An investment thesis is your gateway into a wide market filled with investment opportunities. With a properly grounded thesis, you are on the road to finding the best companies to invest in. By then you already defined your goals and did your research. But, before you put your plan into motion you should first critique your investment thesis. You should know how to critique your investment thesis so you do not miss out on some crucial steps, leading to errors in later decision-making.
For a start, you should clearly outline the thesis, and be sure that the thesis goals are achievable and measurable. Next, go through your market analysis, and check the current state of the market. Go over industry trends. Investigate one more time the company’s fundamentals, and identify potential risks. Identify the potential competitive advantages and crucial competitors.
Do not forget to check the current valuation of the investment and compare it with historical values. Also, reevaluate your exit strategy. Assess will under current conditions the investment go over better in the short or long term. But, this topic demands a focus on a deeper perspective that we will go through in this article. Stay with us, and you will understand the importance of writing and critiquing the investment thesis.
What Is Investment Thesis
An investment thesis is a group of backed arguments for using a particular investment strategy when making an investment decision. The data in the thesis is gathered through deep analysis of all key factors. Those include analyzing the company that is the potential investment, its competition, industry trends, and even regulatory changes.
Once the investor can confidently go through the information about the industry trends it can base its business model approach. Would this investment opportunity be a short or a long-term investment? Can a company make innovational breakthroughs that would create a competitor edge?
With data gathered from financial markets, industry trends, and competition you can better understand what the market needs. All these data should closer explain the potential investment, and even offer a chance to adapt your investment thesis in case of a market swing.
These factors are the key takes in every thesis and are drivers that are driving it. The thesis must explain what factors you identified when you chose the specific asset class or company to invest in. You want to explain why you think the target investment is a good investment opportunity.
Why Reviewing Your Investments Matters
Reviewing your investment is crucial for several reasons. An investment doesn’t work on the principle of fire-and-forget. Even an annual investment review is often not good enough. How often you will conduct an investment review depends on your investment goals, risk tolerance, and market volatility. Practice showed that quarterly reviews offered the best results. With this in mind, the dynamics of the market are constantly changing, and there are periods when your input would be crucial.
Checking The Performance And Relevance
The first factor you want to achieve by reviewing the investment is inspecting its performance and relevance. Is the current performance of the investment helping you in achieving actual investment goals? The key goal is a return that you predicted by the thesis. You should always be on top when checking the performance because you can make adjustments on the fly.
If you regularly check the performance of your investment portfolio you can identify underperforming assets. Some you can adjust and still get returns, but some are eventually dead wood. By regularly checking the portfolio you can adjust asset allocation, and increase return on assets.
Also, your investment goals can change in your life. In one moment, long-term investing was fulfilling your needs. But, that can change and you may want or need to switch to a more aggressive short-term investing approach. In that case, a portfolio review process is essential, and with it, you can find a way to shift your investment focus.
Assessing Portfolio Risk
The second major reason you need to review your investment is to assess portfolio risk. Once you start creating your portfolio, you may have in mind one level of risk tolerance. But, that can also change over time. You should check the risk level of your portfolio and compare it with your current goals and views. Make a benchmark for risk, and go through your whole portfolio until you adjust it.
Risk can increase as a result of market changes. Sudden market fluctuations can make you shift your ideal asset allocation. In some cases individual securities can be under negative impact from several factors, resulting in lower returns, or even losses. With risk management assessment you can identify potential issues on time, and react to minimize or avoid losses.
Gains From Tax Optimization
Finally, with investment reviewing you can benefit from tax optimization. Specific investments come with tax advantages. You can shift your portfolio towards them in case you want to exploit these chances.
By identifying losing investments you can offload them on time and offset capital gains taxes. With timely reviews, you can also identify opportunities for tax-loss harvesting.
