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What Is an Investment Thesis?

• Understanding the Thesis

Special Considerations

• What's Included?

The Bottom Line

• Portfolio Management

Investment Thesis: An Argument in Support of Investing Decisions

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

The term investment thesis refers to a reasoned argument for a particular investment strategy, backed up by research and analysis. Investment theses are commonly prepared by (and for) individual investors and businesses. These formal written documents may be prepared by analysts or other financial professionals for presentation to their clients.

Key Takeaways

• 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.

Understanding the Investment Thesis

As noted above, an investment thesis is a written document that provides information about a potential investment. It is a research- and analysis-based proposal that is usually drafted by an investment or financial professional to provide insight into investments and to pitch investment ideas. In some cases, the investor will draft their own investment thesis, as is the case with venture capitalists and private equity firms.

This thesis can be used as a strategic decision-making tool. Investors and companies can use a thesis to decide whether or not to pursue a particular investment, such as a stock or acquiring another company. Or it can be used as a way to look back and analyze why a particular decision was made in the first place—and whether it was the right one. Putting things in writing can have a huge impact on the direction of a potential investment.

Let's say an investor purchases a stock based on the investment thesis that the stock is undervalued . The thesis 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 financial crisis or the Brexit vote that forced the United Kingdom out of the European Union (EU) 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.

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.

Portfolio management is now 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.

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.

What's Included in an Investment Thesis?

Although there's no industry standard, there are usually some common components to this document. Remember, an investment thesis is generally a proposal that is based on research and analysis. As such, it is meant to be a guide about the viability of a particular investment.

Most investment theses include (but aren't limited to) the following information:

• The investment in question
• The investment goal(s)
• Viability of the investment, including any trends that support the investment
• Potential downsides and risks that may be associated with the investment
• Costs and potential returns as well as any losses that may result

Some theses also try to answer some key questions, including:

• Does the investment align with the intended goal(s)?
• What could go wrong?
• What do the financial statements say?
• What is the growth potential of this investment?

Putting everything in writing can help investors make more informed decisions. For instance, a company's management team can use a thesis to decide whether or not to pursue the acquisition of a rival. The thesis may highlight whether the target's vision aligns with the acquirer or it may identify opportunities for growth in the market.

Keep in mind that the complexity of an investment thesis depends on the type of investor involved and the nature of the investment. So the investment thesis for a corporation looking to acquire a rival may be more in-depth and complicated compared to that of an individual investor who wants to develop an investment portfolio.

Examples of an Investment Thesis

Portfolio managers and investment companies often post information about their investment theses on their websites. The following are just two examples.

Morgan Stanley

Morgan Stanley ( MS ) is one of the world's leading financial services firms. It offers investment management services, investment banking, securities, and wealth management services. According to the company, it has five steps that make up its investment process, including idea generation, quality assessment, valuation, risk management , and portfolio construction.

When it comes to developing its investment thesis, the company tries to answer three questions as part of its quality assessment step:

• "Is the company a disruptor or is it insulated from disruptive change? 
• Does the company demonstrate financial strength with high returns on invested capital, high margins, strong cash conversion, low capital intensity and low leverage? 
• Are there environmental or social externalities not borne by the company, or governance and accounting risks that may alter the investment thesis?"

Connetic Ventures

Connetic Adventures is a venture capital firm that invests in early-stage companies. The company uses data to develop its investment thesis, which is made up of three pillars. According to its blog, there were three pillars or principles that contributed to Connetic's venture capital investment strategy. These included diversification, value, and follow-on—each of which comes with a pro and con.

Why Is an Investment Thesis Important?

An investment thesis is a written proposal or research-based analysis of why investors or companies should pursue an investment. In some cases, it may also serve as a historical guide as to whether the investment was a good move or not. Whatever the reason, an investment thesis allows investors to make better, more informed decisions about whether to put their money into a specific investment. This written document provides insight into what the investment is, the goals of the investment, any associated costs, the potential for returns, as well as any possible risks and losses that may result.

Who Should Have an Investment Thesis?

An investment thesis is important for anyone who wants to invest their money. Individual investors can use a thesis to decide whether to purchase stock in a particular company and what strategy they should use, whether it's a buy-and-hold strategy or one where they only have the stock for a short period of time. A company can craft its own investment thesis to help weigh out whether an acquisition or growth strategy is worthwhile.

How Do You Create an Investment Thesis?

It's important to put your investment thesis in writing. Seeing your proposal in print can help you make a better decision. When you're writing your investment thesis, be sure to be clear and concise. Make sure you do your research and include any facts and figures that can help you make your decision. Be sure to include your goals, the potential for upside, and any risks that you may come across. Try to ask and answer some key questions, including whether the investment meets your investment goals and what could go wrong if you go ahead with the deal.

It's always important to have a plan, especially when it comes to investing. After all, you are putting your money at risk. Having an investment thesis can help you make more informed decisions about whether a potential investment is worth your while. Make sure you put your thesis in writing and answer some key questions about your goals, costs, and potential outcomes. Having a concrete proposal in place can spell the difference between earning returns and losing all your money. And that's if your thesis supports the investment in the first place.

Harvard Business School. " Writing a Credible Investment Thesis ."

Lanturn. " What is an Investment Thesis and 3 Tips to Make One ."

Morgan Stanley. " Global Opportunity ."

Medium. " The Data That Built Our Fund's Investment Thesis ."

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An Investment Thesis: The Key To Making More Money Long Term

In general, the longer you stay invested, the greater your chance of making money. To help you maintain a long-term investment approach, it's imperative to develop an investment thesis.

Drawing from my experience in investing since 1995, it's sometimes easy to get shaken out of a particular investment. Or it’s easier for some people to just keep their money sitting in cash out of fear of financial loss. I get it. I’ve lost plenty of money before because there are no guarantees when you take risk.

I observed panic selling during the 2000 dot bomb and 2008 global financial crisis, affecting both stock and real estate sellers. More recently, I witnessed panic selling at the beginning of the global pandemic in 2020. The events lead me to try and allay fears with the post, “ How to Predict the Stock Market Bottom like Nostradamus .”

Having a solid investment thesis, as long as it remains intact, will provide you with the courage and confidence to hold on for the long term.

The Importance Of Developing An Investment Thesis When Investing

Let me go through some examples of how having an investment thesis has helped me hold long-term and make more money overtime. Coming up with an investment thesis also helped me make a significant decision on a recent dilemma. At the end of this post, I'll also share what makes a good investment thesis.

If you are just starting out and are fearful of investing your hard-earned money, developing an investment thesis will help you take action. To beat inflation , you must continuously invest over the long term. If you don’t overcome your fear of investing, then you will likely fall way behind over time.

Please know that you don't have to be a great investor to make money. You just need to be a good-enough investor to significantly outperform a large part of the population that does not save and invest aggressively.

1) Heartland Real Estate Investment Thesis

In 2016, I published my post titled “ Focus on Trends: Why I'm Investing in the Heartland of America .” My investment thesis was based on the anticipation that more people would relocate to lower-cost areas of the country due to advancements in technology and the increasing ability to work from home. Additionally, I believed that Trump's victory would contribute to increased interest, funding, and expansion in red states.

Given the uncertainty of which specific real estate investment deal to pursue, I opted to invest in a couple of funds that focused on acquiring real estate in the heartland of America. Now, eight years and $954,000 later, I have generally witnessed positive returns on my investments. Texas properties, in particular, have performed quite well since 2016. However, as I shared in my post on private real estate investing after eight years , there have also been some duds as well.

Investing for such an extended period has been relatively straightforward. In the realm of private funds , the expected distributions typically span between 5-10 years.

Based on my investment thesis of a demographic shift to the heartland, I logically looked for real estate investment firms that had the same investment thesis. And I found one in 2016 in Fundrise. Fundrise predominantly invests in the Sunbelt region where valuations tend to be lower and rental yields tend to be higher.

2) San Francisco Real Estate Investment Thesis

When I arrived in San Francisco in 2001, I was amazed by the affordability of real estate compared to New York City. Properties were priced 20 to 30% lower, offering more space for the same cost or a similar property for less.

At that time, compensation in the finance industry was comparable between the two cities at my level. My investment thesis was that prices in SF would catch up to prices in Manhattan due to a better quality of life and the growth of technology.

Didn’t Want To Miss Out On The Tech Boom

My firm played a role in taking Facebook and Google public in the early 2000s. As a result, I anticipated a resurgence in Web 2.0. Lacking the skills or connections to enter the tech industry, I opted to invest in tech stocks and acquire rental properties instead.

Overall, San Francisco property prices have shown positive performance. The excitement of living in a big city attracts billions of people. However, the city's reputation suffered post-pandemic due to hesitancy by officials to address criminal activities and remove drug dealers downtown.

Thankfully, to stay in power, politicians must address corruption, tackle crime, clean up the city, and provide tax incentives for businesses to thrive. Citizens discontented with criminal activities are likely to vote out ideological politicians and judges who harm the community. Consequently, there is potential for the city's image to be restored post 2024 election, leading to a recovery in real estate prices.

Deja Vu With Artificial Intelligence

Since 2023 there has been an extraordinary surge in tech stock prices. Fueled by substantial bonuses and robust portfolios, I anticipate that a portion of this wealth will flow back into San Francisco Bay Area real estate. Redfin reports that luxury home prices are reaching all-time highs , attracting a significant number of all-cash buyers .

The rise of artificial intelligence (AI) is evoking a sense of déjà vu, reminiscent of 25 years ago when the internet promised to revolutionize the world. Today, it is equally apparent that AI will shape the world in the next two decades.

Despite the likelihood that most of us won't secure lucrative AI jobs due to intense competition, there's an opportunity for ordinary individuals to invest in AI companies. Beyond public companies like Nvidia, Microsoft, Google, and Facebook, private investments can be made through open-ended venture capital funds like the one offered by Fundrise.

Fundrise launched its venture capital product at the end of 2022, which was great timing given private company valuations had corrected. The investment minimum is only $10, you can see the product's holdings, and the fees are much lower than closed-end venture capital funds.

I am personally adopting this approach by investing in both public and private AI-related companies. My goal is to allocate $500,000 to these companies over the next five years. This strategy not only positions me for potential gains but also serves as a hedge against the challenges AI might pose for our children in terms of job opportunities.

AI Facilitated My Property Decision

In my previous post, “ Rent out, sell, or create a wellness center, ” I detailed my dilemma regarding what to do with my old house. At 46 years old, with two young children and already managing four rental properties, the prospect of overseeing another rental didn't appeal to me.

Being a landlord can be burdensome, particularly when dealing with challenging tenants or constant maintenance issues. Such responsibilities take away time that could be better spent on more enjoyable activities, like playing tennis or spending quality moments with my kids.

After reading through the comments on my post, which provided diverse opinions on the course of action, I weighed the options and arrived at a decision to rent out the house and hold it for the long term. The deciding factor was the formulation of an investment thesis.

Why Renting Out Is Better For Now

My investment thesis revolves around the belief that owning a single-family home on the west side of San Francisco is a sound decision. Local economic catalysts, including the opening of a large school in the fall of 2024 and the $4 billion renovation of the UCSF Parnassus Hospital by 2030 (expected to create 1400 new jobs), indicate a positive trajectory for real estate on the west side.

Remote work is here to stay. In addition, there is a demographic transition from downtown on the east side to the west side. The final catalyst for my decision to rent out is the anticipated wealth generated by Artificial Intelligence (AI) for employees and investors. As a result, I will suck it up as a landlord for the next 3-5 years and then reevaluate.

I spoke to Ben Miller, CEO of Fundrise , and he believes we're past the real estate market as do I. As a result, holding onto my property and renting it out makes even more sense.

3) The Vision Pro Investment Thesis For Apple

I've owned Apple stock since 2012 and it has done well. With the S&P 500 surpassing 4,900, I've faced increasing challenges in finding compelling stock investments. However, when the Vision Pro was unveiled on February 2, 2024, my interest was piqued.

At that time, Apple had just reported somewhat soft quarterly results, causing a dip in the stock. I contemplated whether this could be the opportunity to further invest in the company. After dedicating several hours to researching the Vision Pro, I concluded that the answer was affirmative.

Apple's new Vision Pro is a significant accessibility tool for the visually impaired . Approximately 2.2 billion people worldwide experience some form of visual impairment. While an estimated 237 million face moderate to severe impairment. Among them, 40 million are considered legally blind or completely blind. This figure is expected to rise to 115 million by 2050.

Consequently, I believe the Vision Pro holds the promise of greatly assisting a substantial portion of the global population in enhancing their vision and interaction capabilities. Considering the critical importance of sight, the demand for this product should be relatively inelastic for the visually impaired. Furthermore, Apple is likely to enhance the product over time and reduce its retail cost. I can’t wait for version 2 and 3.

An Example Of How The Vision Pro Can Help The Visually Impaired

If you have regular sight or can correct your myopia or hyperopia with glasses or contact lenses, then you might take for granted your vision. Seeing a small screen on your phone or the 10-point font size on a menu is usually not a problem. For for those with visual impairments, it can be.

This Vision Pro commercial succinctly captures one of its many benefits for the visually impaired.

Apple is already an outstanding company with intelligent employees and an impressive product line. Further, it is cash flow positive with substantial cash reserves and a dividend payout. My confidence in investing in Apple stock aligns with my confidence in the S&P 500. However, I anticipate additional upside potential, particularly with the introduction of the Vision Pro and how Apple with integrate artificial intelligence with all its products.

Note: The definition of legally blind means the inability to correct your visual accuity to at least 20/200 with corrective lenses. Most people can correct their visual acuity to 20/20 to 20/40 with glasses or contacts. Legally blind usually does not mean complete blindness, as many people who are legally blind still have some vision.

America The Great: The Ultimate Investment Thesis

I harbor a home country bias as an American patriot. I've resided in this country since 1991 and have payed six figures in taxes annually since 2003. My children were born on American soil. In addition, I've crafted over 2300 personal finance posts aimed primarily at aiding Americans in achieving financial freedom sooner. These experiences have fostered my deep connection and commitment to this nation.

I envision my final days in America, leaving behind a positive legacy . Consequently, my long-term outlook is bullish and biased on owning American assets.

The greatness of America, in my belief, stems from:

• Entrepreneurial spirit
• Strong work ethic
• A stable democratic government
• A robust legal system safeguarding intellectual property and individual rights
• A formidable defense industry ensuring citizens' protection
• A stable world currency
• Generally thoughtful and kind people aspiring to assist others globally in attaining freedom
• A history of unity during times of crisis, exemplified by events like 9/11 and the pandemic

While acknowledging America's challenges—crime, poverty, socioeconomic injustices—I consider it unwise to bet against its long-term excellence. The collective willpower of our nation, I believe, will drive ongoing positive improvements.

I advocate that everyone, globally, should find a way to own a piece of America . You can do so by buying the S&P 500 or U.S. physical real estate or private real estate.

In 50 years, when our grandchildren become adults, they will appreciate our foresight in investing in America today. Despite inevitable economic fluctuations, with a well-defined investment thesis, we stand to accumulate wealth beyond our current imagination.

What Makes A Good Investment Thesis

A good investment thesis is a well-researched and articulated rationale behind an investment decision. It serves as a comprehensive guide that outlines the reasons and expectations for choosing a particular investment. Here are key characteristics of a good investment thesis:

• Clear and Concise: The thesis should be easily understandable and to the point.
• Supported by Research: Ground your thesis in thorough research, including fundamental analysis, technical analysis, and an understanding of relevant economic and market trends.
• Alignment with Goals: Clearly state how the investment aligns with your overall financial goals and objectives. Whether it's capital appreciation, passive income generation , or risk mitigation, the thesis should reflect your goals.
• Identifies Investment Opportunity: Specify the investment opportunity or opportunities you have identified. This could involve a specific asset class, industry, sector, or individual securities.
• Analysis of Risks: Acknowledge and assess the risks, challenges, and uncertainties associated with the investment.
• Time Horizon: Clearly define your time horizon for the investment. Specify whether it's a short-term trade, a long-term hold, or something in between.
• Competitive Advantage: Understand what sets it apart from competitors and how it plans to sustain or enhance that advantage.
• Financial Metrics: Include relevant financial metrics supporting your investment decision. This may include valuation ratios, growth rates, profitability, and other key financial indicators.
• Scenario Analysis: Consider different scenarios and outcomes. A well-thought-out thesis anticipates how the investment might perform under various circumstances.
• Adaptable and Dynamic: Recognize that market conditions can change. A good investment thesis is adaptable and allows for adjustments based on new information or changing circumstances.
• Exit Strategy: Clearly outline your exit strategy. Know under what conditions you would sell or reduce your position.
• Communication: Share your thesis with others to find any blind spots, like I am with this post. Others should be able to understand your rationale and analysis.

Keeping updating your investment thesis over time

Having a good investment thesis won't guarantee success, but it's like a roadmap for your investments. Keep updating it based on what's happening in the market, and make sure you invest for the long term.

Investment theses can vary in quality, and sometimes you might get the investment right with the wrong thesis. The main thing is to have a good reason why you're investing, so you stick with it over time.

In 10 years, you'll probably end up with more money who keeps investing for the long haul, compared to someone who doesn't invest or tries to time the market. Decide which situation you want to have in the future.

Invest In Private Growth Companies

If you believe artificial intelligence will be an important economic driver, check out Fundrise . Fundrise invests in the following five sectors:

• Artificial Intelligence & Machine Learning
• Modern Data Infrastructure
• Development Operations (DevOps)
• Financial Technology (FinTech)
• Real Estate & Property Technology (PropTech)

Roughly 90% of Fundrise's venture capital product has exposure to artificial intelligence. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI.

The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. You can see what Fundrise is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.

Fundrise is a long-term sponsor of Financial Samurai and Financial Samurai is an investor in Fundrise.

About The Author

Financial Samurai

35 thoughts on “an investment thesis: the key to making more money long term”.

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your quote sums up our last 40+ years of heavy real estate investing vs investing in equities.

“Since 1996, I’ve discovered that having a well-defined investment thesis increases the likelihood of consistently investing and holding onto investments during challenging periods. As the old saying goes, ‘time in the market is more important than timing the market.’ This lesson came to me the hard way during the first 10 years of my investing career.”

We were told many times that we would lose it all, go bankrupt, have to grovel to return to work & suffer the never ending torment of bad tenants & damages. We could write a book on it all, as it definitely was not easy, but since 1998 (& retired) we have been free & clear on every property since, have no debt since & live comfortably between three homes during the year after selling our 4th, a FL home of 31 years, just before H. Ian hit. love your articles & financial insight.

My California real estate thesis is this:

Despite numerous rent control efforts and the State’s (and most coastal counties’) hostility towards landlords, I think California residential real estate will be very lucrative for landlords assuming they have sufficient cash on hand to withstand vacancies, evictions, cash for keys, etc.

This is because rent control decreases landlord and developer participation in providing housing and thus leads to fewer units on the market. Fewer units on the market will increase rental prices.

Hi, like you I own and manage a few rental properties in the city, which is our primary income. Although the rental market here isn’t great, at least it’s stabilized. It’s like survive until 2025 and hopefully things will turn around in SF. These upcoming city elections, with a swell of moderate candidates will hopefully make a tangible difference in quality of life issues, which of course have hurt SF’s reputation worldwide.

I’m also bullish on the potential for the AI industry. But work from home is pervasive and I think downtown and soma are going to be challenged for several years. Also tech firms are less concentrated in the Bay Area now and getting more distributed in 2nd tier cities. The saving grace for SF is that many local neighborhoods are now more cleaned up and also have thriving foot traffic, if it’s the mission, inner sunset, etc. So I feel good about the future of good and established SF neighborhoods, which is where I own properties.

SF has roughly doubled in value every 10years, which is amazing. The first chart in this report is a good visual, https://www.bayareamarketreports.com/trend/3-recessions-2-bubbles-and-a-baby The main thing I need to wrap my head around is that I think the next 5-10 years will not have the amazing appreciation that we’ve had since the mid-late 90’s when I started investing. I honestly got used to that phenomenal rate growth, but I’m trying to set more modest expectations going forward.

How bullish are you on future SF appreciation? Do you think it will be anything like the last 30 years?

The market may simmer this year. But I think it’ll eventually go up again by a rate of 3.5 to 5% a year. If you look at the historical cycles, there’s generally about 4 to 5 years of flat lining.

Given we’re already at a high base, the growth rate of appreciation won’t be as high as in the past. That said, I think there’s gonna be another renaissance of Wealth being created over the next 10 to 20 years with new tech / AI.

What the cost of building materials, labor, and restrictive building should help push real estate prices higher.

