How To Form An Investing Thesis

November 28, 2022

An investing thesis is critical to making confident, informed investments. Here’s how to form one.

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Today we’ll explore why it's essential to have an investing thesis and how to form your own.

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How To Form An Investing Thesis

Highlights

  • A thesis provides reasons for investing in a company and can help an investor feel more comfortable owning the stock.

  • A thesis can also be used to decide when it’s time to sell.

  • After researching a company, formulating a thesis is one of the last things I do.

Why Form An Investing Thesis?

When I first started investing, I would buy stocks that other people were talking about and hope they go up so I can sell for a little bit of profit.

I used to buy stocks of companies and I had no idea what their products or business models were.

If my stocks took a hit I would panic sell.

These are terrible investing strategies.

I learned the hard way that just because a lot of people talk about a stock doesn’t mean it’s a good business to own. I had no idea what some of the companies I owned produced, and therefore I had no idea whether or not the company was performing well.

I was buying and selling based on hear say and the number on the screen. Not a good strategy.

I was uncomfortable with my holdings and I couldn’t hold for the long term to truly create wealth.

I soon learned that to become comfortable with my holdings and decide when a good time to buy or sell would be, I’d have to dig deep and research these companies. Part of researching is to find reasons for investing, and those reasons help make our thesis.

How Does A Thesis Help?

A thesis provides you with reasons for investing in a company. These reasons can be things like:

  • Competitive Advantages

  • Industry Changes

  • New Products

After you find your reasons for investing, you can decide whether or not you want to buy shares of that company. These reasons help you feel more comfortable owning the stock because you’ve done your research and know what to expect.

A thesis can also help you decide when to sell a stock. Personally, I don’t sell a stock unless something has disproved my thesis or the dividend gets cut. For example, if my thesis for investing in Apple revolved around the iPhone and Apple were to eliminate it, my thesis was disproven and I would sell.

Deciding if something has disproved your thesis enough to sell is a judgment call that’s entirely up to you.

For example, if part of my Starbucks investing thesis was that expansion into China will propel the company’s growth for the next few years and all of a sudden Starbucks pulls out of China, I’d have to reassess my position.

Will Starbucks continue to make coffee in other countries? Yes. Will they be able to make up lost revenue from China? Maybe. Is it bad enough news to make me sell the company? That’s the tough part I would have to decide.

How To Formulate A Thesis

Formulating a thesis is one of the last things I do after researching a company. I start by looking at a business and making sure it passes my basic checklist of criteria.

Then, I begin to conduct SWOT Analysis which analyzes the Strengths, Weaknesses, Opportunities and Threats to a business.

After that, I look at the parts of the business I believe will drive future growth. I try to pick at least 3 solid reasons as to why I believe a company is poised for success and then I can monitor the company closely to see if they’re still meeting my expectations in those areas.

This helps me separate a “bump in the road” from a potential fatal flaw in the business.

Examples Of My Theses

In my thesis for the company ASML, I cite how ASML is the only company that makes the machines used in advanced semiconductor production. That's a huge advantage over any competitor.

Union Pacific has the most extensive rail network in the U.S. and in the U.S. rail networks are privatized and very costly to make. It also is the most efficient shipper of bulk goods like coal, grain, and fertilizer. I believe these competitive advantages will set them apart from competitors.

My thesis for investing in Air Products & Chemicals revolves around their current success in selling gases but also includes the worldwide shift to going green. This undeniable trend plays into my reason for investing.

Final Thoughts

I truly believe there is only one shortcut in life – learning from someone a couple of steps ahead of you. I've made the mistake of panic selling, buying without a thesis, and then wondering what I'm going to do when the stock draws down.

Today, I conduct thorough research and formulate a thesis before I buy any stock. I'm much more confident in my stock choices and I know why the stock should appreciate in value, rather than just hoping it'll be worth more than I paid.

It might be a good time with the market on this uptrend to assess your portfolio and trim any positions you're not confident in. Take a look at your holdings, decide why you hold each stock, and adjust accordingly.

I hope you can learn from my mistakes and become a more refined investor!

Memes Of The Week

Some people really play life on expert mode:

On a scale of 1-10, how good do you think spin cycle chicken tastes?

In case you wondered what my Thanksgiving dinners were like before I became a long term investor:

Sometimes I make memes too:

I've seen this so now you have to:

If you've been watching the 2022 World Cup, who are you cheering for? I'm cheering for my family's home country of Portugal.

Amazing to see Cristiano Ronaldo become the only man to score in FIVE World Cups!

This is just cool:

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Helpful Resources Are Here!

Don’t forget to check out my website full of awesome free resources to jumpstart your investing! 👇

Here’s my list of the best resources for financial freedom, enjoy!

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