Benefits of Regular Portfolio Review
Some of the benefits of regular portfolio inspection, we already mentioned, and the crucial ones are:
- Tracking the progress of all investments
- Finding underperforming assets
- Making changes on time
- Monitoring risk exposure of all specific investments
- Reducing tax burdens and identifying chances for tax-loss harvesting.
But, besides those factors that focus on financial well-being, there are other, mostly psychological factors.
With regular checkups of the portfolio, you will remain resilient and informed about current market conditions and trends. While you always have all the important information, you are also learning and adapting to the ever-changing financial landscape. Only an investor that has all the current information, and is willing to learn can make sound investment decisions.
Regular review of the portfolio also allows you to have better control over your investments. That feeling reduces investment anxiety and increases confidence. This factor is essential in the investment world because it is impossible to count the examples of bad decisions made as a result of a lack of information.
While you are checking up on your portfolio and current market trends, you can also come up with new investment ideas. You can end up shifting or balancing your investment portfolio to other investment strategies that better suit you.
How to Critique Your Investment Thesis
Writing a good and insightful investment thesis is the first step. When done correctly it can result in solid market returns, and it also allows quick shifts in case of need. But, even the best investment thesis demands a quality review. If you want to conduct an honest and ethical thesis critique, these are the crucial elements of the critique to uphold.
In a critique, you should question your thesis biases. Everyone is biased, we are not perfect. But, in an investment world, bias can lead to major financial issues. You should check did your affinities impacted that might impact your investment decision.
Sometimes recent marketing trends are drawing investors to switch their strategies. A herding approach often leads to major losses. This is especially the case if you jump into the investment wagon too late. Do not get swayed by the popularity of a specific industry or company. Check does it aligns with your investment strategy and financial goals first.
If you are critiquing your thesis alone you should look at it from other angles. Imagine what could be the opposing arguments to the thesis. Check would any of them make sense, and how would you answer them. Use this approach to find weaknesses in the thesis.
Do not be afraid to seek outside perspectives. If you have a financial advisor or an experienced investor you can trust, ask them for an opinion. You would be surprised how often you miss out on a problem because you just do not see it.
As a fundamental part of a thesis, analysis should be double-checked. A good analysis has financial projections, market trends, and historical data. Inspect the sources of those data and check whether are they reliable and unbiased.
Sometimes even if you do everything well, an external factor can mess up your investment cycle. Think about major economic and political factors that could have an impact on your investment. Yes, the global situation is often unpredictable, but try to overlook the current state of affairs.
In this situation, a stress test can help you to evaluate your thesis. Simulate various market scenarios and their impact on the investment. Check multiple scenarios and how the investment is coping under pressure.
You did a market and competition analysis when you made the thesis but double-check everything. When doing this you can try to find any alternative investment options that could fare better in the current environment. Also, compare the price of the company you are investing in with its direct competitors. Check all the factors and assess the value you are paying a fair price.
Now when you assess all this information, return to your goals. Can this investment result in the goals that you set? Is the time frame achievable with the returns in mind?
When thinking about goals, did you consider exit strategies? What would push you into selling the investment? How low and how high are you willing to go? And is the current investment liquid enough? Would you be able to easily sell it in volatile market times?
Organizing this type of review can help you prepare for all scenarios. You will not be caught off guard, and you will be ready to act. Do not blow over the critique too easily, because it can be an enormous source of information you can use in crucial moments.
Writing Your Investment Thesis
An experienced investor knows that a quality investment thesis is usually the factor that separates a successful investor from an unsuccessful one. Times of market high volatility are frequent, and you should not enter the arena unprepared.
For a start, you need to identify the target investment. It can be an asset, a company, or a fund, but you must have a clear view of it. Identify its current stage. If it is a company, is it a start-up, or a mature company? This is important for setting expectations and goals.
Create your thesis statement, and in it reflect on your core beliefs. When you read it you should know why you think that it is a good investment in the long run. Explain what factors pushed you to that particular investment. Is it a specific market trend, its competitive advantage, or a unique technological advancement that it offers?