Yeah 3.5-4.5% SF real estate returns over the next 5-10 years is probably realistic. 7% is unlikely, which is what we’ve gotten used to :) Without that outsized 7% equity return, and holding my properties debt free (no leverage), keeping them long term vs selling and going into the stock market becomes a much closer call.

My cash on cash on my RE is 3.5-4%, plus 3.5-4.5% expected appreciation totals 7-8.5% total returns, which is roughly in line with s&p 500 long term returns. Tax treatment favors RE, but then again with stocks you don’t need to deal with tenants and repairs. But of course the main issue is transferring my RE equity into stocks is bloody expensive, with sales expenses and capital gains of about 37%. So I’m still better off holding the RE. My only issue is that I’m heavily RE weighed, with only a small stocks portfolio. My plan has been to dollar cost average excess RE profits into stocks to better balance my portfolio.

I’ll just have to see what transpires over the next 2-3 years to our fair city, plus evaluate the macro economic picture. I guess this “sell RE, buy stocks” dilemma isn’t such a bad problem to have. But nevertheless it’s nice to have a “safe space” (sic) such as this blog where wealthy people can freely cry about their problems…IRW anytime I bring this up to people it’s like, “wait, let me get the worlds smallest violin to play for you” :)

Innovation Fund vs going after AI public companies like the following that are already established and surging YTD. Thinking the latter might be more attractive and with less risk.

Nividia TSMC Arm SoundHound

I don’t have thesis, only several points: -Only buy S&P 500 index with lowest fee. -No trading, hold for LONG time. – Maximize all tax deferred accounts. – No investment in a single company since I have no control over management. I bought and didn’t look at my account for years . I just recently checked and saw that it has 13% compounding interest making me millionaire.

Well done. Don’t forget to capitalize on your investments by selling on occasion to buy things you want and improve the quality of your life. Otherwise, there’s really no point to investing in stocks.

Is there a fundrise equivalent for non-US citizens? Thanks in advance. Dave

Hi Dave, I’m not aware of one. You can just invest in a public real estate ETF like VNQ or one of the publicly-traded REITs like O. Just know they are more volatile.

Just to clarify, Innovation Fund is not currently open to new investors but has a “waitlist.”

Also what is happening with publically traded companies in the AI thesis seems to me to mean that not really necessary to take on added risk of start-ups. just look at recent performance of ARM SMCi and NVDA. and that is just a few. i will continue inverting in a broad 10-12 public stocks and sure to gain solid and not massive returns. i look at it this way, if a start up here or there will do 10x and some will bust, leaving you with overall 3-4 times return, then i am likely to better with the established companies in a sector where the revolution has just begun. smci is up 3x in just a month.

That’s weird. I just checked with Fundrise and the Innovation Fund is open to investors.

“The Innovation Fund is OPEN to new investors. It is possible this person is unable to make a direct investment into the fund if they are an existing investor who is not a Pro member. This is something we’re working on.

But to reiterate the fund is open to new investors.

If you select the Venture Capital investment plan during signup you can invest in the Innovation Fund.”

I’m an existing investor and don’t believe I’m a pro member. I’m able to invest in the Innovation Fund.

i’m an existing investor but not a pro member and i am not able to invest in Innovation fund so must fall into that segment. it is not provided as an option when i select “browse investments” in my account. i then read a review of the fund from late 2023, i will try to post, and it did say that it wasn’t open to all yet. it did said all you needed was $10 to start.

You should reach out to them and let them know.

ASH01 – What are the 10-12 AI public companies you are targeting besides Nividia, smci and ARM? Thoughts on TSMC & SoundHound? I tend to agree with your thesis. Why take on the private risk when the public companies should still be in their infancy in terms of AI growth.

As discussed earlier, here is my investment thesis which could be quite controversial:

1. A portfolio of 50/50 real estate vs. stock. The stock portion should not be lower but could be much higher. Holding real estate is mostly for pleasure/need and rent. Rental properties are all places i would want to live. Once pleasure part of real estate is no longer needed, should graduate to stocks or to rental units.

2. Stocks is a mix of SP500 and Tech i.e. Nasdaq 100, XLK, VOOG and also exposure to single high performing stock. No international stock. No bonds. Mostly automated invested to cost average. Real estate rental income is the security in case stock market crashes.

3. Flexible and nimble approach. Whenever the market is down, try investing more and don’t withdraw funds.

4. No investment in private funds, real estate funds, bitcoin and other cryptos which i dont understand and have no transparency. No need to complicate.

Sounds good. What’s your investment thesis though for your tech stocks?

It’s a good mantra to not invest in what you don’t understand.

I really enjoy investing private funds (VC, VD, real estate) as it forces me to invest for the long term ~10 years. The capital calls also keep me investing even when I might not want to.

I am excited about building out, my artificial intelligence exposure, and I have one from the invested in Ripple, which has turned out to be maybe a 20-40X return. Maybe I can cash out just in time to buy a new car in 2027, when my current car is 12 years old.

Here’s an example of an AI company one of my private funds (Kleiner) is investing in. I’m pumped! https://techcrunch.com/2024/02/06/ambience-healthcare-raises-70m-for-its-ai-assistant-led-by-openai-and-kleiner-perkins/

I’m also excited about the AI investments in the Fundrise Innovation Fund , like Databricks.

Sounds good. As for tech, i have a single stock exposure due to my employment which is doing better than market and is a great company that does good work. So thesis for that is don’t fix what is working. As for the rest, my strategy is similar to most here – i Invest in 15-20% of stock portfolio in QQQ and lesser to XLK and VOOG which are Apple, Microsoft heavy – i believe i get enough AI and other exposure through these since i dont know what the next big thing will be.

One last point. I am very bullish about US Stocks for the following reasons:

1. European markets are not performing. On surface, it appears cheap to buy however not a single tech company in the top 100 European companies. 2. China stock market is not performing. Significant decline and volatility. Could be the beginning of a Japan like deflation and decline. 3. US is the center of AI and innovation. 4. Stock ownership, although at historical highs is still low among Americans being at approx 56%.

In couple years, i think everyone will want a piece of the US companies. Already evidenced by the fact that Shiller CAPE after 80s is much higher than historically has been. Could this lead to a bubble? Definitely – but it could well last 10-20 years and the fundamentals could also catch up in the meanwhile either due to AI generated earnings or something else and optimism pays when investing!

My best thesis was investing in semiconductor stocks. Roughly 5 years ago I noticed how almost everything needed a chip. My thesis proved itself out during the pandemic. You couldn’t get a car, dishwasher or any smart device because chips weren’t available. I bought AMD, NVDA, and Intel. 2 of them worked out pretty good. I was banking on the cloud and data centers to boom. That part worked out okay. I didn’t see any of the AI craze coming which has been hugely beneficial. Decent thesis and a ton of luck!

Nice! But what about the future?

Take a little profit and hold the rest for another 5 years. I realize we’re right in the middle of AI mania but everything I read and watch tells me we’re still in the early days of AI.

No matter what happens we’re still going to need more chips to power all our future ambitions

so interesting how almost nobody but nvda saw the AI craze coming. that one earnings report by them set this whole thing off about a year ago. such an interesting phenomenon. AI has been talked about for many years but then suddenly companies decide to try to make a product of it in a massive scale. nvda explosion in earning was because companies suddenly ordered their chips.

Yup, I spend hours a day watching cnbc, reading blogs and doing research and I truly didn’t know what AI could do or how much money companies could make off it. Luck is definitely a factor.

VTI + VXUS + long haul = chill

Agree, but it’s hard to retire earlier by just investing in the total stock market. There are two levels of wealth , the top-tier wealth did not get there by investing in ETFs or index funds.

100% agree with you on that front! BUT I do personally believe that 95% of people will accumulate more wealth through regular and automated index investing over time vs. active investment strategies such as picking 1:1 stocks. I would guess you also have a sizable audience base that loves the content but also leans toward simple investing strategies over the long haul and not constantly stressing about achieving the top tier of wealth. The content here can sometimes make you feel behind, overly stressed that you’ll never have enough, and stuck stressing about the future. I personally have to step back and remember it’s really about regular investing (in your strategies of choice) + time in the market and not timing the market. Which I personally think is a sound investment thesis! Love the content though to be clear. It’s really helped me think about allocation percentages and mortgage payoff strategies.

Yes, good points. For most people, buying a primary residence and regularly investing in an S&P 500 index fund is a great long-term strategy.

Personally, I like to always be challenged bc it’s fun. Even if I fail, I will likely have accumulated more than if I hadn’t pushed myself.

From my coaching days, the players who advance the most are pushed the hardest.

But good reminder to press the easy button once in a while for readers who may be burning out or feeling behind.

I love your clear and specific convictions in your investment thesis. That’s something I need to work on. Very cool on the Apple Vision Pro. I don’t have anything specific in my own investments. Although I do believe in long term real estate, stock, and tech exposure. Thanks for the list of steps on creating an investment thesis.

I’ve been investing since the mid-1980s. Every time I’ve evaluated my portfolio against a portfolio of index funds using backtesting of 5 years and more, the index funds (with expenses deducted) have beaten my portfolio’s performance over a 5+ year time horizon. I’ve finally realized that I have a lot more money today if I’d purchase a mix of three low-cost, passively managed index funds. My latest lesson occurred during the latest 5 year period in which my portfolio performed well. It did what it was designed to do (mitigate losses during down markets like 2022). I was only down 2% that year. Unfortunately, if I had invested in a mix of SCHD (50%), SCHG (25%), and SWPPX (25%), that portfolio would have crushed my performance by a wide margin. Yes, it lost more money in 2022 (around 14.75%) but dramatically exceeded its performance in the other four years. I’m done trying to be smart. I’m buying a mix of passive ETFs and accepting the market risk.

Thanks for posting that. You basically stated my “investment thesis”:

1. My assets must grow in order for me to keep up with long term inflation 2. Over the long haul it’s very difficult for me to outperform the market 3. Figuring out my my risk tolerance and indexing accordingly is probably my best bet

No different than you, it’s taken since the mid 1980’s for this reality to really set in…

Those are great points Vaughn. Keep the focus and stay invested for the long term!

Active funds underperform their benchmark passive index >95% of the time after 10 years. With retail investors its over 99% with average underperformance by 4% *annually*. The 1% that crush due to lucky pick with concentration are the reason people still do it, but I’d rather have a 99x higher chance to have a +4% CAGR *and* barely think about it.

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Writing a Credible Investment Thesis

Only a third of acquiring executives actually write down the reasons for doing a deal.

By David Harding and Sam Rovit

• November 15, 2004

Every deal your company proposes to do—big or small, strategic or tactical—should start with a clear statement how that particular deal would create value for your company. We call this the investment thesis. The investment thesis is no more or less than a definitive statement, based on a clear understanding of how money is made in your business, that outlines how adding this particular business to your portfolio will make your company more valuable. Many of the best acquirers write out their investment theses in black and white. Joe Trustey, managing partner of private equity and venture capital firm Summit Partners, describes the tool in one short sentence: "It tells me why I would want to own this business."

Perhaps you're rolling your eyes and saying to yourself, "Well, of course our company uses an investment thesis!" But unless you're in the private equity business—which in our experience is more disciplined in crafting investment theses than are corporate buyers—the odds aren't with you. For example, our survey of 250 senior executives across all industries revealed that only 29% of acquiring executives started out with an investment thesis (defined in that survey as a "sound reason for buying a company") that stood the test of time. More than 40% had no investment thesis whatsoever (!). Of those who did, fully half discovered within three years of closing the deal that their thesis was wrong.

Studies conducted by other firms support the conclusion that most companies are terrifyingly unclear about why they spend their shareholders' capital on acquisitions. A 2002 Accenture study, for example, found that 83% of executives surveyed admitted they were unable to distinguish between the value levers of M&A deals. In Booz Allen Hamilton's 1999 review of thirty-four frequent acquirers, which focused chiefly on integration, unsuccessful acquirers admitted that they fished in uncharted waters. They ranked "learning about new (and potentially related) business areas" as a top reason for making an acquisition. (Surely companies should know whether a business area is related to their core before they decide to buy into it!) Successful acquirers, by contrast, were more likely to cite "leading or responding to industry restructuring" as a reason for making an acquisition, suggesting that these companies had at least thought through the strategic implications of their moves.

Not that tipping one's hat to strategy is a cure-all. In our work with companies that are thinking about doing a deal, we often hear that the acquisition is intended for "strategic" reasons. That's simply not good enough. A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value.

A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value. This point needs underscoring. Justifying a deal as being "strategic" ex post facto is, in most cases, an invitation to inferior returns. Given how frequently we have heard weak "strategic" justifications after a deal has closed, it's worth passing along a warning from Craig Tall, vice chair of corporate development and strategic planning at Washington Mutual. In recent years, Tall's bank has made acquisitions a key part of a stunningly successful growth record. "When I see an expensive deal," Tall told us, "and they say it was a 'strategic' deal, it's a code for me that somebody paid too much."

And although sometimes the best offense is a good defense, this axiom does not really stand in for a valid investment thesis. On more than a few occasions, we have been witness to deals that were initiated because an investment banker uttered the Eight Magic Words: If you don't buy it, your competitors will.

Well, so be it. If a potential acquisition is not compelling to you on its own merits, let it go. Let your competitors put their good money down, and prove that their investment theses are strong.

Let's look at a case in point: [Clear Channel Communications' leaders Lowry, Mark and Randall] Mayses' decision to move from radios into outdoor advertising (billboards, to most of us). Based on our conversations with Randall Mays, we summarize their investment thesis for buying into the billboard business as follows:

Clear Channel's expansion into outdoor advertising leverages the company's core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements. Second, similar to the radio industry twenty years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to "roll up" a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.

Note that in Clear Channel's investment thesis (at least as we've stated it), the benefits would be derived from three sources:

• Leveraging an existing sales force more extensively
• Using the balance sheet to roll up and fund an undercapitalized business
• Applying operating skills learned in the radio trade

Note also the emphasis on tangible and quantifiable results, which can be easily communicated and tested. All stakeholders, including investors, employees, debtors and vendors, should understand why a deal will make their company stronger. Does the investment thesis make sense only to those who know the company best? If so, that's probably a bad sign. Is senior management arguing that a deal's inherent genius is too complex to be understood by all stakeholders, or simply asserting that the deal is "strategic"? These, too, are probably bad signs.

Most of the best acquirers we've studied try to get the thesis down on paper as soon as possible. Getting it down in black and white—wrapping specific words around the ideas—allows them to circulate the thesis internally and to generate reactions early and often.

The perils of the "transformational" deal. Some readers may be wondering whether there isn't a less tangible, but equally credible, rationale for an investment thesis: the transformational deal. Such transactions, which became popular in the exuberant '90s, aim to turn companies (and sometimes even whole industries) on their head and "transform" them. In effect, they change a company's basis of competition through a dramatic redeployment of assets.

The roster of companies that have favored transformational deals includes Vivendi Universal, AOL Time Warner (which changed its name back to Time Warner in October 2003), Enron, Williams, and others. Perhaps that list alone is enough to turn our readers off the concept of the transformational deal. (We admit it: We keep wanting to put that word transformational in quotes.) But let's dig a little deeper.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. In search of effective transformations, people sometimes cite the examples of DuPont—which after World War I used M&A to transform itself from a maker of explosives into a broad-based leader in the chemicals industry—and General Motors, which, through the consolidation of several car companies, transformed the auto industry. But when you actually dissect the moves of such industry winners, you find that they worked their way down the same learning curve as the best-practice companies in our global study. GM never attempted the transformational deal; instead, it rolled up smaller car companies until it had the scale to take on a Ford—and win. DuPont was similarly patient; it broadened its product scope into a range of chemistry-based industries, acquisition by acquisition.

In a more recent example, Rexam PLC has transformed itself from a broad-based conglomerate into a global leader in packaging by actively managing its portfolio and growing its core business. Beginning in the late '90s, Rexam shed diverse businesses in cyclical industries and grew scale in cans. First it acquired Europe's largest beverage—can manufacturer, Sweden's PLM, in 1999. Then it bought U.S.-based packager American National Can in 2000, making itself the largest beverage-can maker in the world. In other words, Rexam acquired with a clear investment thesis in mind: to grow scale in can making or broaden geographic scope. The collective impact of these many small steps was transformation. 14

But what of the literal transformational deal? You saw the preceding list of companies. Our advice is unequivocal: Stay out of this high-stakes game. Recent efforts to transform companies via the megadeal have failed or faltered. The glamour is blinding, which only makes the route more treacherous and the destination less clear. If you go this route, you are very likely to destroy value for your shareholders.

By definition, the transformational deal can't have a clear investment thesis, and evidence from the movement of stock prices immediately following deal announcements suggests that the market prefers deals that have a clear investment thesis. In "Deals That Create Value," for example, McKinsey scrutinized stock price movements before and after 231 corporate transactions over a five-year period. The study concluded that the market prefers "expansionist" deals, in which a company "seeks to boost its market share by consolidating, by moving into new geographic regions, or by adding new distribution channels for existing products and services."

On average, McKinsey reported, deals of the "expansionist" variety earned a stock market premium in the days following their announcement. By contrast, "transformative" deals—whereby companies threw themselves bodily into a new line of business—destroyed an average of 5.3% of market value immediately after the deal's announcement. Translating these findings into our own terminology:

• Expansionist deals are more likely to have a clear investment thesis, while "transformative" deals often have no credible rationale.
• The market is likely to reward the former and punish the latter.
• The dilution/accretion debate. One more side discussion that comes to bear on the investment thesis: Deal making is often driven by what we'll call the dilution/accretion debate. We will argue that this debate must be taken into account as you develop your investment thesis, but your thesis making should not be driven by this debate.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. Simply put, a deal is dilutive if it causes the acquiring company to have lower earnings per share (EPS) than it had before the transaction. As they teach in Finance 101, this happens when the asset return on the purchased business is less than the cost of the debt or equity (e.g., through the issuance of new shares) needed to pay for the deal. Dilution can also occur when an asset is sold, because the earnings power of the business being sold is greater than the return on the alternative use of the proceeds (e.g., paying down debt, redeeming shares or buying something else). An accretive deal, of course, has the opposite outcomes.

But that's only the first of two shoes that may drop. The second shoe is, How will Wall Street respond? Will investors punish the company (or reward it) for its dilutive ways?

Aware of this two-shoes-dropping phenomenon, many CEOs and CFOs use the litmus test of earnings accretion/dilution as the first hurdle that should be put in front of every proposed deal. One of these skilled acquirers is Citigroup's [former] CFO Todd Thomson, who told us:

It's an incredibly powerful discipline to put in place a rule of thumb that deals have to be accretive within some [specific] period of time. At Citigroup, my rule of thumb is it has to be accretive within the first twelve months, in terms of EPS, and it has to reach our capital rate of return, which is over 20% return within three to four years. And it has to make sense both financially and strategically, which means it has to have at least as fast a growth rate as we expect from our businesses in general, which is 10 to 15% a year.

Now, not all of our deals meet that hurdle. But if I set that up to begin with, then if [a deal is] not going to meet that hurdle, people know they better make a heck of a compelling argument about why it doesn't have to be accretive in year one, or why it may take year four or five or six to be able to hit that return level.

Unfortunately, dilution is a problem that has to be wrestled with on a regular basis. As Mike Bertasso, the head of H. J. Heinz's Asia-Pacific businesses, told us, "If a business is accretive, it is probably low-growth and cheap for a reason. If it is dilutive, it's probably high-growth and attractive, and we can't afford it." Even if you can't afford them, steering clear of dilutive deals seems sensible enough, on the face of it. Why would a company's leaders ever knowingly take steps that would decrease their EPS?

The answer, of course, is to invest for the future. As part of the research leading up to this book, Bain looked at a hundred deals that involved EPS accretion and dilution. All the deals were large enough and public enough to have had an effect on the buyer's stock price. The result was surprising: First-year accretion and dilution did not matter to shareholders. In other words, there was no statistical correlation between future stock performance and whether the company did an accretive or dilutive deal. If anything, the dilutive deals slightly outperformed. Why? Because dilutive deals are almost always involved in buying higher-growth assets, and therefore by their nature pass Thomson's test of a "heck of a compelling argument."

As a rule, investors like to see their companies investing in growth. We believe that investors in the stock market do, in fact, look past reported EPS numbers in an effort to understand how the investment thesis will improve the business they already own. If the investment thesis holds up to this kind of scrutiny, then some short-term dilution is probably acceptable.

Reprinted with permission of Harvard Business School Press. Mastering the Merger: Four Critical Decisions That Make or Break the Deal , by David Harding and Sam Rovit. Copyright 2004 Bain & Company; All Rights Reserved.

