What does an investment thesis mean?

An investment thesis is a well-thought-out argument for a particular investment strategy based on study and analysis. Businesses and individual investors frequently write investment theses for them. Analysts or other financial experts may write formal papers like these to give to clients.

How to Understand the Investment Thesis

As was already said, an investment thesis is a piece of writing that details a possible investment. A financial or investment professional generally writes a proposal based on research and analysis to give information about investments and sell investment ideas. Sometimes, the investor will write their investment thesis. Venture capitalists and private equity companies tend to do this.

This thesis can be used to help you make an important choice. A thesis can help investors and businesses decide whether to invest in a sure thing, like a stock or buy another business. It can also be used to contemplate why a choice was made in the first place and assess whether it was the correct one. Writing things down can make a big difference in the direction of an investment.

The Harvard Business School has a guide called “Writing a Credible Investment Thesis.”

Take the example of an investor who buys a stock because they think it is cheap. The purchaser plans to hold on to the stock for three years when its price will rise to reflect its worth. After that, the stock will be sold for more than it costs. After a year, both the stock market and the investor’s pick go down. The investor thinks back to the investment thesis and trusts its results are correct, so they continue holding the stock.

It’s a good plan as long as something completely unexpected and not part of the investment theory doesn’t happen. Two examples are the Great Recession of 2007–2008 and the Brexit vote that caused the UK to leave the European Union (EU) in 2016. These events were a complete surprise and could change someone’s business thesis.

Stick with your investment theory through good times and bad.

Unique Things to Think About

An investment thesis is usually written down in a structured way, but there are no set rules for what it should contain. Some need quick action and aren’t very complicated. When an investment thesis is about a big trend, like a global macro viewpoint, it may have a lot of research and even some marketing materials that can be used to show potential investors.

These days, portfolio management is a science, just like medicine or engineering. As in those other fields, significant steps forward in fundamental theory, technology, and market structures always lead to better goods and better ways of doing things as a professional. Many people now agree that the business thesis is more robust thanks to widely accepted qualitative and quantitative methods.

Like any thesis, an idea may come up, but it takes careful study to turn it from a vague idea to a suggestion for what to do. This is like a game plan in the world of investing.

What Should Be in an Investment Thesis?

This paper doesn’t have a set standard, but some parts are always included. Always remember that an investment thesis is usually a plan based on study and research. So, it’s meant to be a guide about whether or not an investment will work.

This is what most business theses include, but it’s not limited to:

• This is the investment in question
• The goal of the business
• whether the plan will work out, including any trends that support it
• Possible problems and dangers that might come with the investment
• costs and possible returns, as well as any losses that could happen
• Some theses also try to answer some critical questions, such as:
• If so, does the investment help reach the goal(s)?
• What might go wrong?
• What do the business records say?
• How much growth do you think this business will have?

Putting everything down on paper can help buyers make better choices. For example, a thesis can help a company’s management team decide if they want to buy a competitor. The thesis might show if the acquirer and the target have the same goals or if they might find growth opportunities in the market.

Remember that the difficulty level of an investment thesis varies depending on the type of investor and the type of investment. So, an investment thesis for a company that wants to buy a competitor might be longer and more involved than one for an individual investor who wants to build a portfolio of investments.

Different Types of Investment Theses

Investment firms and portfolio managers often put details about their investment thesis on their websites. These are just two examples.

MF Morgan Stanley

Morgan Stanley (MS) is one of the world’s biggest and best banking companies. It helps people handle their investments, do investment banking, buy and sell securities, and manage their wealth. The company says its business process has five steps: coming up with ideas, judging the quality of the ideas, valuing them, managing risks, and putting together a portfolio.

• As part of its quality control process, the company tries to answer three questions when it comes to writing its business thesis:
• “Is the company a disruptor or does it avoid change that could be disruptive?”
• Does the business show strong finances by having high returns on spent capital, high margins, good cash flow, low capital intensity, and low leverage?
• Are there social or environmental costs that the company doesn’t have to pay for, or are there risks to the company’s leadership and finances that could change the investment thesis?”

Smart Ventures

Venture capital firms like Connetic Adventures put money into new businesses in their early stages. The company builds its business thesis with three pillars with data. The company’s blog says that its venture capital investment approach was based on three pillars or principles. Some of these are follow-on, value, and variety, each with pros and cons.

Why is it essential to have an investment thesis?

An investment thesis is a written argument or research-based explanation of why a business or owner should invest. Sometimes, it can also help you figure out if the investment was a good one or not. No matter the reason, an investment thesis helps buyers decide if they want to put their money into a particular investment. In this written record, you can learn about the investment’s purpose, any costs that come with it, its possible returns, and any risks and losses that could happen.

Someone who wants to write an investment thesis.

Anyone who wants to spend their money needs to have an investment thesis. A thesis can help an individual trader decide if they want to buy stock in a particular company and what strategy they should use, such as a buy-and-hold strategy or a strategy where they only hold the stock for a short time. A business can make its investment thesis to help it decide whether it should buy another business or grow.

How do you write a thesis about investments?

Writing down your investing thesis is essential. If you want to make a better choice, seeing your plan in print can help. Ensure your business thesis is clear and to the point when writing it. Ensure you read up on the subject and include any numbers and facts to help you decide. List your goals, the good things that could happen, and any risks you might face. A few essential questions you should ask and answer are: Does the investment fit your investing goals? What could go wrong if you go through with the deal?

Conclusion

• An investment thesis is a piece of writing that suggests a new investment after researching it and figuring out how much money it could make.
• Individual buyers can use this method to look into investments and choose ones that meet their needs.
• The business thesis is how people who work in finance sell their ideas.