Go deeper with explaining the drivers of your decision. That evidence should provide the deeper reasoning behind your decision. Back those claims with the use of relevant sources and correct data. Conduct market analysis and financial projections to strengthen your stance.
Do not be afraid to point to possible pitfalls and obstacles in your thesis. If there are chances that economic uncertainties or market downturns can have an impact, present them. Also, use the thesis to tackle these issues. Show how would you mitigate risk, and how you plan to navigate through complex issues that can come up.
Finally, explain your expectations time-wise. Is your approach short-term or long-term? When you define the time frame you can also plan the possible returns, or even problems that can present themselves.
Finish everything with a concise and clear summary. The reader should after reading this part have a clear understanding of your goals, approach, and strategy you are planning to employ.
Through the thesis, you are crafting your investment approach and goals, and identifying potential risks and rewards. With a thesis, you can always look up to a document, and reshape it in case of market changes. It will allow you to adapt to new situations, and pass the downturns with minimum negative impact.
Take A Look At How to Write Your Investment Thesis for Your Fund:
Common Mistakes to Avoid
Writing a good thesis is an art. It demands a lot of knowledge and experience. There are certain mistakes and pitfalls that you should learn how to identify and avoid on time. If your thesis has any of these issues you should address them immediately.
Keep your thesis focused on the goals, concise, and clear. Do not get lost in overcomplicated explanations. Always keep in mind the core reasons for your investment and aim to focus on them.
When creating a thesis you mustn’t use vague or unclear terms. Sentences that are too long with no clear end are also a thing to avoid.
One of the key elements of a good thesis is an unbiased approach. Do not get cocky, and ignore potential risks and challenges. Instead, focus on them, and how you plan to mitigate them.
Do not let your emotions cloud your judgment. Do not forget, you are dealing with impact investment decisions. Be objective and fair in both research and reasoning. Back your thesis with checked data and reliable research.
A critical factor in a thesis is realistic goals. Do not overestimate your potential returns. Also, be realistic about the timeframe in which you expect to reap the benefits. The last thing you need is to chase quick turnarounds and end up with a total loss.
Arguably the most important factor of a thesis is aligning it with ethical and responsible financial principles. For your thesis use publicly available data and sources. Avoid utilizing intransparent investment practices.
Tips for Avoiding Common Mistakes
Writing a thesis is a process that is properly done through three phases. The pre-writing, writing, and post-writing phases.
In the pre-writing phase, start with a clear purpose of a thesis. Define what you are aiming for in a thesis. Is a thesis a pitch to investors, are you speaking to yourself, or you are simply organizing your thoughts? This will factor in later while you are going deeper into detail.
Conduct a deep analysis of all factors. Check the company, the industry, competition, and market condition. Look for any usable data, financial reports, and industry analysis to back your writing approach.
When you have the basis of a thesis, question it. Go through it and look for potential weak spots. Identify your biases and motivations toward this specific investment.
In the writing phase, you should first focus on a strong thesis statement. Do it concisely and clearly. Do not let your emotions drive you, and support the thesis with data and evidence.
The structure of the thesis is important, and it uses headings, subheadings, and bullet points. A well-organized thesis will help in the long run. It will improve the readability, and you will find it easier to find specifics.
When composing sentences write them concisely and avoid using jargon. If you are pitching to inexperienced investors, they also need to understand it with ease.
Post-writing phase allows you to review the thesis and fix any potential issues. Check if the flow of the thesis is logical. Inspect all the data for correctness. Do not avoid making adjustments. You will probably have to do it at some moment since the investment landscape is constantly changing.
Examples of Investment Thesis
Investment thesis differs in detail in length, depending on the style of the thesis, and the complexity of the investment. Going through an actual complete thesis would often require dozens of pages. So we will go through the outline of several theses used as an example, so you will know where to start from.