David Harding (HBS MBA '84) is a director in Bain & Company's Boston office and is an expert in corporate strategy and organizational effectiveness.

Sam Rovit (HBS MBA '89) is a director in the Chicago office and leader of Bain & Company's Global Mergers and Acquisitions Practice.                                              

10. Joe Trustey, telephone interview by David Harding, Bain & Company. Boston: 13 May 2003. Subsequent comments by Trustey are also from this interview.

11. Accenture, "Accenture Survey Shows Executives Are Cautiously Optimistic Regarding Future Mergers and Acquisitions," Accenture Press Release, 30 May 2002.

12. John R. Harbison, Albert J. Viscio, and Amy T. Asin, "Making Acquisitions Work: Capturing Value After the Deal," Booz Allen & Hamilton Series of View-points on Alliances, 1999.

13. Craig Tall, telephone interview by Catherine Lemire, Bain & Company. Toronto: 1 October 2002.

14. Rolf Börjesson, interview by Tom Shannon, Bain & Company. London: 2001.

15. Hans Bieshaar, Jeremy Knight, and Alexander van Wassenaer, "Deals That Create Value," McKinsey Quarterly 1 (2001).

16. Todd Thomson, speaking on "Strategic M&A in an Opportunistic Environment." (Presentation at Bain & Company's Getting Back to Offense conference, New York City, 20 June 2002.)

17. Mike Bertasso, correspondence with David Harding, 15 December 2003.

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How To Make An Investment Thesis: Ultimate Guide To Best Investment Decision

An Introduction to Investment Thesis

An investment thesis forms the basis of an investor's strategy and serves as a framework to direct investment choices as well as articulate the reasoning behind targeting assets or markets. A robust investment thesis clearly outlines the factors that will drive returns while minimizing risks. Developing a thought-out investment thesis is crucial for achieving success in investments.

This guide will take you through the components of creating a compelling investment thesis from beginning to end. We will discuss how to identify promising investment opportunities, analyze target companies, perform valuation modeling, build a portfolio, present the fund's thesis to potential investors, implement the thesis in investment activities, and adapt it as market conditions evolve. By adhering to a disciplined investment thesis, investors can consistently make informed decisions and make choices to outperform the market.

Identifying Investment Opportunities

The initial step in developing an investment thesis involves pinpointing areas of focus that will shape your investment decisions. This entails determining sectors, asset classes, geographical regions, or other frameworks on which you wish to concentrate your research and analysis.

When determining the area you want to focus on, there are four key questions and factors to consider;

• Your expertise and knowledge - It is best to concentrate on areas where you have experience or can gain expertise without stretching yourself
• Macroeconomic trends - Look out for trends that can have an impact. These trends could include shifts, advancements, policy changes, and more. Identify sectors, regions, or asset classes that are likely to benefit from these long-term shifts
• Market inefficiencies - Keep an eye out for market inefficiencies. Opportunities often arise in markets that are fragmented, complex, or experiencing changes
• Investment horizons - Consider the investment horizon required for investment theses. Some ideas may require a time frame to materialize their potential returns while others may offer shorter-term gains

Once you have determined your area of focus, it is crucial to conduct in-depth research on the macro trends shaping that market. Look for trends that will drive growth over the years rather than focusing solely on quarterly fluctuations mentioned in market reports. The objective is to identify factors that can positively impact revenues, margins, and valuations of well-positioned companies.

With an understanding of the landscape established through research, you can then search for companies positioned to take advantage of the identified trends. Look for firms, with products/services/customers/geographical reach or innovative strategies that give them an edge when it comes to capitalizing on these opportunities.

Analyzing the Company

For an investment thesis, it is crucial to assess the company you are considering for investment. This assessment should include an evaluation of the company's drivers of growth, its management team and strategy as well as potential risks and challenges.

Growth Drivers

When analyzing the market value of a company, you'll want to closely examine the products, customers, and competitive positioning that are fueling its growth.

• Products: Look at the company's current product portfolio and pipeline. Do they have innovative products that are gaining market share? How large is their total addressable market and how much of it have they penetrated so far?
• Customers: Evaluate who their key customers are and how loyal they are. Look at metrics like net dollar retention rate to understand how loyal their customers are
• Competition: Analyze the competitive landscape and the company's positioning. Do they have a durable competitive advantage? How do they compare to rivals on factors like pricing, product features, and customer experience?
• Scalability: Do margins get larger or smaller as a customer increases its size? In some cases, unprofitable companies become highly profitable with growth - in other cases, costs increase in line with revenues. 

Management and Strategy

The strategy and execution capabilities of management are critical to a company's success.

• Management Team: Research the background and track record of key executives. Do they have relevant industry experience and a history of generating returns?
• Strategy: Assess management's strategic priorities and plans to drive growth. Do they have a coherent plan to expand their market opportunity?
• Culture & Incentives: Assess how they attract and retain talent. Are employees actively involved and motivated to excel?

Assessing the management will help ascertain whether the company has the leadership to seize the upcoming opportunity.

Risks and Challenges

When conducting an analysis it's important to consider factors;

• Technology Shifts: Take into account innovations that could affect the company's market.
• Regulation: Consider possible changes in regulations that may impact the business model and financial aspects.
• Macro Trends: Look at shifts in the wider economic environment that could influence customer demand.

Thoroughly examining the company across these dimensions provides the information and perspective to build confidence in your investment thesis. It helps you understand the business model, growth trajectory, management capabilities, risks involved, and valuation potential.

Conducting Valuation

Whilst a company's valuation is largely based purely on how much an investor or acquirer is willing to pay, there are a number of methodologies that help to guide valuations:

Choosing the Appropriate Valuation Method

DCF valuation is typically preferred when assessing situations where reliable projections can be made. However, for early-stage or volatile companies, it may be more appropriate to consider comparable multiples based on similar industry peers.

Making Projections and Assumptions

When making projections and assumptions it is essential to conduct research to establish credible forecasts.

Projections should encompass metrics such as revenue growth, margins, capital expenditure requirements, and working capital needs. Additionally, explicit assumptions should be made regarding elements like market size, market share, pricing strategies, and costs among others. Conducting sensitivity analysis can help stress test these assumptions.

Ensuring Upside to Current Valuation

Once you have determined the value of a company you can compare this value against its market capitalization. Look for the ultimate goal of valuation is to support your thesis that the company is undervalued. If the current market price exceeds your estimate of value it may be prudent to reassess your assumptions and analysis. The greater the upside potential identified within your analysis the stronger your conviction becomes in considering an investment opportunity.

Constructing Your Portfolio

When constructing your portfolio based on your investment thesis, you should diversify your holdings and size your positions appropriately based on conviction and risk tolerance.

Diversification

Your investment thesis should guide how you diversify your portfolio. For example, if your thesis focuses on emerging market consumer stocks, you would want exposure across multiple countries and consumer product categories. Diversifying appropriately helps manage overall portfolio risk. You want to avoid overexposure to any single company, sector, or country.

Position Sizing

When determining position sizes within your portfolio, larger positions should be allocated to your highest conviction ideas based on your investment thesis. However, position size should also be constrained based on your risk tolerance. Larger positions will drive portfolio performance but also increase volatility. 

Rebalancing

As market conditions change, rebalancing your portfolio involves  realigning holdings in line with your investment thesis. If certain positions have increased significantly in size, trimming them down and reallocating to underweight areas can improve diversification and risk-adjusted returns. Revisiting your thesis and rebalancing at regular intervals instills discipline in sticking to your core investment tenets.

Presenting to Investors

When presenting your investment thesis to investors it's crucial to communicate and address important information right from the start. Your objective is to explain your insights and build confidence in your ability to generate returns.

To begin - guide investors through your thesis, research process, and valuation methodology. Elaborate on the trends you've identified and analyze the company's growth drivers and competitive position. Share how you arrived at your valuation.

Next, emphasize your "edge”. The expertise, relationships, or analytical skills that give you an advantage in assessing this opportunity. Provide examples of investments you've made in the past by leveraging an edge to establish credibility

Lastly, demonstrate your risk management abilities by addressing challenges and risks. Outline the assumptions underlying your thesis and discuss scenarios where they may not hold true. Describe how you plan to monitor and mitigate risks related to regulations, supply chains, customer demand, or management execution. 

Implementing the Thesis

Once you have developed an investment thesis the next step is executing trades to construct a portfolio that aligns with your thesis. It is crucial to approach this process with strategic planning in order to achieve results.

When making investments it is important to allocate positions based on your level of confidence in each holding while also ensuring diversification. Generally speculative or higher risk assets should be given allocations that don’t jeopardize the portfolio as a whole.

Ongoing portfolio management necessitates actively monitoring performance against the expectations outlined in your investment thesis. By keeping track of metrics, business drivers, and macroeconomic factors you can gauge whether your thesis remains valid.

As new data emerges over time adjustments and rebalancing of your portfolio will likely be required. This involves reducing exposure to holdings where the original thesis has weakened or deteriorated while increasing exposure to emerging opportunities. 

Continuously refining your portfolio ensures that it remains closely aligned with your investment thesis as market conditions evolve. Successful investors remain adaptable. Adjust their allocations while keeping their long-term perspectives intact.

Updating the Investment Thesis

As time progresses it is crucial to revisit and update your investment thesis accordingly.

Markets are constantly changing and it is crucial to stay updated with information that emerges. Your initial assumptions may not always hold true which can lead to poor investment decisions if you stick to an investment thesis.

To ensure the relevance of your investment thesis periodically reassess all your assumptions and projections. Take a look at your growth estimates, address any emerging threats, and analyze how market sentiment has shifted. If there have been changes in the investment narrative it's essential to update your thesis

Incorporate insights from sources such as earnings reports, industry conferences, macroeconomic data, and more. I. Objectively evaluate if adjustments need to be made based on the information at hand.

The key here is flexibility; being able to adapt to information sets good investors apart from the average ones. 

Common Mistakes to Avoid When Developing an Investment Thesis

To ensure the success of your investment thesis it's important to steer clear of pitfalls. Here are a few common ones;

Lack of Diversification

Having an overconcentration in a sector, geography, or asset type can leave a portfolio vulnerable. For example, an investment thesis focused solely on fast-growing US tech companies could miss opportunities in emerging markets. 

Biased Assumptions

It's easy to fall into the trap of making projections that confirm your existing bias about a company's growth potential. Avoid exaggerated assumptions that are not grounded in facts, and remember that “hope” has historically been a bad investment strategy 

Ignoring New Information

Markets and companies are dynamic, so no investment thesis holds true forever. Do not blindly stick to your original assumptions if new data suggests your thesis is no longer valid. Be ready to change course if your investment case deteriorates. Failing to adapt can turn gains into losses.

To summarize this guide - here are the most important factors in an investment thesis ;

• Identifying economic trends and sector-specific opportunities to focus on when making investments.
• Conducting a thorough analysis of potential companies, for your portfolio including their products, customers, competitors, and management.
• Using valuation models such as discounted cash flow (DCF) analysis to determine a target value based on your projections.
• Creating a diverse portfolio by considering your confidence level and risk tolerance for each position.
• Clearly presenting your investment strategy and unique advantage to inspire confidence in investors.
• Consistently implementing your investment strategy when making buy or sell decisions.
• Monitoring your portfolio and assumptions, updating the thesis as needed based on new data.

Creating a thoughtful investment thesis takes rigorous research and ongoing discipline. However, it also establishes a framework to capitalize on the upside potential of emerging trends. Investors who take the time to develop a compelling thesis are more apt to outperform the market. With the right blend of macro perspective and individual security analysis, your investment thesis can unlock substantial value creation.

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The Impact Investor | ESG Investing Blog

Investing for financial return is only part of the equation.

How to Create an Investment Thesis [Step-By-Step Guide]

Updated on June 13, 2023

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One of the worst mistakes an investor can make is to sink their money into an investment without knowing why. While this may seem like the world’s most obvious mistake to avoid, it happens every day. Look no further than the stock market for plenty of examples of misguided optimism gone terribly wrong.

That’s where the idea of an investment thesis comes in. An investment thesis is a common tool used by venture capital investors and hedge funds as part of their investment strategy.

Most funds also use it on a regular basis to size up potential candidates during buy-side job interviews. But you don’t have to work at a venture capital fund or private equity firm to reap the benefits of creating an investment thesis of your own.

Table of Contents

What Is an Investment Thesis?

Materials needed to create a thesis for your investment strategy, a step-by-step guide to creating a solid investment thesis, step 1: start with the essentials, step 2: analyze the current market, step 3: analyze the company’s sector, step 4: analyze the company’s position within its sector, step 5: identify the catalyst, step 6: solidify your thesis with analysis, free tools to help strengthen your investment strategy.

An investment thesis is simply an argument for why you should make a specific investment. Whether it be a stock market investment or private equity, investment theses are all about creating a solid argument for why a certain acquisition is a good idea based on strategic planning and research.

While it takes a little more work upfront, a clear investment thesis can be a valuable tool for any investor. Not only does it ensure that you fully understand why you’re choosing to put your hard-earned money into certain stocks or other assets, but it can also help you develop a long-term plan.

Should an investment idea not go as planned, you can always go back to your investment thesis to see if it still holds the potential to work out. By considering all the information your thesis contains, you’ll have a much better idea of whether it’s best to cut your losses and sell, continue holding, or even add to your position.

An investment thesis includes everything you need to create a solid game plan, making it a foundational part of any stock pitch.

See Related : Best Socially Responsible Stocks To Invest In Today

One of the benefits of an investment thesis is that it can be as complex or as simple as you like. If you actually work at a venture capital firm , then you may want to develop a full-on venture capital investment thesis. But if you’re a retail investor just looking to solidify your investment strategy, then your thesis may be much more straightforward.

If you’re an individual investor, then all you really need to create an investment thesis is somewhere to write it out. Whether it be in a Google or Word doc or on a piece of paper, just make sure you have a place to record your thesis so that you can consult it down the line.

If you’re developing a venture capital investment thesis that you plan to present to an investment committee or potential employers, then there are plenty of great tools online that can help. Slideteam has thousands of templates that can help you create a killer investment thesis , as well as full-on stock pitch templates.

As mentioned earlier, an investment thesis holds the potential to help you plot out a strategy for pretty much any acquisition. But for the sake of simplicity, we’ll assume throughout the examples in the following steps that you’re an investor interested in going long on a stock that you plan to hold for at least a few months or years.

Venture capitalists looking to invest in companies or startups can also apply the same principles to other investment goals. Investors who are looking to short a certain stock should also be able to use these techniques to locate potential investments. The main difference, of course, is that you’ll be looking for bad news instead of good.

First things first. Before you get into doing the research that goes into an investment thesis or stock pitch, make sure you take the time to write out the basics. At the top of the page, include things like:

• The name of the company and its ticker symbol
• Today’s date
• How many shares of the company you already own, if any
• The current cost average for any shares you may already hold
• Whether the stock pays dividends and, if so, how often. You may also want to include the current ex-dividend and dividend payment dates.
• A brief summary of the company and what it does

See Related : How to Start Investing With Purpose

Now it’s time to take a look at the entire market and the direction it’s headed. Why? As Investors Business Daily points out,

“History shows 3 out of 4 stocks move in the same direction as the overall market, either up or down. So if you buy stocks when the market is trending higher, you have a 75% chance of being right. But if you buy when the market is trending lower, you have a 75% chance of being wrong.”

While the overall market direction is definitely an important factor to keep in mind, what you choose to do with this information will largely come down to your individual investing style. Investors Business Daily founder William O’Neil advised investors only to jump into the market when it was trending up.

Another approach, however, is known as contrarian investing, which revolves around going against market trends. Warren Buffett summed up the idea behind this strategy with his famous quote, “Be fearful when others are greedy, and greedy when others are fearful.” Or as Baron Rothschild more graphically put it, “Buy when there is blood in the streets, even if the blood is your own.”

Most investors who are looking for a faster return will likely be better off waiting to strike until the iron is hot. If you align more with the long-term contrarian philosophy, however, bleak macroeconomic outlooks may actually strike you as an ideal investment opportunity .

See Related: How to Invest in Private Equity: A Step-by-Step

Now that you’ve got a look at the overall market, it’s time to take a look at the sector your company fits into. The Global Industry Classification Standard (GICS) breaks down the entire market into 11 sectors. If you want to get even more specific, you can further break down companies into the GICS’s 24 industry groups, 69 industries, and 158 sub-industries.

Once you identify which group your company belongs to, you’ll then want to take a look at that sector’s performance. Fidelity provides a handy breakdown of the performance of various sectors over different time periods.

But why does it matter? Two reasons.

• Identifying which sectors various companies belong to can help you ensure that your portfolio is properly diversified
• The reason that sector ETFs tend to be so popular is that when a sector is trending, many of the stocks within that sector tend to move in unison. The reverse is also true. When a certain industry is lagging, the individual stock prices of the companies in that industry may be affected negatively. While this is not always the case, it’s a general rule of thumb to keep in mind.

The idea behind working sectors into your investment criteria is to give you an overview of what type of investment you’re about to make. If you’re a momentum trader, then you may want to shoot for companies within the strongest-performing sectors this year or even over the past few months.

If you’re a value investor, however, you may be more open to sectors that have historically experienced high growth, even if they are currently suffering due to the overall state of the economy. Some speculative investors may even be interested in an innovative industry with strong potential growth possibilities, even if its time has not yet come.

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If you want to up your odds of success even more, then you’ll want to compare the company you’re interested in against the performance of similar companies in the same industry.

These are the companies that tend to get the most attention from large, institutional investors who are in a position to significantly increase their market value. Institutional investors tend to have a huge amount of money in play and are far less likely to invest in a company without a proven track record.

When choosing an investment, they’ll almost always go with a global leader over a new business, regardless of its promise. However, they also consider intrinsic value, which considers how much a company’s stock is selling for now, as opposed to how much revenue the company stands to earn in the future. In other words, institutional investors are looking for companies that are stable enough to avoid surprises but that also stand to generate considerable capital in the future.

Why work this into your game plan? Because even if you don’t have millions of dollars to invest in a company, there may be hedge funds or venture capital firms out there that do. When these guys make an investment, it tends to be a big one that can actually move a company’s share price upward. Why not ride their coattails and enjoy a solid growth rate as they invest more money over time into proven winners?

That’s why it’s important to make sure that you see how a company stacks up against its closest competitors. If it’s an industry-leading business with a large market share, it’s likely to be a strong contender with solid fundamentals. If not, you may end up discovering competing companies that make sense to consider instead.

See Related : What is a Triple Bottom Line? Definition & Examples

At this point, hopefully, you’ve identified the best stock in the best sector based on your ideal investing style. Now it’s time to find out exactly why it deserves to become a part of your portfolio and for how long.

If a company has been experiencing impressive growth, then there’s bound to be a reason why.

• Is the company experiencing a major influx of business because it’s currently a leader in the hottest sector of the moment? Or is it a “good house in a bad neighborhood” that’s moving independently of the other stocks in its industry?
• How long has it been demonstrating growth?
• What appears to be the catalyst behind its movement? Does the stock owe its growth to strong management, recent world events, the approval of a new drug, the introduction of a hot new product, etc?

One mistake that far too many beginning investors make is assuming that short-term growth alone always indicates the potential for long-term profit. Unfortunately, this is not always the case. By figuring out exactly why a stock is moving, you’ll be far better positioned to decide how long to hold it before you sell.

A strong catalyst can cause the price of a stock to skyrocket overnight, even if it’s laid dormant for years. Even things like social media hype and rumors can cause a stock’s price to shoot up over the course of a given day. But woe to the investor that assumes these profits will last. Many are often left holding the bag when the price increase turns out to be part of a “ pump and dump .”

While many day traders can make a nice profit by capitalizing on these situations, such trades are best avoided altogether if you plan to hold a stock long-term. That’s why it’s so important to understand whether a stock is “in play” for the day or whether its growth can be attributed to more permanent factors that support the potential for a high return over time.

See Related : How to Become an Impact Investor [Step-By-Step Guide]

If you’re planning on investing a significant amount of capital in any stock, then a little research may be able to save you from a lot of heartache. Keep in mind that the focus of an investment thesis is to formulate a reasoned argument about why adding an asset to your portfolio is a good idea.

While all investments come with some level of risk, research can be an excellent risk mitigation strategy. There’s nothing worse than watching an investment fail due to an obvious factor you could have spotted with closer analysis. Don’t let it happen to you!

Fundamental analysis can help you ensure that your potential investments have the underlying traits that winning stocks are made of. While there’s a bit of a learning curve involved when you’re first starting out, here are some of the things you’ll want to focus on:

EPS stands for “earnings per share.” It’s a common financial indicator that basically tells you how much a company makes each time it sells a share of its stock. In this regard, a higher EPS is a good thing, but it’s important to look for solid EPS growth over time. Ideally, you’ll want to see consistent growth in a company’s EPS over the past three or more quarters.

