What Is an Investment Thesis?
An investment thesis is a reasoned argument for a particular investment strategy, backed up by research and analysis. In the financial world, an analyst may prepare a formal document outlining an investment thesis for presentation to potential investors or an investment committee.
- 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.
An investment thesis can help individual investors evaluate investment ideas and select the ones that can best help them meet their investment goals.
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.
Understanding the Investment Thesis
Most investment theses are in written form, and can be used to look back and analyze why a particular decision was made in the first place—and whether it was the right one.
Let's say an investor purchases a stock based on the investment thesis that the stock is undervalued. The thesis further 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 global financial crisis or the Brexit vote that forced Great Britain out of the European Union 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.
As markets ever evolve, so do the ideas and strategies investment professionals believe are best suited to take advantage of growth and value creation opportunities.
Documenting an Investment Thesis
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.
In the last few decades, portfolio management has become 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.