Thesis For A Technology Company TechX
Investment opportunity: TechX is a technology company based on its innovative approach to product development is expected to make growth. Due to its advanced use of artificial intelligence, it has a competitive advantage that will offer competitive prices resulting in strong market demand.
Key factors: TechX is constantly increasing its market share as a result of its wide intellectual property portfolio. Companies fundamentals, like a skilled management team and, a track record of constant revenue increase guarantee the long-term benefits of this investment.
Risk: Potential risks can come from the introduction of new regulatory standards. Also, since the industry is trending, new companies and competitors can arise and pose a threat. Another risk could be the sudden implementation of new technologies, which would result in the lagging technology process of the company.
Thesis For A Real Estate Company Highrises Reality
Investment opportunity: Highrises Reality is developing new commercial and urban projects in locations with high demand for those types of spaces. This investment could bring both short and long-term gains based on sales and renting options.
Key factors: Their projects are well-designed, and the city is undergoing population growth with a demand for all types of spaces. The demand for living and commercial space in this location has been constant in the last 5 years due to urbanization factors. Its strategic location and all other benefits create a potential for value appreciation.
Risks: Sudden economic downturn, the rise in the price of building materials, or regulatory issues are the major risks that come with this investment.
Thesis For A Consumer Goods Company Shop&Go
Investment opportunity: Shop&Go is an established consumer goods company that is going through the restructuring phase. The aim is to improve operational efficiency and brand positioning and through it a rise in the market share.
Key factors: Factors that show promise are a new management team with a good track record, cost-cutting initiatives, and rebranding efforts. These factors present a correct approach to the rise of market share.
Risks: The biggest challenge is on the new management team and their capability to implement a new turnaround plan. Also, the plan should be designed to leave a good and lasting impression on the customers. With consumer goods companies always comes the risk of macroeconomic factors that can have an impact on customers’ spending habits.
FAQs
How Often Do You Review Your Investments?
How often you review your investments depends on specific circumstances and current market volatility. In periods of high volatility, it is crucial to keep a steady eye on the market. Often you need to act fast and prevent a big loss. Or in other cases, an opportunity may arise in a short time window that you can exploit.
If the situation is under control, a quarterly review is an okay time frame. An annual investment review is recommended for a deeper analysis of every aspect of the portfolio. But, as we said, in volatile times reviews must be done frequently.
What Are the Two 2 Methods of Analyzing Investments?
The 2 methods of analyzing investments are fundamental analysis and technical analysis. Each method offers a unique approach to understanding potential investment value.
Fundamental analysis puts a focus on the intrinsic value of the investment. Its crucial elements are the company’s financial health, its competitive advantages, and its potential for future growth.
When conducting a fundamental analysis, the factors that are analyzed are financial statements, the management team, economic factors, and current industry trends.
The technical analysis comes from a different approach and focuses on identifying patterns and trends in the investment price and trading volume of the analysis target. With the help of technical indicators, it is used to predict future price movements.
Essential techniques of this analysis include trend analysis, chart patterns, and technical indicators. With trend analysis, the aim is to identify upward or downward trends in price movements. Chart patterns help in identifying frequent patterns in price charts. Those can signal to buy or sell a security.
Utilizing technical indicators demands employing mathematical formulas for the analysis of prices and trading volume data. Currently used formulas are moving averages, relative strength index, and Bollinger Bands.
Final Considerations
Compiling an investment thesis and critiquing goes hand in hand. Once you write the thesis it is essential to check it for achievability, bias, and conceptual issues. When critiquing the thesis is it advisable to have unbiased and professional analysts who will go through it also.
Remember, the thesis if used can have a long-term impact on your investment portfolio. If written and critiqued properly you can always reach out for it and find necessary information. This is particularly important in case you need to adjust a specific asset due to changes in the market. So, all in all, do not think that a critique of the thesis is a waste of time, but prepare and conduct it in the right manner.