Sales and Margins

Investing is all about putting your cash into successful companies, which is why sales and margins are key components to finding worthy investments. Sales indicate how much a business has made from (you guessed it) sales. Sales margin, also known as gross profit margin, is the amount of revenue a company actually gets to keep after you factor in overhead and other production costs. Ideally, a good investment will exhibit strong, consistent sales growth in recent years.

Return On Equity (ROE)

ROE is one of the more commonly used valuation metrics and is calculated by dividing the company’s net income/shareholders’ equity. ROE is basically a measure of how efficiently a company is using the capital it generates from equity fundraising to increase its own value. The higher the ROE, the more likely it is that a company operates with a focus on using its cash flow to increase its profits.

See Related : How to Do a Stakeholder Impact Analysis?

While these are just a few examples of various analysis methods to work into your investment thesis, they can go a long way toward locating solid companies worth investing in. Interested in learning more about technical and fundamental analysis? There are now plenty of great sites that can help you master the secrets of the training world.

In our opinion, Tradimo is one of the most underrated, as it provides tons of free classes for investors of all levels. Udemy also has some great classes that can help you learn how to beef up your investment thesis with as much quality information as possible.

But keep in mind that these are only suggestions. The most important part of any personal investment thesis is that it makes sense to you and can serve as a valuable tool to help you along your investing journey.

Related Resources

• Best Impact Investing Online Courses
• Best Green Apps for a More Sustainable Life
• Sustainable Investing vs Impact Investing: What’s the Difference?

Kyle Kroeger, esteemed Purdue University alum and accomplished finance professional, brings a decade of invaluable experience from diverse finance roles in both small and large firms. An astute investor himself, Kyle adeptly navigates the spheres of corporate and client-side finance, always guiding with a principal investor’s sharp acumen.

Hailing from a lineage of industrious Midwestern entrepreneurs and creatives, his business instincts are deeply ingrained. This background fuels his entrepreneurial spirit and underpins his commitment to responsible investment. As the Founder and Owner of The Impact Investor, Kyle fervently advocates for increased awareness of ethically invested funds, empowering individuals to make judicious investment decisions.

Striving to marry financial prudence with positive societal impact, Kyle imparts practical strategies for saving and investing, underlined by a robust ethos of conscientious capitalism. His ambition transcends personal gain, aiming instead to spark transformative global change through the power of responsible investment.

When not immersed in the world of finance, he’s continually captivated by the cultural richness of new cities, relishing the opportunity to learn from diverse societies. This passion for travel is eloquently documented on his site, ViaTravelers.com, where you can delve into his unique experiences via his author profile.

Investment Thesis: Definition, Components and How to Prepare One

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What is an investment thesis, the role of an investment thesis in investment decision-making, tailoring your investment thesis to your financial goals, components of a strong investment thesis, market research and analysis, target investment criteria, risk assessment and mitigation, expected returns and exit strategy, alignment with your risk tolerance and time horizon, building your investment thesis, conducting comprehensive market research, defining your investment objectives, selecting the right assets or securities, creating a clear investment strategy, addressing potential risks, implementing your investment thesis, portfolio diversification, monitoring and reviewing your investments, adapting your thesis to market changes, tracking progress towards your goals, evaluating the success of your investment thesis, measuring performance against initial projections, identifying key milestones, learning from both successes and failures, what is the difference between an investment thesis and a strategy, how often should i revisit and adjust my investment thesis, can i have multiple investment theses for different investment goals, what should i do if my investment thesis is not yielding expected results, key takeaways.

• An investment thesis is a crucial tool for guiding your investment decisions and achieving your financial goals.
• Building a strong investment thesis involves in-depth research, clear objectives, careful risk assessment, and alignment with your risk tolerance and time horizon.
• Implementing your thesis requires portfolio diversification, monitoring, adaptation to market changes, and tracking your progress.
• Regularly evaluate the success of your investment thesis by measuring performance, identifying milestones, and learning from your experiences.

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• Investment thesis

What is an investment thesis?

Why you need a solid investment thesis, how to write an investment thesis , step one: determine your minimum viable fund size, step two: pinpoint your investment focus, step three: portfolio construction , how to present your fund thesis to lps, investment thesis example.

Breaking into the venture capital ecosystem is both challenging and competitive. Having a great investment thesis is key to running a successful VC fund. Without a clear investment strategy and effective portfolio construction , your fund won’t get very far.

In this article, we’ll cover how you can develop a strong investment thesis.

In private equity and venture capital , an investment thesis (sometimes called a fund thesis or fund strategy) outlines how you plan to use invested capital to generate returns. Your investment thesis clarifies how you’ll make money for the investors in your fund—it’s a definition of what your fund will do. 

Your investment thesis may include:

Your fund size

The number of companies in your portfolio

The stages and industries of those companies

The geographies those companies are located in

The differentiated way your fund will support your portfolio companies

Your average check size

The amount of capital reserved for follow-on investments

The return profile for your fund, based on the size of the stakes you’re trying to take in each company and your estimated success rate

How the fund will set itself apart from similarly sized or focused funds

An investment thesis tells a story by describing how each of these elements work together. 

Your fund’s investment thesis explains how you’ll cooperate with, compete with, and differentiate from other venture funds. An effective fund investment thesis is realistic and sustainable. It aligns with your investment team’s network of professional contacts (which provides access to deals), untapped opportunities in new and existing markets, and your LPs’ investment interests. 

Your fund thesis also supports compliance with the “ venture capital fund ” definition under the Investment Advisers Act of 1940 , which is important if you plan to rely on the related regulatory exemption for private funds. 

Creating your own fund investment thesis involves determining fund size, investment focus, and portfolio construction. 

The size of your fund influences almost every element of your investment strategy: The number of companies in your portfolio, your check size, the amount of reserve capital you have, and the return profile for your fund. Fund size also affects the types of LPs you attract and helps determine your fund’s portfolio management fees, which then dictate the operational expenses you can realistically support. 

Competitive research

To determine your ideal fund size, start by researching funds with goals and benchmarks like yours to see how they’re faring. You may also want to research successful funds across a handful of different industries and sectors to see what works. You can learn more information about funds by subscribing to trade publications, reading press releases from funds when they close, or on social media.

Once you’ve settled on a fund size, the next step is to outline the stage, industry, and location you’ll invest in. Articulating your investment focus helps narrow your aim and convince limited partners (LP) with interests in these sectors and stages to get on board with your strategy. It also makes it easier for founders who meet your parameters to identify your fund as a potential investor—and discourages founders who aren’t a good fit from pitching your firm.

At what point in a company’s life cycle do you want to invest and offer guidance? If you’re interested in being a sounding board for early-stage companies who are just getting started, you might want to invest at the pre-seed , seed , or Series A stages. However, if you prefer to work with companies that already have steady revenue and an established business model, you’ll probably want to focus on a later stage. 

Ultimately, the stage where you can focus your investments will be a function of your fund size and the anticipated number of companies in your portfolio. So keep this top of mind when building out your minimal viable fund size.   

Which sectors are you interested in? Do you plan to target a specific industry—like healthcare, fintech, or real estate—or focus on companies across a handful of different industries? 

Where are the companies you’ll be investing in? What particular challenges and assets do they have because of where they operate? You may choose to invest in local companies if you already have a deep network of contacts nearby. On the other hand, if you’re open to traveling, or want to capitalize on emerging, international, or underserved markets, you may want to expand your reach. This may also apply if your fund’s investment thesis is based on industry, for example, so you may be agnostic to geography. 

Other considerations

Depending on your investment goals, you might have other criteria to look at, like a company’s social impact, environmental influence, or commitment to diversity, equity, and inclusion. 

A thoughtful portfolio is critical to running a successful fund and shaping your overall investment thesis. Your strategy for portfolio construction signals to LPs how you plan to allocate their capital across investments. Your fund’s investment portfolio is essentially the roadmap for the life of the fund. It spells out the number of companies you’ll invest in, the amount of capital you’ll pour into each company, your target ownership for each company, how much you’ll set aside for initial investments, and how much you’ll reserve for follow-on investments.

Portfolio construction is made up of the following elements: 

Investment focus

Diversification: Types of companies you’ll invest in and what percent of the fund will be for non-qualifying investments or investments outside the thesis

Check size: The amount you’ll invest in each company

Investment horizon: How long you have to allocate the capital and how long you’ll hold each investment

Expected returns: How much you expect to return on the capital invested

Investor requirements: Maximum or minimum contributions

A good rule of practice is to ensure that your investments align with your portfolio construction model before making each investment decision, and then actively thereafter. Set aside time to regularly evaluate whether your investments align with your model, and where to course-correct. If your investments deviate from your original thesis, you’ll need to adjust your model or reset your focus. This is particularly important to track if you include a specific investment thesis in your fund’s legal documents.

Learn more about how to create a portfolio construction strategy

Most VCs prepare versions of their fund thesis that go into different levels of detail, ranging from a one-sentence elevator pitch, like the example below, to a full pitch deck.

You should be able to sum up your fund strategy in one or two straightforward sentences. Here’s an example investment thesis from a hypothetical venture fund:

“Krakatoa Ventures is raising a $25 million seed fund to back U.S.-based startups focused on climate technology and earth sciences. The fund will capitalize a highly specialized network of climate scientists the general partners developed during their two decades of academic study in volcanology and climatology.”

→Ready to make a full pitch deck for LPs? Prepare for your next meeting with investors using our free pitch deck template and example pitch decks .

This example highlights a key aspect of a great fund strategy: It shouldn’t be a thesis that just anybody can go out and execute. Your edge, such as your personal experience and network, are integral parts of the plan. Articulate why you’re better positioned than anyone else to execute your investment thesis.

Related Content

Writing a Credible Investment Thesis

by David Harding and Sam Rovit

Every deal your company proposes to do—big or small, strategic or tactical—should start with a clear statement how that particular deal would create value for your company. We call this the investment thesis . The investment thesis is no more or less than a definitive statement, based on a clear understanding of how money is made in your business, that outlines how adding this particular business to your portfolio will make your company more valuable. Many of the best acquirers write out their investment theses in black and white. Joe Trustey, managing partner of private equity and venture capital firm Summit Partners, describes the tool in one short sentence: "It tells me why I would want to own this business." 10

Perhaps you're rolling your eyes and saying to yourself, "Well, of course our company uses an investment thesis!" But unless you're in the private equity business—which in our experience is more disciplined in crafting investment theses than are corporate buyers—the odds aren't with you. For example, our survey of 250 senior executives across all industries revealed that only 29 percent of acquiring executives started out with an investment thesis (defined in that survey as a "sound reason for buying a company") that stood the test of time. More than 40 percent had no investment thesis whatsoever (!). Of those who did, fully half discovered within three years of closing the deal that their thesis was wrong.

Studies conducted by other firms support the conclusion that most companies are terrifyingly unclear about why they spend their shareholders' capital on acquisitions. A 2002 Accenture study, for example, found that 83 percent of executives surveyed admitted they were unable to distinguish between the value levers of M&A deals. 11 In Booz Allen Hamilton's 1999 review of thirty-four frequent acquirers, which focused chiefly on integration, unsuccessful acquirers admitted that they fished in uncharted waters. 12 They ranked "learning about new (and potentially related) business areas" as a top reason for making an acquisition. (Surely companies should know whether a business area is related to their core before they decide to buy into it!) Successful acquirers, by contrast, were more likely to cite "leading or responding to industry restructuring" as a reason for making an acquisition, suggesting that these companies had at least thought through the strategic implications of their moves.

Not that tipping one's hat to strategy is a cure-all. In our work with companies that are thinking about doing a deal, we often hear that the acquisition is intended for "strategic" reasons. That's simply not good enough. A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value.

This point needs underscoring. Justifying a deal as being "strategic" ex post facto is, in most cases, an invitation to inferior returns. Given how frequently we have heard weak "strategic" justifications after a deal has closed, it's worth passing along a warning from Craig Tall, vice chair of corporate development and strategic planning at Washington Mutual. In recent years, Tall's bank has made acquisitions a key part of a stunningly successful growth record. "When I see an expensive deal," Tall told us, "and they say it was a 'strategic' deal, it's a code for me that somebody paid too much." 13

And although sometimes the best offense is a good defense, this axiom does not really stand in for a valid investment thesis. On more than a few occasions, we have been witness to deals that were initiated because an investment banker uttered the Eight Magic Words: If you don't buy it, your competitors will.

Well, so be it. If a potential acquisition is not compelling to you on its own merits, let it go. Let your competitors put their good money down, and prove that their investment theses are strong.

Let's look at a case in point: [Clear Channel Communications' leaders Lowry, Mark, and Randall] Mayses' decision to move from radios into outdoor advertising (billboards, to most of us). Based on our conversations with Randall Mays, we summarize their investment thesis for buying into the billboard business as follows:

Clear Channel's expansion into outdoor advertising leverages the company's core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements. Second, similar to the radio industry twenty years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to "roll up" a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.

Note that in Clear Channel's investment thesis (at least as we've stated it), the benefits would be derived from three sources:

• Leveraging an existing sales force more extensively
• Using the balance sheet to roll up and fund an undercapitalized business
• Applying operating skills learned in the radio trade

Note also the emphasis on tangible and quantifiable results, which can be easily communicated and tested. All stakeholders, including investors, employees, debtors, and vendors, should understand why a deal will make their company stronger. Does the investment thesis make sense only to those who know the company best? If so, that's probably a bad sign. Is senior management arguing that a deal's inherent genius is too complex to be understood by all stakeholders, or simply asserting that the deal is "strategic"? These, too, are probably bad signs.

Most of the best acquirers we've studied try to get the thesis down on paper as soon as possible. Getting it down in black and white—wrapping specific words around the ideas—allows them to circulate the thesis internally and to generate reactions early and often.

The perils of the "transformational" deal . Some readers may be wondering whether there isn't a less tangible, but equally credible, rationale for an investment thesis: the transformational deal. Such transactions, which became popular in the exuberant '90s, aim to turn companies (and sometimes even whole industries) on their head and "transform" them. In effect, they change a company's basis of competition through a dramatic redeployment of assets.

The roster of companies that have favored transformational deals includes Vivendi Universal, AOL Time Warner (which changed its name back to Time Warner in October 2003), Enron, Williams, and others. Perhaps that list alone is enough to turn our readers off the concept of the transformational deal. (We admit it: We keep wanting to put that word transformational in quotes.) But let's dig a little deeper.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. In search of effective transformations, people sometimes cite the examples of DuPont—which after World War I used M&A to transform itself from a maker of explosives into a broad-based leader in the chemicals industry—and General Motors, which, through the consolidation of several car companies, transformed the auto industry. But when you actually dissect the moves of such industry winners, you find that they worked their way down the same learning curve as the best-practice companies in our global study. GM never attempted the transformational deal; instead, it rolled up smaller car companies until it had the scale to take on a Ford—and win. DuPont was similarly patient; it broadened its product scope into a range of chemistry-based industries, acquisition by acquisition.

In a more recent example, Rexam PLC has transformed itself from a broad-based conglomerate into a global leader in packaging by actively managing its portfolio and growing its core business. Beginning in the late '90s, Rexam shed diverse businesses in cyclical industries and grew scale in cans. First it acquired Europe's largest beverage-can manufacturer, Sweden's PLM, in 1999. Then it bought U.S.–based packager American National Can in 2000, making itself the largest beverage-can maker in the world. In other words, Rexam acquired with a clear investment thesis in mind: to grow scale in can making or broaden geographic scope. The collective impact of these many small steps was transformation. 14

But what of the literal transformational deal? You saw the preceding list of companies. Our advice is unequivocal: Stay out of this high-stakes game. Recent efforts to transform companies via the megadeal have failed or faltered. The glamour is blinding, which only makes the route more treacherous and the destination less clear. If you go this route, you are very likely to destroy value for your shareholders.

By definition, the transformational deal can't have a clear investment thesis, and evidence from the movement of stock prices immediately following deal announcements suggests that the market prefers deals that have a clear investment thesis. In "Deals That Create Value," for example, McKinsey scrutinized stock price movements before and after 231 corporate transactions over a five-year period. 15 The study concluded that the market prefers "expansionist" deals, in which a company "seeks to boost its market share by consolidating, by moving into new geographic regions, or by adding new distribution channels for existing products and services."

On average, McKinsey reported, deals of the "expansionist" variety earned a stock market premium in the days following their announcement. By contrast, "transformative" deals—whereby companies threw themselves bodily into a new line of business—destroyed an average of 5.3 percent of market value immediately after the deal's announcement. Translating these findings into our own terminology:

• Expansionist deals are more likely to have a clear investment thesis, while "transformative" deals often have no credible rationale.
• The market is likely to reward the former and punish the latter.

The dilution/accretion debate . One more side discussion that comes to bear on the investment thesis: Deal making is often driven by what we'll call the dilution/accretion debate . We will argue that this debate must be taken into account as you develop your investment thesis, but your thesis making should not be driven by this debate.

Simply put, a deal is dilutive if it causes the acquiring company to have lower earnings per share (EPS) than it had before the transaction. As they teach in Finance 101, this happens when the asset return on the purchased business is less than the cost of the debt or equity (e.g., through the issuance of new shares) needed to pay for the deal. Dilution can also occur when an asset is sold, because the earnings power of the business being sold is greater than the return on the alternative use of the proceeds (e.g., paying down debt, redeeming shares, or buying something else). An accretive deal, of course, has the opposite outcomes.

But that's only the first of two shoes that may drop. The second shoe is, How will Wall Street respond? Will investors punish the company (or reward it) for its dilutive ways?

Aware of this two-shoes-dropping phenomenon, many CEOs and CFOs use the litmus test of earnings accretion/dilution as the first hurdle that should be put in front of every proposed deal. One of these skilled acquirers is Citigroup's [former] CFO Todd Thomson, who told us:

It's an incredibly powerful discipline to put in place a rule of thumb that deals have to be accretive within some [specific] period of time. At Citigroup, my rule of thumb is it has to be accretive within the first twelve months, in terms of EPS, and it has to reach our capital rate of return, which is over 20 percent return within three to four years. And it has to make sense both financially and strategically, which means it has to have at least as fast a growth rate as we expect from our businesses in general, which is 10 to 15 percent a year. Now, not all of our deals meet that hurdle. But if I set that up to begin with, then if [a deal is] not going to meet that hurdle, people know they better make a heck of a compelling argument about why it doesn't have to be accretive in year one, or why it may take year four or five or six to be able to hit that return level. 16

Unfortunately, dilution is a problem that has to be wrestled with on a regular basis. As Mike Bertasso, the head of H. J. Heinz's Asia-Pacific businesses, told us, "If a business is accretive, it is probably low-growth and cheap for a reason. If it is dilutive, it's probably high-growth and attractive, and we can't afford it." 17 Even if you can't afford them, steering clear of dilutive deals seems sensible enough, on the face of it. Why would a company's leaders ever knowingly take steps that would decrease their EPS?

The answer, of course, is to invest for the future. As part of the research leading up to this book, Bain looked at a hundred deals that involved EPS accretion and dilution. All the deals were large enough and public enough to have had an effect on the buyer's stock price. The result was surprising: First-year accretion and dilution did not matter to shareholders. In other words, there was no statistical correlation between future stock performance and whether the company did an accretive or dilutive deal. If anything, the dilutive deals slightly outperformed. Why? Because dilutive deals are almost always involved in buying higher-growth assets, and therefore by their nature pass Thomson's test of a "heck of a compelling argument."

Reprinted with permission of Harvard Business School Press. Mastering the Merger: Four Critical Decisions That Make or Break the Deal , by David Harding and Sam Rovit. Copyright 2004 Bain & Company; All Rights Reserved.

[ Buy this book ]

David Harding (HBS MBA '84) is a director in Bain & Company's Boston office and is an expert in corporate strategy and organizational effectiveness.

Sam Rovit (HBS MBA '89) is a director in the Chicago office and leader of Bain & Company's Global Mergers and Acquisitions Practice.

10. Joe Trustey, telephone interview by David Harding, Bain & Company. Boston: 13 May 2003. Subsequent comments by Trustey are also from this interview.

11. Accenture, "Accenture Survey Shows Executives Are Cautiously Optimistic Regarding Future Mergers and Acquisitions," Accenture Press Release, 30 May 2002.

12. John R. Harbison, Albert J. Viscio, and Amy T. Asin, "Making Acquisitions Work: Capturing Value After the Deal," Booz Allen & Hamilton Series of View-points on Alliances, 1999.

