What is an investment thesis?
Any successful business starts with a clear mission statement. Same goes for investing. When choosing an asset to put your cash into, you need to have a clear investment objective, also known as an investment thesis.
An investment thesis definition is as follows: analysis performed to evaluate the potential purchase of an asset, based on a set of investment criteria. In simpler terms, it is the belief that investors rely on when deciding which investments to buy or sell and how to treat them afterwards. It serves as a guide that you initially establish, helping to guide further investment decisions.
An investment thesis determines which initiatives an investor should participate in and which are better to avoid. This analysis helps you to set your investment goals. A good investment thesis can be the basis for a profitable portfolio, while a misguided investment thesis can lead to weak gains or even losses.
What you need to know about an investment thesis...
The main goal of an investment thesis is to turn an abstract concept into a functional investment strategy. It helps investors to assess possible investment ideas, guiding them through the options to choose the most suitable ones.
Just as markets continuously evolving, the ideas, techniques and strategies implemented by investment professionals do not stand still. In the past few decades, portfolio management has become a more science-based discipline, which considers developments and breakthroughs in basic theory, technology and market structure, resulting in improvements in professional practices. Therefore, the modern investment thesis is usually significantly backed up by quantitative and qualitative methods.
Typically, a savvy seller will get ahead of the process by preparing the investment thesis for the buyer by himself. As an example, even before a letter of intent is issued, private equity firms usually develop an investment thesis for every potential acquisition. It is usually done by presenting the future strategy of the company and its plans for the expansion and diversification of its services and products. The aim is to show potential buyers that the company knows how to generate high returns for its shareholders.
An investment thesis is typically done in a written form as a document or slide presentation. It is then presented to the buyer's investment committee to achieve deal approval. It gives the seller the opportunity to communicate the rationale behind the transaction.
Although an investment thesis is generally considered formal in nature, there are no universal standards to be applied when writing up the document. It can vary depending on the given situation. Some investment opportunities come with little time to take advantage, and therefore professionals have to act as fast as possible. In other scenarios, when it comes to bigger, global trends, an investment thesis may be well documented to include all the minutiae and specifications.
Remember that the principles of successful investing are quite simple. The hard part is to adhere to your initial plan through the ups and downs of the market. In this sense, an investment thesis can become your anchor, guiding you through the hardships.