An investment thesis is a crucial part of any sound investing approach. In simple terms an investment thesis can be defined as a qualitative and perhaps partially quantitative review of a particular company you’re going to own or invest in. So, you need to give quite solid reasons to justify your upcoming ownership of investment.
The given thesis helps investors to set realistic goals for their investments. Furthermore, it measures whether these objectives have been met or not. This thesis normally exists in a written form, however, even being just an idea it can’t be less effective. A properly composed investment thesis will serve a solid foundation for an extremely profitable portfolio, while a wrong thesis will most likely generate devastating losses.
Let’s assume an investor buys a stock based on his thesis that this particular stock is undervalued. Then the thesis suggests that the investor should hold this stock for a couple of years as a powerful surge of its value is getting closer. Exactly at this point, the investor should sell his stock to get his deserved revenue. That’s a simple example of aninvestment thesis.
Frankly speaking, there aren’t any specific outlines for this type of thesis. Nevertheless, we shouldn’t overlook a couple of must-have things. To be exact we should answer a slew of crucial questions. Let’s have a look at them:
Smart buyers always stand out by getting ahead of the process. They formulate a clear thesis for their investment and respectively win. In fact, not so much needs to be done to achieve the desired result. You need to present the future strategy of this particular company. Foresee how it grows and how it has its services and products diversified. It’s up to you to see predict whether this company will generate great return for its shareholders or not.
You should clearly understand the very essence of an investment thesis. It acts like a signal, pointing out to persuasive reasons to buy stocks of a certain company. If you intend to write this thesis just to acquire a must-have attribute of a serious entrepreneur or you simply fail to compose something really convincing and plausible, then you’d better avoid using this thesis in your commercial activity. You don’t want to stumble on an investing blunder, do you? On the contrary, if you’re able to clearly formulate persuasive reasons to own this particular stock, you’re most likely on the right path.
An investing thesis is an effective tool enabling you to control your emotional side when it comes to purchasing and selling shares. Writing down your reason for buying a share and saving it is an efficient way to keep yourself on track.
Unfortunately, in reality things often go in the wrong way, the way we do not expect. Fortunately, a good thesis helps investors to adapt to any changes in the market.
Well, let’s assume you bought a company being motivated by quite rational reasons, but after a while the stock price suddenly dropped. In this situation, inexperienced or unwise investors get impatient and dissatisfied with the progress their undertaking. As a result, they consider selling the stock and look for greener pastures. That’s the time, when your thesis will come in handy.
If you clearly see the logical reasons to purchase the stock, then you can also see if all or at least most of those reasons are in place. So, if they’re still in place, everything is OK, though your emotions try to take control of you. If the qualities fail to be in place or you consider your purchasing reasons illogical, you can sell the stock, as the company isn’t in line with your investing original logic.
As you see, writing down a thesis for your investment would be a good move for your financial well-being. Do it before investing in dividend stocks, for example. The thesis will help you to determine whether you need to invest in this particular company or not.
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