13. Craig Tall, telephone interview by Catherine Lemire, Bain & Company. Toronto: 1 October 2002.

14. Rolf Börjesson, interview by Tom Shannon, Bain & Company. London: 2001.

15. Hans Bieshaar, Jeremy Knight, and Alexander van Wassenaer, "Deals That Create Value," McKinsey Quarterly 1 (2001).

16. Todd Thomson, speaking on "Strategic M&A in an Opportunistic Environment." (Presentation at Bain & Company's Getting Back to Offense conference, New York City, 20 June 2002.)

17. Mike Bertasso, correspondence with David Harding, 15 December 2003.

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How to Write an Investment Thesis

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NASDAQ: DUOL

Plus, a look at "one of the most obvious long-term trends out there" and more.

In this podcast, Motley Fool analyst Jason Moser discusses:

• Recognizing short-term catalysts.
• Why home improvement is "one of the most obvious long-term trends out there."
• Travel and return-to-work are two trends worth watching.

Then, using language-learning app Duolingo ( DUOL -0.38% ) as an example, Motley Fool analyst Alicia Alfiere shares key questions to ask when writing an investment thesis, including:

• What are its competitive advantages?
• Who's running the company?
• Will broader trends help or hurt?
• Stocks discussed: BKNG ( BKNG 0.34% ) , HD ( HD 0.28% ) , LOW ( LOW 0.28% ) ,  MSFT ( MSFT 1.47% ) , and DUOL.

To catch full episodes of all The Motley Fool's free podcasts, check out our  podcast center . To get started investing, check out our  quick-start guide to investing in stocks . A full transcript follows the video.

10 stocks we like better than Duolingo, Inc. When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now… and Duolingo, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.

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*Stock Advisor returns as of March 3, 2022

This video was recorded on March 7, 2022.

Chris Hill: Tell the DJ to queue up ZZ Top because we're talking about investing trends with legs. Motley Fool Money starts now. I'm Chris Hill joined by Motley Fool senior analyst Jason Moser. Thanks for being here.

Jason Moser: Hey, thanks for having me.

Chris Hill: Everybody loves a good trend, right?

Jason Moser: Sure.

Chris Hill: We're investors, we love a good trend. Lately, I don't know if you've noticed as the market has continued its grim slide of 2022, that doesn't stop potential trends from emerging here or there. I wanted to talk with you about how to figure out which trends have legs and which ones don't. I'll just start with an example of one that I think for me anyway, doesn't really have legs, and it goes under the umbrella of because of reasons, this industry has sold off tremendously. Therefore, it presents an opportunity for investors because it's trading below where it should be. The one that leaves to mind for me that's come up several times over the past two plus years is the Cruise Industry, and that may be a good short-term opportunity for some people. I'm not interested in that.

Because it's not an industry that I think has great long-term tailwinds behind it, I don't mean to pick on the Cruise Industry, but you know what I'm talking about. There are some trends that get a lot of attention, but it's for short-term reasons.

Jason Moser: Yeah, I'm glad you said short-term reasons because I agree with what you're saying. I think the way I typically try to break this down in my own mind, and I've talked before about the way that I invest. As a long-term investor, someone who typically like to be a net buyer of stocks, I'd like to buy, I don't really like selling. Typically I am looking for companies that I feel they're going to be relevant for decades. Figuring out and following the long-term trend in differentiating that between what I would call a short-term catalyst, and so I think that the Cruise example there is a good example of something where there's a short-term catalyst. Before 2020, I don't know that Cruise ships were really a place where I was interested in investing, it sounds you feel the same way. It's just not an industry that you're all that interested in. I think that's how I start to at least look at this, because you could look at the Cruise liners for example, and say, "well, I'm not all that interested." But by the same token, it does feel there's a short-term catalysts in place that could result in value for shareholders if things continue to improve. The travel industry in general has been shellacked, but things are starting to come back.

There were a lot of questions early on in 2020 as to whether these major Cruise liners would even survive. They did a good job, I think of figuring out ways to survive and keeping their balance sheets in working order there, but I think for me, you see the benefit of a reopen and then say, alright, Cruise liners could benefit from that, the stock's been may start to reflect that optimism. But beyond that short-term catalyst, is there something there? Do you see more people clamoring to go on cruises as the years go by? I'm not convinced that's the case. I think it's a relevant industry. I think there are people who love to take cruises, but I think there are also a lot of risks that come with something like that. For me, it's trying to think about what direction the world is headed and I'll be honest with you, I'm sure you probably can relate to this as a parent. I looked at my kids, I have two daughters, they're are at sophomore junior and high school. I looked at them and their friends and what they're doing, what they're watching, the apps that they're using, ways that they're conducting their business, that to me starts to tell a little bit more about consumer behavior, trends that may be forming, things that matter to younger generations that will continue to matter even as they get older. I typically try to break it down between looking at a long-term trend versus a short-term catalysts in figuring out ways to discern between the two.

Chris Hill: If you think back to last year in the late spring, one of the big trends getting a lot of attention was what was referred to as the great reopening.

Jason Moser: Yeah.

Chris Hill: It seems we're at that point again, as Omicron levels continue to drop, vaccines continue to rise, more and more businesses, we talked about this last Friday on Motley Fool Money about some of the biggest tech companies in America opening up their offices, mask mandates coming down. You were talking to the folks at Cheddar, and I'm happy to share Jason Moser as a resource our with media outlets. [laughs] You're welcome Cheddar. But seriously, you were talking to them about this trend, weren't you?

Jason Moser: Yeah, we were talking about reopening, and to me it feels like reopening 2.0. We did go through a reopening before, where I think a lot of us are starting to get back out there and resuming somewhat normal behavior. This is the next iteration of that, where I think the wall start to come down and even more people start to go out and really get their lives back to normal. We were talking about ideas, investments, companies that will benefit from this next phase of reopening, and then what future they may have even beyond that, because I would look at reopening as definitely a short-term catalyst. This is not something where the long-term trend is for our economy to reopen, and so for me that doesn't mean that there aren't great ideas out there, that doesn't mean there's no money to be made, but by the same token, and I think, we said this a lot when we were talking about the stay at home stock, theme that we were delving into a couple of years ago. 

You want to make sure that regardless, these are businesses that you feel will continue to do well even beyond the short-term catalysts. Because this short-term catalyst will end, and then you want to make sure that you're not left holding the bag with the business that maybe isn't going to continue to benefit beyond just that catalyst. For me, there are a lot of different ways you can look at the companies that will benefit from this. I mean, you're talking about incremental traffic in all places, people going back to work, office buildings getting busier, the areas around the office buildings getting busier, malls getting busier, so what companies can you expect a benefit there? To me, there are a lot of different ways you can look at it. I think travel is one that stands out immediately just because so many people are ready-to-go do something. We saw some of the snap-back in travel earlier through the course of this last couple of years, but it does look things continue to get even better. 

I was looking through Booking Holdings, for example their most recent earnings call, they were talking about the fact that they are seeing the trends continuing to move in the right direction. They said the first half of February they saw meaningful improvement across all of their regions compared to January, but then they made this reference to gross bookings. They said gross bookings for the summer are higher than they were at this time in 2019, so that's encouraging for a number of different reasons and it sounds a lot of people are planning trips. I know that we are both planning to get a trip and I'm going to be going a few places here over the summer as well looking forward to that. But when you think about just the fact that gross bookings for the summer are higher than they were at this time in 2019, that's really encouraging. The nice thing about travel is it's truly a global opportunity. I think travel is going to continue to be a long-term trend that investors can benefit from, so Booking Holdings stands out as one way to look at this reopen 2.0.

Chris Hill: It is interesting. The difference, as you said, the long-term trend versus the short-term catalysts, because ultimately there has to be something sustainable. There has to be something about an underlying business that we as investors can see a pathway for growth. Which, and this may be just my preference, I always prefer organic growth as opposed to growth through acquisition. It's not to say that that doesn't work, there are plenty of businesses that have rewarded shareholders by going the route of acquisition. But to me, it's just preferable to see a business like I've talked before about Home Depot and Lowe's, and not that they do a tremendous amount of increasing their store count year-over-year, but you look at the way that they've grown out their online presence, their deliveries, that sort of thing, that's just easier for me to wrap my head around.

Jason Moser: Well, yeah. I think Home Depot and Lowe's, two very good examples of businesses that I think could certainly benefit here over the next several months as consumer traffic continues to pick up. We've seen the strength in the housing market over the past couple of years, and the neat thing about housing is whether you own or you rent, home improvement maintenance, all that stuff is always on the table. That's to me one of the most obvious long-term trends out there, because everybody needs a roof over their head. You look at Home Depot and Lowe's, the quarters that they just chalked up, to be able to maintain their gross margins in a time like this when inflation really is front and center, Lowe's actually expanded their gross margin very modestly. Home Depot, a little bit of pressure, but overall they've really been able to maintain prices very well and passes these costs along to consumers.

I think part of that is just due to the nature of the market that it serves, it's a necessary market. Then they love to throw the statistics out there, 50 percent of the homes here in the US are over 40 years old. A lot has changed in 40 years. The ways that we build houses, the ways that we've repair our homes and update and improve our homes. What that ultimately means is you get this massive installed housing base out there just in this country alone, that really requires a lot of what Home Depot and Lowe's are selling. They may not be the sexiest names in the world, and they may not like the world on fire in the near-term, but when you stretch the chart out, if you look at the way these companies performed through the years, 3, 5, 10 years, they are just tremendous performers. Lowe's in particularly, you look at what Marvin Ellison has done there, that has been just nothing short of spectacular. I think what we've got now is really two businesses there in Lowe's and Home Depot that you and I have likened before to MasterCard and Visa . It's almost like a which one should I pick? Why bother choosing? You could actually own both and get away with it just fine. It's not a bad idea, actually.

Chris Hill: Not a bad idea at all. Last thing and then I'll let you go. When you think about long-term trends, I suppose there are a couple of different ways you can think about them. One is to try and predict where the future is going and be right, not only about the direction, but the timing of how soon we're going to get there. I was on David Gardner's Rule Breaker investing podcast recently and on an episode that were set in the year 2052 and one of the jokes we made on that was that self-driving cars, still not a thing [laughs] and it may not be by the way. That's one way to do it, like OK, this is where the world is going. But another way to do it is to look at trends right now and say, OK, do I think this is going to be here in 20 years? You can say that about individual products, you can also say that about industries. It's why whenever someone has a new baby and he's like, I want to buy a stock for them. My answer is always Starbucks. Because I know that the way we drink coffee in 50 years is going to look a whole lot like the way we drink it now.

Jason Moser: [laughs] If it looks any different, Starbucks is probably going to be one of the companies that is innovating and iterating there. So you probably win either way. Yeah, I think to me, one of the trends that I think it's front and center right now for a lot of people is work, exactly how we're going to be working. We're talking about stay at home, now we're talking about reopen. It's been a weird two years. There're offices that never closed down and then there are other offices that just have closed down completely and you wonder what exactly the future holds. I look to a business like Microsoft, for example, and I think it's very telling that you've got a lot of these big tech companies that are reopening their offices. They're eager and excited to do that, and I think that's for a number of reasons. I think that you've seen some of the CEOs of these businesses, Twitter for example, they're talking about the fact that, yes, remote work is available, but it is harder. It makes things a lot more difficult. I'm sure probably you run into some challenges where remote work does make things harder. 

But by the same token, there are a lot of folks that like that, convenience in being able to go do what they want to do when they want to go do it, it certainly expands that work schedule. For me, I look at the absolutes as being probably what you want to avoid. If you're saying, well, we're just going to be a virtual-only company, you're probably leaving something on the table there. But if you say that, well, everybody has to be at the office all the time, well, you're leaving some talent out there that you might not be able to get otherwise. To me, the hybrid work environment, that's what seems like the future holds. You look at a company like Microsoft , a company that's responsible for getting so many of those tools that we've been able to use, whether you're Slack or Zoom or Microsoft Teams, Microsoft Teams and all of the tools that Microsoft provides, they help enable what ultimately I think we're going to see is the hybrid work environment where a lot of folks have the opportunity to do it however they want to do it, but companies still have a process and a philosophy in place that leaves everybody feeling included. I think that's probably one of the bigger challenges. I think that's going to be one of the things that companies will figure out as time goes on, is managing the remote and the physically present workforce together. Not saying that's an easy thing to do, but I think that's going to be something that companies are going to have to do. Because to me, again, it feels like you've take it to the extreme, if you go absolutes one way or the other, that to me seems to open up more challenges of opportunities the longer you play that out.

Chris Hill: Jason Moser, thanks for being here.

Jason Moser: Thank you.

Chris Hill: Remember back in high school when your English teacher taught you how to write a thesis statements, it's the main idea of your essay and you are not going to get an A without a strong thesis statement. It turns out that's one of those skills that comes in handy for investors like you and me. Here to talk through the nuts-and-bolts of an investment thesis is Motley Fool Senior Analyst, Alicia Alfiere. Thanks for being here.

Alicia Alfiere: Thanks for having me.

Chris Hill: Before we get into some of the key questions that can go into an investment thesis. Why do you think an exercise like this is helpful for us as investors?

Alicia Alfiere: First, when we think of an investment thesis, it's really a summary of what you think of the company and why you think it makes a good investment case, as well as some of the risks. It's really important, particularly now when we are seeing a lot of market volatility. The idea here is that I will help you cut through all the noise of that market volatility and focused on signals for your company and hopefully stop you from selling a company that's actually pretty good.

Chris Hill: I know that you've been using Duolingo, let's use that as an example here, and some of the key questions that people can ask when they are looking to build an investment thesis for any business, for any stock and it starts with really knowing the company.

Alicia Alfiere: This one sounds like a no-brainer, but there are actually companies out there that require a little bit extra time and research to be able to answer questions like, what does this company sell? Do? What problem are they solving? Who are their customers? How do they make money? That's really fundamental to understand. If we use Duolingo as an example here, Duolingo is a global mobile learning platform with the mission to develop the best educational content in the world and make it universally available. They offer a gamified approach to learning over 40 languages and they offer a lot of different solutions here. They have their flagship Duolingo Learning Language App, which is free. They have Duolingo Plus, which is a subscription. Duolingo English Test, which is a proficiency exam, and Duolingo for Schools. Essentially the problem that they're solving here, is making education accessible to the mobile generation and their lessons are pretty effective. According to their internal study, users with five Duolingo units were as proficient in reading and listening as students with four college semesters of language classes. Then in terms of how do they make money, again really important to understand. They make most of their money from their subscription products. The rest comes from the Premium Apps, so those are based revenues and revenues from their English tax.

Chris Hill: Every business has competition, so obviously it is worth spending a minute or two when you're putting together an investment thesis thinking about competitive advantages that a business might have.

Alicia Alfiere: Look at the competition within the industry. Is there a product or service sticky? Does the business have network effects? When we talk about network effects, think of a platform like Facebook. Where you have this virtuous circle of data which makes your users use it more, which brings in more data, which allows you to get more insights, [laughs] which again makes that product even more valuable. In terms of Duolingo they are in a highly competitive industry. Lots of options to learn new languages, whether it's a virtual or in-person classes, other apps and websites and there is substitution items that you could use as well like translator apps. But what advantages does Duolingo have? They have a strong brand, they have had over 500 million downloads and their flagship app is the top grossing app in the education category on Google Play and the Apple App Store. This strong brand recognition really helps to drive organic growth for them. 

They also have strong network effects so 41.7 million monthly active users, which includes a US contingent that actually out numbers. Total US high school foreign language learners which a massive amount here. They have over a half billion exercises completed daily on the platform and as a result of that strong network, Duolingo beliefs, they have the largest collection of language learning data, and they feed this virtual cycle of their network by using their collection of data, to make learning experiences more efficient and differentiated for its users. In terms of platform stickiness, over 50 percent of daily active users have used the app for more than seven days in a row, and one million users have an active stretch of longer than 365 days. Pretty impressive there, but there are some tricky parts here for paid subscribers, it's a bit more complicated. About 40 percent of annual subscribers renew their subscriptions after a year or about nine percent of monthly subscribers renew their subscription after one year. They got some work to do here.

Chris Hill: At the Motley Fool, we're not just interested in the business, we're interested in the management as well. It's worth spending time figuring out, hey, who are the people running this business?

Alicia Alfiere: Absolutely. Take a look at who are the co-founders, who is leading the Company? Do they have a long-term vision? What's their culture like? Remember their employees are what make a vision come to life. If employees don't buy in, it's going to be really hard for a company to grow. For Duolingo, it was founded by Luis von Ahn and Severin Hacker, two engineers who met at Carnegie Mellon. Luis is the CEO and Director, Severin is the CTO and Director. They're both heavily involved in the company, which we really like. For Luis growing up in Guatemalan, he saw how access to education can truly transform lives and when he met his kindred spirit in Safran the two embarked are creating an accessible, effective, and intelligent learning solution. While they started with languages, their long-term goal is to have language learning be just one of the education solutions that they offer. They've already started along this path. They have their Literacy App, Duolingo ABC, which teaches children how to read and they're working on an app to teach elementary school math. For culture, I like to look at website like Glassdoor to see what employees think. Do they like working there? Are they dedicated to vision? On Glassdoor, 93 percent of employees would recommend Duolingo to a friend and 97 percent approve of the CEO, so pretty solid results here.

Chris Hill: We say all the time investing is about the future. At some point when you're putting together an investment thesis, you got to check a couple of boxes in terms of what does the future look like for this business?

Alicia Alfiere: Yes. Think about the future. What's the market opportunity for them? Can they grow? How can they grow? Are there any broader trends that can help or hurt the company in the future? For Duolingo, they're a player in a growing market, the mobile learning space. Preferences for convenience, an on-demand services have driven a lot of consumers toward mobile solutions. Whether it's shopping or learning, and COVID accelerated the usage for mobile learning. Though the growth will probably edge away from some of that COVID highs, it's still expected to grow. Global language learning spending both online and offline, reached 61 billion in 2019 and is projected to grow to 115 billion by 2025. Within this market, online learning is growing fast. From 12 billion in 2019 to 47 billion in 2025. Perhaps the convenience and flexibility of mobile learning, as well as smartphone adoption overall, is broadening the demand for that language learning products. Since Duolingo's annual revenues were about 161 Million in 2020, they're only about 1.3 percent of the current market for online language learning, which gives them a ton of room to grow. They have a plan to grow, which is really important. They think that they could grow by increasing the number of users, converting free users to those paid subscription users, increasing subscription stickiness, which we already talked about, and expanding their solutions, beyond that language learning.

Chris Hill: We want to be bullish when we're thinking [laughs] about stock that we're considering adding to our portfolio. But at some point you have to put on the bare hat and think about what are the risks to this business?

Alicia Alfiere: Because every investment has risks, that's the nature of the beast and if you can't find one, you need to research more. Be curious, play the part of the skeptic and ask, what could go wrong. This is especially important in times of market volatility. For Duolingo, we already talked about some of the issues that they have here. Operating in a highly competitive environment and subscription retention numbers that could be better. But there's also another issue we didn't talk about, and that's low switching costs. What that means that it doesn't really cost a lot of money and it's not a huge hassle for users to simply change apps, or take in person costs instead and so that is another risk.

Chris Hill: You've clearly put in some work on Duolingo, tell me how the story ends. Is this stock you're adding to your portfolio or is it on your watchlist for right now?

Alicia Alfiere: Well, right now it's more on my watchlist. At the end of this process, what I like to do is summarize and actually, hey, what would the investment thesis look like? In this case, I would say Duolingo has gamified approach to learning, which has helped the company build a strong brand and benefit from strong network effects in some platform stickiness. With these competitive advantages, strong tailwinds from online education trends, a large market to expand into, and a plan for expansion, Duolingo is an intriguing company by subscription retention statistics and those low switching costs give me a bit of a pause for right now. I'm going to continue to follow them and research them because I find this company fascinating and a really value leadership's vision and plans for the future.

Chris Hill: Do you've more information about putting together your own investment thesis in our show notes. So check those out when you get a chance. Alicia Alfiere, thanks so much for being here.

Chris Hill: That's all for today, I will be coming up tomorrow, three analysts share some of the biggest investing lessons that they've learned over the past 20 years. As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.

Alicia Alfiere owns Microsoft. Chris Hill owns Home Depot, Lowe's, Microsoft, Starbucks, and Visa. Jason Moser owns Booking Holdings, Mastercard, Starbucks, and Visa. The Motley Fool owns and recommends Booking Holdings, Home Depot, Mastercard, Microsoft, Starbucks, Twitter, and Visa. The Motley Fool recommends Lowe's and recommends the following options: short April 2022 $100 calls on Starbucks. The Motley Fool has a disclosure policy .

