-up utilization from Covid finally normalizing, I expect a much more normalized year in terms of MCRs.

I'm not expecting MCR to drop back to 2019 levels so quickly, but I think a gradual improvement from recent highs is a reasonable outlook. For context, a 1% improvement equals over $3 billion in gross profit.

UnitedHealth has a very steady and predictable trading range. When things are bad, it can get to as low as 16-18 times forward earnings. When things are good, it can get to as high as 22. So, a fair multiple, in my view, is 20x.

Currently, UNH is trading at 20.4 times forward earnings and 18.2 times 2025 earnings. Applying a fair multiple on 2025 estimates already gets us to nearly 10% upside by early 2025.

On top of that, I see significant room to beat 2025 estimates. Based on what we discussed, I expect UNH to achieve revenue growth above the current 7.5% estimate, as well as drive margin expansion. The last time UNH didn't beat estimates was in 2008, and I don't see that record stopping next year.

I see them earning $32.00 per share, which brings me to a price target of $640 by early 2025. I also think that the multiple could go even higher, considering the favorable outlook in the near-to-mid-term.

When the industry is good, everybody can win. When things get tougher, that's when top-quality companies like UnitedHealth Group come to shine.

As we're getting closer to wrapping up 2024, a year full of headwinds, I encourage investors to start looking ahead.

I expect 2025 to be an extraordinary year for UNH, with market share gains, growth acceleration, and margin expansion.

Therefore, I reiterate a 'Buy' rating, with a price target of $640 a share.

This article was written by

Analyst’s Disclosure: I/we have a beneficial long position in the shares of UNH either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

About unh stock.

More on UNH

Related stocks.

Trending Analysis

Trending news.