Investment Thesis For Stocks

Write an investment thesis for every stock you buy

You should write an investment thesis for any stock or share you buy to fit into an A4 sheet giving your reasons for purchasing the stock.

Anthony Bolton, the legendary Fidelity stock market investor and fund manager advises that every stock you own should have an investment thesis. Over 25 years he delivered a market-beating return of 20% in his Fidelity Special Situations Fund. So we can learn from him.

Before purchasing a stock, the smart investor should develop and write down an investment thesis for buying the stock. You should summarise in a few sentences your reasons for purchasing that particular stock. 

This will be similar to the Peter Lynch’s “two-minute drill”. Peter Lynch, another Fidelity legend who grew the Magellan Fund at a compound 29% rate of return from 1977 to 1990, said that he likes to give a two-minute monologue that even a child could understand which covers the reasons for his interest in the stock, what has to happen for the company to succeed and any pitfalls.

Equally important to the positive aspects of the stock, is to write down what factors may make it a bad stock (the counter thesis). 

The thesis should be re-visited from time to time and retested to ensure that the qualities you recorded remain intact.

Having researched a company, the smart investor should be able to write an investment thesis on a single A4 sheet of paper.

What are the key factors to consider?

—–> the quality of the business
—–>the quality of management
—–> the key valuation and financial strength metrics.

—–AND

—–>Always include the date the thesis was written as a future reference.

—–>Show the maximum price you will be prepared to pay for the shares.

These will enable an investment thesis to be drafted in an objective manner

Learn fundamental stock analysis, valuation and how to write an investment thesis for every stock you own

What questions are you looking to answer in writing an investment thesis for a stock?

…..is the management strong, credible and with interests aligned with those of shareholders? How much stake do they have in the business?

…..what is the the quality of the business franchise? In what business sector does it operate? Who are the competitors? What competitive advantages does it have?

…..what are the key financial ratios? Is the company financially strong with little or no debt? What is the cash position? As Anthony Bolton would say, ‘if in doubt about how a company is doing, follow the cash’. Beware of highly indebted businesses who are particularly exposed to company specific or economic downturns. 

…..what are the key valuation ratios? At what price is the stock currently selling in relation to current earnings and historical mean?

…..what are the prospects for the company? Could it be involved in mergers and acquisitions? This should not necessarily be a reason to purchase a stock but may add to its attraction.

Investing in individual stocks can be risky but you can build a margin of safety by doing some homework on the stock, removing all emotions in your analysis and writing an objective summary. With practice a thesis can be drafted in 20-30 minutes. Keep the length as much as possible to a single A4 page. 

When buying a stock, remember Warren Buffet’s advice to think of a stock as a small part of a business.

—–>>Will you buy a business without due diligence and research?

—–>>Will you not look at the books, examine the economic strength of the business, its cash generating qualities, debt, long term prospects and management?

Use the same mindset when buying a share.

—–>>Do not purchase a stock on impulse or based on a tip.

—–>>use solid fundamental criteria from your investment thesis. 

The investment thesis should be re-CHECKED from time to time.

—–>>Have the company fundamentals changed?

—–>>Is the balance sheet still strong?

—–>>Is there a major threat to the business, for example from litigation?

As long as the fundamentals and investment thesis remain INTACT, you stay invested.

On the contrary…..

………..if the fundamentals have seriously deteriorated and especially if there is a significant threat to the company’s survival and viability, the smart investor should dispose of the shares even if doing so will incur a loss. The money is better deployed in a more attractive business.

The smart investor should maintain a list of companies with a strong investment thesis that may be possible future ‘buys’ and monitor them regularly. Keep a list of such quality companies. They may perhaps be overvalued at the time of your analysis. Buy keeping a close eye on them you can invest when the price falls to your buying range. Having an online portfolio of a potential “buy list” of shares is very useful in this respect. 

Read about this further in my book, ‘The Smart & Common Sense Investor’.

You can download a FREE PDF copy of an investment thesis I wrote for a company. It will show what parameters to employ in quick company analysis.

Chinedu Chiana

Chinedu Chiana is an Investor, Online Entrepreneur, Business & Financial Coach and Author of 'The Smart & Common Sense Investor'. He helps educate business owners and entrepreneurs on the skills and strategies to create, build and grow profitable online businesses. He reviews business software and digital marketing educational courses covering funnels, social media & email marketing, productivity, business automation and marketing advice.