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Aligning Your Investment Thesis with Long Term Goals

1. the importance of an investment thesis, 2. understanding your financial timeline, 3. risk tolerance and investment horizons, 4. diversification strategies for long-term stability, 5. market trends and economic indicators, 6. aligning investments with personal values, 7. regular portfolio review and rebalancing, 8. the role of patience in wealth accumulation, 9. staying the course.

An investment thesis stands as the cornerstone of any successful portfolio, guiding investors through the tumultuous seas of market volatility towards the safe harbor of long-term wealth accumulation. It is not merely a statement of intent, but a comprehensive framework that encapsulates an investor's convictions, risk tolerance, and strategic outlook. By aligning one's investment thesis with long-term goals , an investor ensures that each decision is made with a clear endgame in sight, reducing the likelihood of being swayed by short-term market fluctuations or speculative trends.

1. Diversification : A well-crafted investment thesis emphasizes the importance of diversification. For instance, an investor might allocate funds across various asset classes such as stocks, bonds, real estate , and commodities. This approach is exemplified by the adage "don't put all your eggs in one basket ," which holds true in the context of investment. Diversification helps mitigate risk and can lead to more stable returns over time.

2. Risk Assessment : Understanding and managing risk is another critical aspect . An investor with a long-term horizon might be more inclined to invest in growth stocks , which typically exhibit higher volatility but offer the potential for substantial returns. Conversely, a risk-averse investor might prefer blue-chip stocks or government bonds, which provide more stable but typically lower returns.

3. Market Trends : Keeping abreast of market trends is also vital . For example, the shift towards renewable energy has seen a surge in investments in green technology firms. An investor who recognizes this trend and includes such companies in their portfolio may benefit from the industry's growth over the coming decades.

4. Valuation Techniques : Employing various valuation techniques to identify undervalued assets is a key feature of a robust investment thesis . Methods such as discounted cash flow analysis or comparative market analysis can reveal opportunities that others might overlook.

5. Behavioral Finance : Acknowledging the role of psychology in investing can provide an edge. Behavioral finance teaches us that investors are not always rational and are often influenced by biases and emotions. An astute investor might use this knowledge to avoid common pitfalls such as herd mentality or overconfidence.

6. Ethical Investing : incorporating ethical considerations into investment decisions is becoming increasingly important. socially responsible investing (SRI) and environmental, social, and governance (ESG) criteria allow investors to align their portfolios with their values, potentially driving positive social change alongside financial returns.

7. Technological Advancements : Technology plays a pivotal role in modern investing. The rise of fintech and robo-advisors has democratized access to investment tools and information, enabling more individuals to craft and manage their investment theses with greater precision.

By weaving these elements into the fabric of an investment thesis, investors can create a resilient strategy that not only withstands the test of time but also aligns seamlessly with their long-term aspirations . Whether it's the story of Warren Buffett's value investing approach or the tech-savvy investor who capitalized on the dot-com boom, history is replete with examples of individuals who have achieved financial success by adhering to a well-defined investment thesis. As the financial landscape evolves, so too must the investment thesis, adapting to new information, emerging trends, and the personal growth of the investor themselves.

The Importance of an Investment Thesis - Aligning Your Investment Thesis with Long Term Goals

When it comes to investing, understanding your financial timeline is crucial. It's the backbone of how you plan, where you allocate your assets, and how you measure progress towards your long-term goals. This isn't just about knowing when you'll need the money, but also about understanding the journey your investments will take over time. Different investment vehicles and strategies will align with various stages of your life, and recognizing this can be the difference between reaching your financial objectives or falling short.

From the perspective of a young professional , the financial timeline is a canvas of potential. Here, the focus is on growth and compound interest . For example, a 25-year-old investing in a diversified portfolio of stocks might not see significant returns in the first few years. However, given the power of compounding, even modest contributions can grow substantially over a 40-year period.

1. Early Career (Ages 20-30) : This is the time to take on more risk for greater growth potential. Retirement accounts like 401(k)s and IRAs are beneficial, especially if they come with employer matching.

2. Mid-Career (Ages 30-50) : Responsibilities often increase during these years. balancing growth with security becomes key. This might involve a mix of stocks, bonds, and real estate investments .

3. Pre-Retirement (Ages 50-65) : The focus shifts towards preserving capital and generating income . Investments may start to lean more heavily towards bonds and dividend-paying stocks .

4. Retirement (Ages 65 and beyond) : The goal here is income generation and capital preservation. Annuities, government bonds, and other low-risk investments become more prominent.

For someone approaching retirement, the timeline is shorter. Let's consider a 50-year-old with a significant amount saved in a retirement fund. The strategy here would likely involve shifting from high-risk stocks to more stable investments like bonds or annuities to protect the nest egg.

A business owner has a different perspective. Their financial timeline might be tied to the lifecycle of their business. Early on, profits might be reinvested into the business for growth, but as they approach a planned exit or sale, the strategy would shift towards liquid assets.

Your financial timeline is a living part of your investment thesis . It should evolve as you move through life's stages, always aligning with your changing goals and circumstances. By understanding and respecting this timeline, you can make informed decisions that pave the way to financial success. Remember, it's not just about the destination; it's about the journey your money takes alongside you.

Understanding Your Financial Timeline - Aligning Your Investment Thesis with Long Term Goals

Understanding your risk tolerance and investment horizon is crucial in aligning your investment strategy with your long-term financial goals. Risk tolerance refers to the degree of variability in investment returns that an investor is willing to withstand. It is a psychological trait that is genetically based, but positively influenced by education, income, and wealth (as these increase, risk tolerance appears to increase slightly) and negatively by age (as one gets older, risk tolerance decreases). Your investment horizon is the timeframe for which you plan to keep your investments before taking the money out. It's a pivotal factor because, generally, the longer the investment horizon, the higher the potential for recovery from market dips.

From the perspective of a conservative investor , risk tolerance is low, and such investors often opt for fixed-income securities , like bonds or fixed deposits, which offer predictable returns. On the other hand, an aggressive investor may have a high risk tolerance and prefer equities, which are more volatile but offer the potential for higher returns over the long term .

Here are some in-depth insights into how these concepts play out:

1. Age and Investment Horizon : Younger investors typically have a longer investment horizon, allowing them to take on more risk. For example, a 25-year-old could invest in a high-growth tech stock, knowing that they have decades to recover from any potential losses before retirement.

2. financial Goals and Risk tolerance : An investor saving for a short-term goal, like buying a house in three years, may have a lower risk tolerance for that particular investment compared to saving for retirement 30 years away.

3. Economic Conditions : During volatile economic times , even aggressive investors might shift towards more conservative investments to preserve capital. Conversely, in a stable economy, conservative investors might be more willing to invest in equities to capture growth.

4. Diversification : This is a strategy used to manage risk by spreading investments across various financial instruments, industries, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event.

5. risk Assessment tools : Many investors use questionnaires or software to help determine their risk tolerance . These tools can provide a quantitative measure of risk appetite, which can then be matched with appropriate investment choices.

6. Life Changes : Major life events, such as marriage, the birth of a child, or retirement, can significantly alter an investor's risk tolerance and investment horizon .

7. Psychological Factors : Fear and greed are powerful emotions that can lead investors to take on too much risk or too little. Being aware of these emotions and how they can affect decision-making is essential.

Example : Consider the case of Emma, a 30-year-old software engineer who is looking to invest her savings. She knows that she won't need to access these funds for at least 20 years. Given her long investment horizon, she decides to allocate 70% of her portfolio to stocks and 30% to bonds. This mix reflects her moderate risk tolerance, allowing for growth while providing some buffer against market volatility .

aligning your risk tolerance and investment horizon with your long-term investment goals is not a one-time task. It requires regular reassessment to ensure that your investment strategy remains in sync with your evolving financial situation and the changing economic landscape . By doing so, you can make informed decisions that pave the way for financial stability and growth over the long term.

Diversification is a cornerstone of prudent investment strategy, often touted for its ability to balance risk and reward over the long haul. By spreading investments across various financial instruments, industries, and other categories, it aims to maximize returns by investing in different areas that would each react differently to the same event. Although it doesn't guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk. This approach is akin to not putting all your eggs in one basket and instead having multiple baskets to hold your eggs, ensuring that if one falls, the loss is contained and does not affect the overall supply.

From the perspective of an individual investor, diversification might mean buying a mix of stocks, bonds, and alternative assets. A retiree, for instance, might lean more heavily on income-generating bonds, while a young professional might take on more stocks for growth potential . Institutional investors, on the other hand, often diversify not just across asset classes but also geographically and by industry sector, to hedge against regional or sector-specific economic downturns.

Here are some in-depth insights into diversification strategies:

1. Asset Allocation : This involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will largely depend on your time horizon and your ability to tolerate risk.

2. Rebalancing : Over time, some investments may grow faster than others. By rebalancing, investors can ensure that their portfolio does not over-concentrate in a particular asset category. For example, if the stock portion of your portfolio were to become larger than you intended, due to rapid growth, you might sell some stocks and invest the proceeds in assets that haven't grown as quickly.

3. Diversification Across Industries and Sectors : Investing in a variety of sectors can help reduce the risk of exposure to industry-specific downturns. For instance, if the technology sector is hit by a regulatory change, a portfolio that also includes healthcare and utilities stocks may be less affected.

4. International Diversification : investing in foreign markets can provide access to growth opportunities outside of an investor's home country. However, it's important to consider the risks, including currency risk and geopolitical risk , which can be mitigated through the use of hedging strategies or international mutual funds.

5. Alternative Investments : These can include real estate , commodities, and hedge funds. They often behave differently from traditional equities and bonds, providing a potential hedge against market volatility . For example, real estate investments may appreciate in value over time , providing a counterbalance to stock market downturns .

6. systematic Investment plans (SIPs) : Regularly investing a fixed amount into a particular asset or portfolio is a strategy that can help in averaging the cost of investments and compounding returns over time. This is particularly useful in volatile markets.

To illustrate, let's consider the example of an investor who started with a simple 50-50 portfolio of stocks and bonds. If the stock market performs well, the value of the stocks will grow faster than the bonds, potentially skewing the allocation to something like 70-30. Without rebalancing, the investor's portfolio becomes riskier than intended. By selling some stocks and buying bonds, the investor can return to the original 50-50 allocation, maintaining the desired risk level .

Diversification strategies are essential for long-term stability in investment portfolios . They help investors spread risk and capitalize on the growth of different market sectors and asset classes. While the future is uncertain, a well-diversified portfolio is equipped to handle market fluctuations and provide a smoother ride towards achieving long-term financial goals.

Diversification Strategies for Long Term Stability - Aligning Your Investment Thesis with Long Term Goals

Understanding market trends and economic indicators is crucial for aligning your investment thesis with long-term goals. These trends and indicators act as a compass, guiding investors through the complexities of financial markets . They provide insights into the health of economies, the direction of markets, and the potential risks and opportunities that lie ahead. By analyzing patterns in market behavior and economic data, investors can make informed decisions that resonate with their long-term objectives . Whether it's the bullish sentiment indicated by a sustained rise in stock prices or the bearish outlook suggested by a contraction in manufacturing activity, each signal plays a pivotal role in shaping investment strategies.

1. stock Market indices : Consider the S&P 500 and the dow Jones industrial Average, which reflect the performance of large-cap U.S. Equities. A consistent upward trajectory in these indices often signals investor confidence and economic growth. For example, a prolonged bull market from 2009 to early 2020 mirrored the recovery and expansion of the global economy post the financial crisis .

2. Interest Rates : Central banks manipulate interest rates to control economic growth . lower interest rates can encourage borrowing and investing, leading to economic expansion. Conversely, higher rates can cool down an overheated economy. The Federal Reserve's decision to cut rates in response to the 2020 pandemic is a case in point, aiming to stimulate economic activity amidst global uncertainty .

3. gross Domestic product (GDP) : gdp growth rates provide a broad measure of economic activity and health. A steady increase in GDP indicates a growing economy, which is generally positive for equity markets. For instance, China's remarkable GDP growth over the past decades has been a significant driver of its stock market performance .

4. Unemployment Rates : Employment levels are directly tied to consumer spending, which drives economic growth . Lower unemployment rates typically lead to higher disposable income and, consequently, increased spending. The U.S. Unemployment rate's drop to 3.5% in February 2020 signaled strong economic conditions before the pandemic-induced recession.

5. Inflation : Moderate inflation is a sign of a healthy economy, but high inflation can erode purchasing power and hurt investment returns. The hyperinflation experienced by Zimbabwe in the late 2000s decimated savings and investments, highlighting the importance of this indicator.

6. consumer Confidence index : This metric gauges the optimism or pessimism of consumers regarding their financial situation and the economy. A high confidence level suggests that consumers are more likely to spend, which can boost economic growth and support higher stock prices.

7. housing Market data : real estate trends can also provide insight into economic conditions. A surge in new home sales and housing starts often precedes economic upturns, as seen in the U.S. housing market recovery preceding the broader economic rebound after the 2008 financial crisis.

By keeping a close eye on these indicators, investors can tailor their investment thesis to capitalize on long-term trends , ensuring that their portfolio is well-positioned for future growth. It's not just about riding the waves of short-term market movements; it's about understanding the underlying currents that drive those waves and using that knowledge to steer towards your investment goals.

Market Trends and Economic Indicators - Aligning Your Investment Thesis with Long Term Goals

In the realm of investing, aligning one's portfolio with personal values is not just a trend but a profound shift in how individuals approach wealth creation . This alignment ensures that investments resonate with ethical, environmental, and social principles, leading to a sense of fulfillment that transcends monetary gains. As investors become more conscious of their impact on the world, they seek out opportunities that reflect their beliefs and aspirations, whether it's through sustainable energy projects , social enterprise funding , or companies with strong governance practices.

1. Ethical Considerations: Many investors start by screening out industries that conflict with their values, such as tobacco, firearms, or fossil fuels. For example, an investor passionate about health and wellness may choose to exclude fast food companies from their portfolio.

2. Environmental Impact: With climate change being a pressing issue, investments in renewable energy sources like solar or wind farms are increasingly popular. Take the case of an eco-conscious investor who opts for a green bond that funds clean transportation initiatives.

3. Social Responsibility: socially responsible investing (SRI) involves supporting companies that contribute positively to society. An investor might focus on firms that promote gender diversity, like a tech company with a female-majority board.

4. Governance: Good corporate governance is crucial for sustainable investment. Investors might look for companies with transparent accounting practices and fair executive compensation policies.

5. Community Investing: This involves directing capital to underserved communities to foster economic growth . An example is investing in a community development financial institution (CDFI) that offers loans to small local businesses.

6. Impact Investing: Going beyond SRI, impact investing aims for a measurable, beneficial social or environmental impact alongside a financial return. For instance, investing in a startup that develops affordable clean water solutions in developing countries.

7. faith-Based investing : Some investors align their portfolios with their religious beliefs, such as Islamic finance which prohibits interest and investing in alcohol or gambling-related businesses.

8. Thematic Investing: This strategy focuses on specific themes, such as aging populations or technological advancements. An investor might buy shares in companies developing innovative healthcare solutions for the elderly.

aligning investments with personal values is a multifaceted approach that requires introspection, research, and a commitment to one's principles. It's a strategy that not only aims for financial success but also for a positive contribution to the world, making it a deeply rewarding journey for the conscientious investor.

In the journey of aligning your investment thesis with your long-term goals, regular portfolio review and rebalancing stand out as critical steps. This process is akin to a periodic health check-up for your financial assets, ensuring that your investment allocations are in sync with your evolving financial objectives and risk tolerance. Over time, market fluctuations can cause your initial asset allocation to drift, potentially exposing you to higher risk or lower returns than intended. By reviewing your portfolio regularly, you can identify such discrepancies and make necessary adjustments.

From the perspective of a retail investor , regular portfolio reviews can help in catching underperforming assets early, allowing for a switch to more promising investments. For instance, if a particular stock has consistently underperformed compared to its peers over several review periods, it might be time to consider reallocating those funds.

On the other hand, institutional investors often employ rebalancing as a risk management tool . They might rebalance more frequently, using sophisticated models to determine optimal asset allocation . For example, an institutional investor might reduce exposure to equities after a strong market rally to lock in gains and prevent overexposure to a subsequent market downturn.

Here are some in-depth insights into the process:

1. Assessment of Current Asset Allocation : Begin by comparing your current asset distribution with your target allocation. This will highlight areas where the actual investment mix has deviated from the plan.

2. Performance Review : Evaluate the performance of individual assets and asset classes . Look for trends such as consistent underperformance or overperformance, which might necessitate a change.

3. Risk Evaluation : Consider how changes in the market or your personal life may have altered your risk profile. Adjust your investments to ensure they still align with your risk tolerance .

4. Cost Considerations : Be mindful of transaction costs and tax implications when rebalancing. Sometimes, it may be more cost-effective to adjust future contributions rather than selling existing assets.

5. Strategic Rebalancing : Decide on a rebalancing strategy that suits your needs. Some investors prefer a calendar-based approach, while others may opt for a threshold-based strategy where rebalancing occurs once an asset class deviates by a certain percentage from the target allocation.

To illustrate, let's consider Jane, a long-term investor . Jane's target allocation was 60% stocks and 40% bonds . However, after a bull run in the stock market , her portfolio shifted to 70% stocks. Recognizing this drift, Jane sold some of her stock holdings and purchased bonds to revert to her original allocation, thus maintaining her desired risk level.

In summary, regular portfolio review and rebalancing are not just about maintaining balance but also about making informed decisions that keep your investments aligned with your long-term financial aspirations. It's a disciplined approach that can significantly contribute to the health and growth of your investment portfolio .

Regular Portfolio Review and Rebalancing - Aligning Your Investment Thesis with Long Term Goals

Patience is often touted as a virtue in many aspects of life, but its significance is profoundly felt in the realm of wealth accumulation. The journey to financial prosperity is seldom a sprint; it's a marathon that requires a steadfast commitment to long-term objectives. In an era where instant gratification is the norm, patience stands out as a critical differentiator between fleeting success and enduring wealth. This principle is echoed in the investment strategies of some of the world's most successful investors, who often highlight the importance of a long-term horizon for realizing the full potential of investments. From the slow compounding of interest to the meticulous cultivation of a diverse portfolio, patience permeates every facet of wealth building. It's the silent guardian that allows investors to weather market volatility , resist the allure of speculative trends, and adhere to a disciplined investment thesis that aligns with their long-term goals.

1. Compounding Interest : The magic of compounding interest is a quintessential example of patience in action. Consider the story of Anne Scheiber, a retired IRS auditor who turned a $5,000 investment into $22 million over 50 years. By patiently reinvesting dividends and capital gains , she allowed her investments to grow exponentially.

2. Market Cycles : Understanding and respecting market cycles is another aspect where patience is key. The legendary investor Warren Buffett is known for his patient approach, often quoting, "The stock market is designed to transfer money from the Active to the Patient." He emphasizes the virtue of holding onto stocks of robust companies through market ups and downs .

3. Behavioral Finance : Patience also plays a pivotal role in overcoming the psychological traps of investing, such as herd mentality and overreacting to market news. The patient investor is one who can look beyond the noise and make decisions based on fundamental analysis and long-term perspectives.

4. Diversification : A patient approach to diversification involves gradually building a portfolio that spreads risk across different asset classes , industries, and geographies. This strategy was employed by the Yale Endowment Fund, which saw significant growth by patiently sticking to a diversified investment plan over decades.

5. Innovation and Growth : Patience is crucial when investing in innovation and growth sectors. Amazon's Jeff Bezos, for instance, is renowned for his long-term outlook , prioritizing growth over immediate profits, a strategy that has paid off handsomely for patient investors.

6. real estate : In real estate, patience can be seen in the 'buy and hold' strategy, where investors purchase properties and hold onto them for long-term appreciation and rental income. This approach has been a cornerstone of wealth for many real estate moguls.

7. retirement planning : For retirement planning, patience is about consistent, long-term contributions to retirement accounts like 401(k)s and IRAs, often resulting in a substantial nest egg due to the power of compounding over time.

Patience in wealth accumulation is not merely a passive waiting game; it's an active strategy that involves thoughtful decision-making , a deep understanding of market dynamics, and a steadfast focus on long-term objectives. It's the art of resisting the temptation for immediate rewards in favor of substantial, lasting prosperity. Whether it's through the steady growth of compounding interest, the resilience in market downturns, or the foresight to invest in future growth , patience is the thread that weaves through the tapestry of successful wealth accumulation strategies . It's the unsung hero in the narrative of financial triumph, and its role is indispensable in aligning one's investment thesis with their long-term goals.

The Role of Patience in Wealth Accumulation - Aligning Your Investment Thesis with Long Term Goals

In the realm of investing, the journey is often long and winding, with various factors influencing the path one takes. Staying the course is a principle that resonates deeply with investors who understand that alignment with long-term goals is not just a strategy but a discipline. It requires a steadfast commitment to an investment thesis that can weather the storms of market volatility and the allure of short-term gains. This steadfastness is not born out of rigidity but out of a clear understanding of one's financial objectives and the conviction that the chosen investment vehicles are the most suitable conduits to achieve them.

From the perspective of a retail investor , staying the course might mean consistently contributing to a diversified portfolio, regardless of the market's ups and downs. For an institutional investor , it could involve adhering to a set investment mandate that aligns with the long-term interests of stakeholders. Here are some in-depth insights into what 'staying the course' entails:

1. Understanding Risk Tolerance : Knowing one's risk tolerance is crucial. For example, a young investor might be more inclined to invest in growth stocks with higher volatility, while someone nearing retirement may prefer bonds or dividend-paying stocks for stability.

2. Asset Allocation : This is the process of distributing investments among different asset classes . A classic example is the 60/40 split between stocks and bonds, which has historically provided a balance between risk and return .

3. Rebalancing : Over time, the original asset allocation can drift due to differing returns from various assets. Rebalancing involves selling high-performing assets and buying underperforming ones to maintain the desired allocation. For instance, after a bull market, an investor might sell some stocks and buy bonds to return to their 60/40 allocation.

4. dollar-Cost averaging : This strategy involves investing a fixed amount of money at regular intervals, regardless of the asset price. An investor might purchase more shares when prices are low and fewer when prices are high, which can lead to a lower average cost per share over time.

5. Avoiding Emotional Decisions : Emotional reactions to short-term market fluctuations can derail long-term investment strategies . A disciplined approach helps in avoiding panic selling during market downturns or impulsive buying during euphoric highs.

6. Regular Reviews and Adjustments : While staying the course is important, so is flexibility. Life changes, such as marriage, having children, or retirement, may necessitate adjustments to one's investment strategy.

7. Tax Considerations : understanding the tax implications of investment decisions is vital. For example, utilizing tax-advantaged accounts like IRAs or 401(k)s can significantly impact long-term growth .

8. Inflation Hedging : Investments should also be considered in light of inflation. Real estate and treasury Inflation-Protected securities (TIPS) are examples of assets that can help protect against the eroding effects of inflation.

By incorporating these principles, investors can align their actions with their long-term investment thesis, ensuring that short-term market movements do not dictate their financial future. The key is to have a well-thought-out plan and the discipline to stick to it, making adjustments as necessary to stay aligned with one's long-term goals. Remember, the most successful investors are often those who stay the course, remaining focused on their long-term objectives rather than getting sidetracked by short-term market noise.

Staying the Course - Aligning Your Investment Thesis with Long Term Goals

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How to Develop Your Own Investment Thesis: A Critical Step for Aspiring Venture Capitalists

s an aspiring venture capitalist, you hold the key to unlock the untapped potential of startups, propelling them to soaring heights and reshaping industries. But in this electrifying landscape of opportunities, how do you navigate through the ever-changing tides? The answer lies in the essence of venture capital success: developing your own investment thesis.

What exactly is an Investment Thesis?

An investment thesis is your North Star, an illuminating beacon that guides you through the vast ocean of startups, helping you navigate toward the brightest prospects. It's a strategic framework, meticulously crafted to align your investment approach, criteria, and aspirations.

With an investment thesis, you define the types of companies you want to invest in, the industries you're interested in, and the stages of startups you believe have the most potential. It's like setting your preferences and priorities before you begin the journey.

Why is an investment thesis so critical for aspiring venture capitalists? The answer is simple—this well-defined roadmap sets you apart from the crowd and gives you the edge to thrive in this fiercely competitive world. It empowers you to make informed decisions, uncover hidden gems in the startup ecosystem, and unlock the true potential of visionary entrepreneurs.

In this blog post, we will explore the essential steps to create a compelling and potent investment thesis

Getting Started With Your Investment Thesis: Conducting Market Research

At the core of any successful investment thesis lies comprehensive market research. Understanding industry trends, evaluating market opportunities, and assessing the competitive landscape are vital steps to identify lucrative investment prospects. 

Keep a finger on the pulse of the business landscape and stay attuned to shifts and disruptions. Analyze the forces shaping various sectors, from cutting-edge technologies and regulatory changes to changes in consumer behavior. Identifying and understanding these trends will enable you to anticipate the future landscape, positioning you as an astute investor who can spot opportunities before they materialize.

With a keen understanding of industry trends, venture capitalists must evaluate market opportunities with a discerning eye. Look beyond the surface and assess the long-term growth potential of markets and industries. Identify white spaces and areas where innovation is likely to flourish. Be mindful of macroeconomic factors, such as GDP growth, inflation rates, and demographic shifts, as they can profoundly influence market dynamics. A comprehensive evaluation of market opportunities will empower you to focus your investments on ventures that have the potential to become tomorrow's industry leaders.

In the vibrant world of startups, competition is the norm. As such, to excel as a venture capitalist, you must also gain a panoramic view of the competitive landscape. Analyze existing players and their strengths, weaknesses, opportunities, and threats (SWOT analysis). Identify startups that have the potential to disrupt established markets and challenge the status quo. Furthermore, seek out market gaps, where unmet needs and underserved customer segments await innovative solutions. Investing in startups that address these gaps can lead to remarkable returns on investment and foster a positive impact on society.

Market research is not a mere exercise of intuition and speculation; it thrives on data-driven insights. Leverage data analytics, market reports, and industry research to augment your understanding of market trends. Embrace technology and data tools that can provide you with a wealth of information at your fingertips. By making data-driven decisions, you'll foster a more robust investment thesis and bolster your credibility as a venture capitalist.

While conducting market research, it's crucial to remember that the startup ecosystem is dynamic and ever-changing. Be prepared to pivot and adapt your investment thesis in response to new information and shifts in the market. Stay agile and flexible, allowing your investment strategy to evolve as you gain deeper insights. Successful venture capitalists are those who can navigate uncertainty, staying attuned to emerging trends and swiftly adjusting their course to capitalize on unforeseen opportunities.

Defining The Investment Criteria for your Investment Thesis

Once you've gathered market insights, now it’s the fun part - it's time to define your investment criteria. Determine the stages of startups you want to invest in, such as seed, early-stage, or late-stage companies. Consider the industries you're passionate about or have domain expertise in. 

Additionally, establish your preferred investment size and the level of diversification you aim to achieve within your portfolio. Having clear investment criteria will streamline your decision-making process and keep your investments focused on your goals.

Determining the Stages of Startups

Venture capitalists invest in startups at various stages of their lifecycle, each offering distinct opportunities and risks. Deciding which stage aligns best with your expertise and risk appetite is pivotal. Consider if you want to invest in seed-stage companies, which are in their infancy and require significant support, or if you prefer early-stage startups with a product and initial traction. Alternatively, you may focus on later-stage companies that are scaling and need capital to expand rapidly. Your chosen stage will dictate your involvement level and the potential return horizon of your investments.

Geographical Preferences and Target Industries

Venture capital is a global endeavor, and you can choose to invest locally, regionally, or even globally. Geographical preferences may be influenced by factors like your network, knowledge of specific markets, and comfort with regulatory environments. Moreover, identifying the industries you're passionate about or have domain expertise in is crucial. Investing in industries you understand well will allow you to provide strategic value to the startups you support, beyond just financial backing.

Investment Size and Portfolio Diversification

The size of your investments and portfolio diversification strategy are interlinked. Determine the average investment size you are comfortable with, as this will influence the types of startups you can back. Some venture capitalists prefer larger, concentrated bets on a select few startups, while others spread their investments across a broader range of smaller companies to diversify risk. Striking the right balance is key—too few investments can expose you to concentrated risk, while too many might dilute your ability to provide adequate support to each startup.

Alignment with Personal Values and Objectives

As an aspiring venture capitalist, your investment criteria should be in harmony with your personal values and long-term objectives. Consider what impact you want to make through your investments. Are you driven by social impact, environmental sustainability, or a particular mission? Aligning your investment criteria with your values will not only enhance your satisfaction as an investor but may also attract entrepreneurs who share your passion, fostering a mutually rewarding relationship.

Market Fit and Growth Potential

While defining your investment criteria, focus on identifying startups that exhibit strong market fit and immense growth potential. Market fit refers to the startup's ability to address a specific problem or need in the market effectively. Investigate whether the startup's product or service resonates with its target audience and has the potential for widespread adoption. Moreover, evaluate the scalability of the business model, as this will determine the startup's growth trajectory and its potential to become a market leader.

Synergy with Your Expertise and Network

Leverage your expertise and network to your advantage when defining your investment criteria. Aligning with startups that can benefit from your insights and connections will create a symbiotic relationship. As an investor, you can offer more than just financial support; your guidance and connections can be invaluable in helping startups navigate challenges and scale their businesses. Synergy with your expertise and network can significantly enhance your value proposition as a venture capitalist.

Balancing Risk and Return

Investing in startups inherently involves risk, and your investment criteria should reflect your risk appetite and tolerance. Strive for a balance between risk and potential return that aligns with your investment objectives. High-growth startups often carry higher risk, but they can also offer substantial rewards.

On the other hand, more established companies may provide a steadier return, albeit with potentially lower growth potential. Understanding this balance is essential in defining your investment criteria and building a well-rounded portfolio.

Balancing risk and potential returns is a fine art, and your investment thesis should outline how you plan to approach this delicate balance. Furthermore, learn to measure and quantify risk in the startup ecosystem using various risk assessment techniques to make informed investment choices.

Identifying Key Performance Indicators (KPIs) for Your Investment Thesis

Key Performance Indicators are quantifiable metrics that provide critical insights into the performance and achievements of a business. By tracking relevant KPIs, venture capitalists can assess the overall health and direction of a startup, enabling them to support portfolio companies effectively. Moreover, KPIs offer a basis for comparison, allowing you to benchmark a startup's progress against its peers and industry standards.

Tailoring KPIs to Startup Stages and Industries

While KPIs share a common goal of tracking performance, their significance can vary significantly based on the stage and industry of a startup. For example, early-stage companies might prioritize metrics related to customer acquisition, retention, and product-market fit. In contrast, late-stage startups might focus on revenue growth, customer lifetime value, and profitability. Tailoring KPIs to suit the unique needs and challenges of each startup stage and industry is vital for meaningful performance assessment.

Selecting Actionable and Measurable Metrics

When identifying KPIs, seek metrics that are both actionable and measurable. Actionable KPIs provide clear guidance on how to improve performance, helping startups identify areas that need attention and enhancement. Measurable KPIs, on the other hand, are quantifiable, allowing you to track progress and changes over time. The ability to take action based on KPIs and measure their impact ensures a proactive approach to enhancing a startup's performance.

Common KPIs in Venture Capital

While KPIs can be highly specific to individual startups and industries, certain metrics have proven valuable across the venture capital landscape. Some common KPIs include:

Customer Acquisition Cost (CAC): The cost to acquire a new customer, helping evaluate marketing efficiency.

Monthly Recurring Revenue (MRR): Provides insight into the company's predictable revenue stream.

Customer Churn Rate: Measures customer retention and the ability to maintain long-term 

relationships.

Burn Rate: Tracks how quickly a startup is spending its capital, indicating runway and sustainability.

Gross and Net Profit Margins: Assessing revenue generation and cost efficiency.

Customer Lifetime Value (CLV): Estimates the value of a customer over their entire engagement with the startup.

The Power of Data-Driven Decision Making

KPIs are not merely numbers on a dashboard; they fuel data-driven decision-making. By continuously monitoring KPIs, you can identify strengths, weaknesses, and potential roadblocks. Data-driven insights enable you to provide tailored guidance and support to your portfolio companies, helping them navigate challenges and seize growth opportunities.

Building a Well-defined Due Diligence Process

A well-structured due diligence process empowers you to make informed decisions, mitigates risks, and will help you identify the startups that align best with your investment thesis!

Let's delve deeper into the key steps involved in building an effective due diligence process so you can include it on your Investment Thesis:

1. Defining Your Due Diligence Objectives

Start by clarifying your objectives for the due diligence process. What key aspects do you want to evaluate in potential startups? Identify the critical areas of focus, such as market opportunity, team capabilities, competitive landscape, financials, and scalability. Setting clear objectives ensures that you leave no stone unturned while assessing potential investments.

2. Gathering Essential Information

Begin the process by collecting comprehensive data and information about the startup under consideration. Request financial statements, market research, business plans, and any other relevant documentation. Engage in one-on-one discussions with the startup's founders and management team to gain insights into their vision, strategy, and execution plans. Gathering essential information lays the groundwork for a detailed evaluation.

3. Market Analysis

Conduct a thorough market analysis to assess the startup's positioning within its industry. Analyze market trends, potential for growth, competitive landscape, and potential threats. Understanding the market dynamics helps you gauge the startup's competitive advantage and potential for success.

4. Team Evaluation

Evaluate the startup's team to understand their expertise, experience, and alignment with the company's vision. Assess the cohesiveness and complementarity of the team, as a strong and capable team is a significant factor in a startup's success.

5. Financial Due Diligence

Perform rigorous financial due diligence to examine the startup's financial health and viability. Analyze revenue streams, cost structures, cash flow, and projections. Scrutinize financial ratios and indicators to assess the startup's financial sustainability and growth potential.

6. Product and Technology Assessment

Evaluate the startup's product or technology to gauge its uniqueness and potential market fit. Understand the value proposition it offers to customers and how it addresses market needs. Assess the scalability and defensibility of the product or technology to ensure long-term competitiveness.

7. Legal and Regulatory Review

Conduct a legal and regulatory review to identify any potential legal risks or compliance issues. Scrutinize contracts, licenses, intellectual property rights, and any pending legal disputes. Ensuring the startup operates within legal bounds safeguards your investment from unnecessary risks.

8. Customer and Partner Feedback

Gather feedback from customers, partners, and industry experts to gain external perspectives on the startup's product or service. Their insights can validate the startup's market fit, customer satisfaction, and potential for growth.

9. Risk Analysis

Identify and assess potential risks associated with the investment. Consider market risks, operational risks, technological risks, and competitive risks. A thorough risk analysis helps you make informed decisions about risk-reward trade-offs.

10. Decision-Making and Post-Investment Monitoring

Based on the findings from the due diligence process, make data-driven decisions on whether to invest in the startup. If you decide to proceed, establish a monitoring plan to track the startup's progress and performance after the investment. Continuously monitor the startup's performance against the initially defined objectives and pivot if needed.

Refining Your Thesis and Iterating

It’s also important to keep in mind that an investment thesis should not be static; it should evolve with your experiences and the changing market dynamics. Embrace flexibility and adaptability, and be open to learning from both successful and unsuccessful investments. As you gain insights from your portfolio companies and the market, update and refine your investment thesis to enhance its effectiveness continually!

Developing your own investment thesis is a critical step for aspiring venture capitalists. It provides you with a structured approach to identify and seize opportunities in the dynamic startup ecosystem. 

Through comprehensive market research, clear investment criteria, risk assessment, and an adaptable approach, your investment thesis will act as a guiding force throughout your venture capital journey. Embrace the continuous learning process, and don't hesitate to iterate and refine your thesis as you gain experience in the thrilling world of venture capital.

Interested in the full research paper?

You might also like, how to master the art of successful exits in venture capital, reinventing the wheel: how transport-tech is revolutionizing travel and mobility, 21 ways to build and maintain strong founder-vc relationships, exploring australia's venture capital ecosystem: a beginner's guide, navigating the post-investment phase: a comprehensive guide for new vcs, goingvc alumnus launches myriad venture partners with $200 million fund, about goingvc.

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Investment Thesis: An Argument in Support of Investing Decisions

October 29, 2023 by Abi Tyas Tunggal

An investment thesis is a well-reasoned argument that supports a specific investment decision, playing a vital role in the strategic planning process for individual investors and businesses alike. It comprises detailed research and analysis to evaluate an investment's potential profitability. A good investment thesis serves multiple purposes, including helping in the decision-making process, providing a comprehensive framework for monitoring and assessment, and offering a structured approach to identifying potential opportunities.

There are different types of investment strategies, such as venture capital , private equity, and long-term value investments. The core of an investment thesis involves identifying key parameters for evaluating an investment, understanding the unique market dynamics and competitive landscape, and realizing how to create value through strategic planning. To ensure a comprehensive and detailed investment thesis, it is crucial to involve thorough research, considering emerging trends and opportunities, and incorporating industry case studies for better understanding. Ultimately, financial statements and valuation metrics play a significant role in determining a well-suited investment decision.

Key Takeaways

• An investment thesis is a well-reasoned, research-based argument supporting a specific investment decision
• There are several types of investment strategies, and a well-structured investment thesis addresses market dynamics and competition to create value
• Research, valuation metrics, and understanding emerging trends are crucial in crafting a compelling investment ideas

Defining an Investment Thesis

An investment thesis is a well-structured, logical argument that justifies a particular investment decision, based on thorough research and analysis. It is essential for investors, as well as financial professionals in the domains of investment banking, private equity, hedge funds, and venture capital funds . A confident and knowledgeable investor will build out clear investment criteria to successfully navigate the investment landscape.

The primary purpose of an investment thesis is to outline the reasons and expected outcomes of a proposed investment, often focusing on the potential for growth and profit. This document offers a roadmap for investors, guiding them through their decision-making process, and helping to ensure that they arrive at rational and informed conclusions. A comprehensive investment thesis should consider various aspects, such as market conditions, competitive landscape, and financial performance of the targeted asset or company.

A strong investment thesis is built on rigorous market research and analysis. This involves evaluating historical and current financial information, as well as scrutinizing industry trends and the overall economic environment. Skilled investors will also incorporate their expertise in the industry to better assess the merits of an investment opportunity. This level of thoroughness creates a confidently expressed thesis, allowing investors to remain steadfast in their investment decisions, even amid market volatility.

In summary, an investment thesis plays a pivotal role in the investing process. It presents a well-reasoned argument, grounded in extensive research and clear analysis, that supports an investment decision. Crafting a robust investment thesis is crucial for both individual and institutional investors as it provides a solid foundation for investment choices and ensures the alignment of investment strategies with long-term objectives.

Importance of Research in Crafting an Investment Thesis

Thorough research is a crucial aspect of creating a solid investment thesis. It allows investors to gather vital information and insights that will help guide their investment decisions. There are several elements to consider while conducting this research, with data analysis, understanding risks, and returns being essential components.

Data Analysis

Data analysis forms the backbone of any research conducted for crafting an investment thesis. It involves collecting, organizing, and interpreting various types of data, such as financial statements, market trends, and industry forecasts, to identify patterns and make informed predictions about a potential investment opportunity. A comprehensive data analysis can help investors make confident choices based on reliable information, which is essential for a successful investment strategy.

Some key data analysis techniques used in crafting an investment thesis include:

• Comparative analysis: Comparing the performance of different companies within the same industry to identify investment opportunities.
• Trend analysis: Monitoring historical data to determine patterns and potential future developments.
• Financial statement analysis: Examining the financial health of a company through its balance sheets, income statements, and cash flow statements.

Understanding Risks and Returns

One of the primary goals of research in developing an investment thesis is to assess the risk/reward profile of a potential investment. This involves evaluating the potential risks associated with the investment and weighing them against the expected returns. A sound investment thesis should demonstrate a clear understanding of these risks and offer a rationale for why the investment’s potential returns make it a worthwhile addition to a portfolio.

Some common risks to consider when crafting an investment thesis include:

• Market risk: The risk of an investment losing value due to fluctuations in the market.
• Credit risk: The risk that a company or issuer of a financial instrument may default on its obligations.
• Operational risk: The risk of losses arising from failed internal processes, systems, or personnel within a business.

Evaluating these risks requires investors to develop a deep understanding of the investment opportunity, its industry, and the factors that may impact its performance. A diligent and systematic approach to research can help investors identify potential risks and gains, leading to informed and confident decision-making in crafting a strong investment thesis.

Types of Investment Strategy

When it comes to crafting an investment thesis, selecting an appropriate investment strategy is crucial. In this section, we will discuss two popular strategies: Value Investing and Growth Investing.

Value Investing

Value investing is a strategy that focuses on identifying undervalued stocks or assets in the market. These investments typically have lower valuations, which are reflected in their price-to-earnings ratios or book values. The central idea behind value investing is that the market may sometimes undervalue a company or asset, presenting an opportunity for investors willing to do thorough research and analysis.

The process of value investing involves:

• Fundamental analysis : Evaluating a company's financial health, management, and competitive advantages
• Value metrics : Identifying various valuation metrics, such as price-to-earnings, price-to-book, and dividend yield
• Margin of safety : Discovering investment opportunities with a built-in cushion to reduce the risk of loss

Famous investors, such as Warren Buffett and Benjamin Graham, have implemented value investing strategies to achieve long-term success.

Growth Investing

On the other hand, growth investing centers on companies that are expected to grow at an above-average rate compared to their industry. Growth investors seek opportunities in businesses they believe will offer substantial capital appreciation through rapid expansion or market-share gains. They prioritize the potential for future profit over the stock's valuation.

Features of growth investing include:

• High expectations : Companies targeted by growth investors typically have a history of robust revenue and profit growth
• Momentum : Investors seek stocks with upward price momentum, as increasing demand for these stocks may drive prices even higher
• Risk tolerance : Growth stocks can be volatile, and investors must be prepared to weather price swings

Renowned growth investors like Peter Lynch and Phil Fisher have demonstrated the effectiveness of growth investing throughout their careers.

Both value and growth investing strategies have their unique advantages and require different levels of risk tolerance. Investors should carefully consider their investment thesis and select a strategy that aligns with their objectives and risk appetite.

Venture Capital and Private Equity Investment Theses

When considering investments in private companies, venture capital (VC) and private equity (PE) firms each have their own unique strategies encapsulated within their respective investment theses. These theses provide guidance on the focus of investments, the sectors or geographies of interest, and the stage of the target companies.

Learn more about the differences between private equity and venture capital .

Venture Capital Investment Thesis

A venture capital investment thesis outlines how a VC fund aims to make money for its investors, typically referred to as Limited Partners (LPs). This strategy identifies crucial factors such as the stage of companies the fund will invest in, commonly early-stage companies, the targeted geography, and specific sectors of focus.

The thesis may vary depending on a venture capitalist's unique specialization, with some firms concentrating on a specific vertical and stage, while others invest more broadly without a core thesis driving their decisions. The underlying objective of a VC investment thesis is to outline how the firm will achieve high returns on investment by supporting and nurturing the growth of portfolio companies.

Private Equity Investment Thesis

In contrast, a private equity investment thesis is an evidence-based case in support of a particular investment opportunity. It usually begins with a concise argument illustrating how the potential deal supports the fund's general investment strategy. The thesis then provides details that substantiate this preliminary conclusion.

Private equity firms often target more established companies compared to venture capital firms, focusing on businesses with a proven track record. The PE investment thesis may identify areas where operational improvements, strategic mergers, or better capital structures could enhance value, ultimately generating a good return for the firm and its investors.

Overall, both venture capital and private equity investment theses serve as critical frameworks guiding investment decisions. They not only help align these decisions with a firm's specialized strategy but also provide a basis for evaluating potential deals to ensure they contribute to the firm's goals and long-term value creation.

Key Parameters for Evaluating an Investment

When assessing the viability of an investment, it is essential to examine various key parameters to make informed decisions. By analyzing these factors, investors can gain a deeper understanding of a company's financial health and its potential for growth.

One vital metric to consider is earnings per share (EPS) , which represents the portion of a company's profit attributed to each outstanding share of its common stock. A higher EPS indicates higher earnings and suggests that the company may be a lucrative investment opportunity.

Another fundamental metric is the return on assets (ROA) , which measures the effectiveness of a company in using its assets to generate profit. The higher the ROA, the better the company is at utilizing its assets to generate earnings. Similarly, return on equity (ROE) is a measure of financial performance that calculates the proportion of net income generated by a company's equity. A higher ROE demonstrates the efficient usage of shareholders' investments.

Conducting a thorough analysis of the company's financial statements is crucial. This includes reviewing income statements, balance sheets, and cash flow statements. By doing so, investors can gain insights into the company's profitability, liquidity, and solvency.

Another important factor to consider is a company's cash position. Adequate cash reserves enable a company to meet its short-term obligations and invest in growth opportunities. On the other hand, a lack of cash can leave a company vulnerable to market fluctuations and financial stress.

It is also essential to evaluate a company's capital structure, which refers to the proportion of debt and equity financing it uses to fund its operations. A balanced capital structure ensures financial stability, while excessive debt may lead to financial distress.

Examining a company's debt level is crucial, as it can directly impact the company's financial flexibility and risk profile. A high level of debt can hinder a company's ability to grow and adapt to changes in the market, making it a less attractive investment option.

Assessing a company's assets and how they're managed plays a significant role in evaluating an investment opportunity. This includes tangible assets, such as property and equipment, and intangible assets, such as patents and trademarks. Effective asset management contributes to a company's ability to generate profit.

Finally, it is important to scrutinize a company's costs associated with its operations, such as production costs and overhead expenses. A company that efficiently manages its costs will likely generate higher profitability and provide better returns for investors.

Creating Value through Strategic Planning

Strategic planning plays a crucial role in creating value for investors and businesses. It serves as the foundation for effective decision-making and guides companies towards achieving their goals. Through strategic planning, management teams can identify and focus on core competencies that contribute to a company's competitive advantage.

One way to create value is to prioritize revenue growth. By identifying key growth drivers, such as product innovation or market expansion, companies can allocate resources accordingly to boost earnings. Such targeted investments in growth engines allow firms to capture a larger market share and drive long-term profitability.

Another aspect of strategic planning involves optimizing a company's holdings. By assessing the existing portfolio, management can decide whether to divest underperforming assets or make strategic acquisitions that align with their investment thesis. The right combinations and adjustments can significantly enhance a company's overall performance and shareholder value.

Risk management is also an essential aspect of strategic planning. Companies must assess potential risks and incorporate suitable mitigation measures in their plans. This ensures that organizations are prepared for unforeseen circumstances, which can safeguard profits and protect the company's assets.

Furthermore, creating value requires continuous improvement and adaptation to market trends. Companies should routinely reevaluate their strategies to identify both internal and external factors that may impact their current position. By setting clearly defined objectives and quantifiable financial targets, management teams can measure their progress effectively and adjust their strategic plans as needed.

In summary , creating value through strategic planning involves a combination of focusing on core competencies, prioritizing revenue growth, optimizing holdings, managing risk, and continuously reassessing the company's strategic direction. This holistic approach can help businesses enhance their profitability, strengthen their market position, and ultimately deliver strong value creation to investors.

Understanding the Market and Competition

Before developing an investment thesis, it is crucial to have a deep understanding of the market and its competition. The stock market is influenced by various factors such as economic supercycles, bear markets, and secular trends. Analyzing these elements will provide a solid foundation to recognize potential investment opportunities.

An economic supercycle is a long-term pattern that occurs over several decades, during which the economy undergoes periods of growth and contraction. Investors need to be aware of the current phase and how it may impact their investment decisions. For instance, during a growth period, certain industries tend to outperform, while others may underperform during a contraction phase.

In addition to analyzing these market conditions, investors must also pay heed to the competitive landscape of the sector in which they plan to invest. Examining the competitors within the industry enables one to identify companies with competitive advantages, which may lead to superior performance. These advantages can stem from factors such as lower costs, innovation, or a dominant market share.

A bear market occurs when the stock market experiences a prolonged decline, typically characterized by a decrease of 20% or more from recent highs. In such environments, it becomes even more crucial for investors to understand the competitive dynamics within an industry to identify resilient companies that can withstand market downturns.

A secular trend is a long-term movement in a particular direction that can last for several years or even decades. Identifying secular trends within industries is essential to spotting opportunities for long-term growth. For example, investors may capitalize on sectors benefiting from a shift towards clean energy usage or the increasing importance of artificial intelligence.

In summary, understanding the market and competition requires a deep analysis of the stock market, economic supercycles, bear markets, and secular trends. By researching industry trends, evaluating market opportunities, and assessing the strengths and weaknesses of competitors, investors can develop a robust investment thesis that increases the likelihood of achieving long-term returns.

Industry Case Studies

In the investment world, the importance of an investment thesis cannot be overstated. By examining various industry case studies, we can gain insight into how businesses make strategic investments to enhance their value. In this section, we'll discuss notable examples from companies such as DuPont, General Motors, Rexam PLC, and Clear Channel Communications.

DuPont is a leading science and innovation company with a focus on agriculture, advanced materials, and industrial biosciences. During its acquisition of Dow Chemical, DuPont developed a robust investment thesis to justify the merger. Their investment case relied on the belief that the combined entity would benefit from increased operational efficiencies, new market opportunities, and enhanced innovation capabilities. This approach provided a strong rationale for the deal, which has created a more competitive company in the global market.

General Motors (GM) , a multinational automobile manufacturer, crafted its investment thesis in response to evolving trends in the automotive industry, such as the increasing importance of emissions reduction, electrification, and autonomous technology. GM's investment case centered on embracing these trends, focusing on innovation, and expanding its product offerings through strategic M&A, investments, and partnerships. For example, GM has made significant investments in electric vehicles and autonomous driving technology, positioning the company for future growth in these areas.

Next, we have Rexam PLC , a former British packaging manufacturer that was a leading producer of beverage cans globally. When Ball Corporation sought to acquire Rexam, they developed an investment thesis based on the value derived from combining the two companies' strengths. This thesis outlined the strategic fit between both companies, synergies from combining production capabilities, and projected growth, particularly in developing markets. The successful acquisition helped Ball Corporation consolidate its position as a global leader in the packaging industry.

Lastly, Clear Channel Communications is a media company specializing in outdoor advertising. As the company sought to expand its presence in this sector, it created an investment thesis centered around leveraging its core competence in outdoor advertising and acquiring strategic assets. One example is Clear Channel's acquisition of crucial billboard locations to solidify its competitive edge in the outdoor advertising market. This targeted growth strategy has allowed Clear Channel to remain a dominant player in the industry.

In conclusion, these industry case studies demonstrate the value of a well-crafted investment thesis. Effective investment theses provide a roadmap for companies to pursue strategic acquisitions and investments that create long-term value, while also helping investors evaluate the viability of proposed deals. By understanding how companies like DuPont, General Motors, Rexam PLC, and Clear Channel Communications have strategically invested in the market, we can better appreciate the importance of a well-structured investment thesis.

Long-Term Investment Strategies

A long-term investment strategy refers to an approach where investors hold onto their investments for an extended period, typically more than one year. This type of strategy aims to achieve the investment goal by allowing assets to grow through market fluctuations and capitalizing on the power of compounding interest. Diversification and patience play pivotal roles in ensuring the success of a long-term investment strategy.

Portfolio managers often use various techniques and methods to craft long-term investment portfolios. Some of these techniques include targeting undervalued sectors or stocks, dividend reinvestment plans, dollar-cost averaging, and asset allocation. By employing these strategies, portfolio managers increase chances of achieving their clients' investment goals over time.

In order to develop long-term investment strategies, investors should first define their investment goal . This could include objectives such as saving for retirement, funding a child's college education, or purchasing a home. Clear investment goals help in designing an appropriate investment strategy, taking into account factors like the investor's risk tolerance, time horizon, and available capital.

One key aspect of a successful long-term strategy is diversification . Diversifying across asset classes and industries allows investors to spread risks and potentially achieve higher risk-adjusted returns. A well-diversified portfolio will typically consist of a mix of stocks, bonds, and other asset types, with variations in investment size, industry sector, and geographical location. This diversified approach minimizes the impact of underperforming investments on the overall portfolio.

Another crucial element in long-term investing is patience . Market fluctuations can be tempting for investors to react to their emotions and make impulsive decisions, which could derail a well-thought-out investment strategy. Maintaining a disciplined approach and sticking to one's investment plan, even during periods of market volatility, is paramount to achieving long-term success.

In conclusion, long-term investment strategies require investors to define clear goals, diversify their portfolio, and exercise patience in the face of market fluctuations. By adhering to these principles, investors and portfolio managers can steer a course towards achieving their investment objectives.

Emerging Trends and Opportunities

In recent years, various emerging trends have presented attractive opportunities for investors. Among these trends, renewable energy, megatrends, and the coffee shop market stand out as sectors with significant potential for growth.

Renewable energy has gained considerable attention and investment as a response to the global push for addressing climate change and reducing emissions. Solar, wind, and hydroelectric power are some of the most prominent technologies in this sector. With an increased interest in clean energy from both governments and consumers, companies in this space are poised to experience substantial growth.

Megatrends such as urbanization, aging populations, and technological advancements are also influencing investment opportunities. These large-scale shifts provide a backdrop for businesses to tap into new markets and adjust their strategies to capitalize on these changes. For instance, companies working in healthcare and biotechnology may benefit from catering to the needs of an aging population, while businesses focused on artificial intelligence (AI) and automation may find increased demand due to technological advancements.

The coffee shop market, too, presents investment opportunities. This industry has experienced robust growth in recent years as consumers increasingly seek out unique, high-quality coffee experiences. Independent and specialty coffee shops are at the forefront of this trend. Niche coffee shops that offer novel and authentic experiences have seen success by catering to the specialized preferences of today's consumers. As the demand for artisanal and premium beverages continues to rise, businesses operating in this space can expect to have ample opportunities for growth.

In conclusion, current emerging trends such as renewable energy, megatrends, and the coffee shop market offer a wealth of investment opportunities. As these sectors continue to develop and evolve, investors with well-informed investment theses stand to benefit from the potential rewards in these growing industries.

Role of Financial Statements and Valuation Metrics

Financial statements play a vital role in the investment thesis by providing crucial information about a company's financial health and performance. They consist of the balance sheet, income statement, and cash flow statement, which offer insights into the company's assets, liabilities, revenues, expenses, and cash flows. Investors use these statements to assess the company's past performance, current financial condition, and potential for future growth.

Valuation metrics, on the other hand, are vital yardsticks that investors use to compare different investment opportunities and make informed decisions. These metrics include price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, price-to-book (P/B) ratio, dividend yield, and return on equity (ROE), among others. By analyzing these ratios, investors can gauge a company's value relative to its peers and make better investment choices.

Analysts and investors scrutinize financial statements to identify growth trends, profitability, and financial stability. For instance, they may calculate the gross margin, operating margin, and net profit margin to determine the company's profitability across different stages of its operations. Additionally, they examine liquidity ratios, such as the current ratio and quick ratio, to assess the company's ability to meet its short-term obligations.

Valuation metrics provide a quantitative basis for comparing investment opportunities within the same industry or across different sectors. For example, a lower P/E ratio may indicate that a stock is undervalued, while a high P/E ratio might suggest overvaluation. Moreover, the P/B ratio can help investors determine if a stock is undervalued by comparing its market price to its book value.

Another key valuation metric is the dividend yield, which measures the annual dividend income per share relative to the stock's price. A higher dividend yield may attract income-oriented investors, while a lower yield might be more appealing to growth-focused investors. Furthermore, the ROE ratio, which measures a company's profitability in relation to its equity base, is an essential metric for evaluating the efficiency of management in creating shareholder value.

In conclusion, financial statements and valuation metrics are indispensable tools for investors to evaluate a company's financial health and investment attractiveness. By analyzing these data points, investors can make well-informed investment decisions that align with their risk tolerance and investment objectives.

Concluding Thoughts on Crafting a Compelling Investment Thesis

Crafting a compelling investment thesis is crucial for informed investing decisions, as it helps investors thoroughly analyze a potential opportunity. A well-researched investment thesis demonstrates the investor's conviction level and reinforces their confidence in the investment choice. This process involves a deep understanding of the business, its value drivers, and its potential growth trajectories.

A strong investment thesis should be definitive, clearly articulating the reasoning behind the opportunity and the expected returns. This allows investors to stay focused on their goals and maintain their conviction, even when the stock's price movement does not align with their expectations.

By adopting a confident, knowledgeable, and neutral tone, investors can effectively communicate their investment thesis to others. Clarity in presenting the investment case is essential for persuading potential partners or stakeholders to support the opportunity. Utilizing formatting tools such as tables and bullet points can aid in conveying essential information efficiently and ensuring the investment thesis is easy to understand.

In summary, crafting a compelling investment thesis enables investors to make well-informed decisions that align with their financial goals. By developing a thorough understanding of the investment opportunity and maintaining a strong conviction level, investors can better navigate the market and achieve long-term success.

Frequently Asked Questions

How do you develop a strong investment thesis.

A strong investment thesis begins with thorough research on the company or asset in question. This may include looking at the financials, competitive position, management team, industry trends, and future prospects. It's essential to critically analyze the available information, identify potential risks and rewards, and establish a clear rationale for the investment based on this analysis. Staying focused on the long-term outlook and maintaining a disciplined approach to the investment process can also contribute to developing a robust investment thesis.

What are the key elements to include in an investment thesis?

An investment thesis should include the following key elements:

• Overview of the company or asset: Provide a brief background of the company or asset, including its market, size, and competitive positioning.
• Investment rationale: Detail the reasons for investing, such as attractive valuation, strong revenue growth, or a unique business model.
• Risk assessment: Identify potential risks and how they could impact the investment returns.
• Expected return: Estimate the potential financial return based on the identified growth drivers or catalysts.
• Time horizon: Indicate the investment period, typically long-term, during which the thesis is expected to play out.
• Fund size: Specify the amount of invested capital that will be allocated to this particular investment, considering its impact on portfolio construction, liquidity, and potential returns within the overall portfolio strategy

How can one evaluate the success of an investment thesis?

Evaluating the success of an investment thesis involves tracking the progress of the company or asset against its initial expectations and underlying assumptions. This may involve measuring financial performance, analyzing key developments in the industry and the company's position within it, and monitoring potential changes in overall market conditions. It is helpful to revisit the investment thesis regularly to assess its validity and make adjustments as necessary.

What's the difference between an investment thesis for startups and publicly traded companies?

An investment thesis for a startup often focuses on the growth potential of a new or emerging market, considering the innovative products or services the startup offers in that market. Here, the focus may be more on the potential for long-term value creation, the management team's ability to execute on their vision, and market fit.

For publicly traded companies, the investment thesis may include analysis of current financial performance, valuation multiples, and overall market trends. Publicly traded companies have more historical data and financial performance information available, allowing investors to make more informed decisions based on these factors.

How does an investment thesis guide decision-making in private equity?

In private equity, the investment thesis helps guide the selection of companies to invest in, as well as the structuring of deals to acquire those companies. It provides a blueprint for how the private equity firm aims to create value, including plans for operational improvements, financial engineering, or growth strategies. This thesis serves as a basis for monitoring the progress of an investment and helps make decisions on the timing of potential exits.

How can real estate investment theses differ from other sectors?

Real estate investment theses may focus on factors such as location, property type, market dynamics, and demographic trends to identify attractive investment opportunities. The analysis may also take into account macroeconomic factors, such as interest rates and economic growth, which can influence real estate markets. Additionally, real estate investments may be structured as either direct property investments or through financial instruments like Real Estate Investment Trusts (REITs), affecting the underlying investment thesis.

What considerations should a first-time fund manager have when developing a fund's investment thesis?

For a first-time fund manager, crafting a compelling and robust fund's investment thesis is paramount for attracting investors. Given their lack of a track record, these managers need to lean heavily on the research, clarity, and vision articulated in their investment thesis. The thesis should detail how the fund aims to identify ideal investments, especially those in industries with high margins. It should also benchmark the strategies against industry standards to highlight the manager's acumen and awareness of market norms.

How is a stock pitch related to an investment thesis and what role does a target price play in it?

A stock pitch is essentially a condensed, persuasive form of an investment thesis, often presented to stakeholders to advocate for investing in a particular publicly-traded company. A key element of any stock pitch is the target price, which is an estimation of what the stock is worth based on projections and valuation models. This target price serves as a quantitative anchor for the investment thesis, giving stakeholders a specific metric against which to measure potential returns and risks.

Investment Thesis

• First Online: 01 January 2020

Cite this chapter

• Yannick Coulon 2  

1228 Accesses

The implementation of ratios is useless if applied irrationally. As a consequence, the principles behind an investment thesis are outlined, adding a touch of behavioral finance to counter investment biases.

Possible investment theses for Alibaba, Amazon and Walmart illustrate the concept.

The key behavioral biases then conclude the chapter.

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Yannick Coulon

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Coulon, Y. (2020). Investment Thesis. In: Rational Investing with Ratios. Palgrave Pivot, Cham. https://doi.org/10.1007/978-3-030-34265-4_7

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• Feb 27, 2023

How to Write the Perfect Investment Thesis

For investment managers, finding investment opportunities is only half the challenge. Often the harder part is raising funds. To do this they need to create the perfect investment thesis to set out a convincing argument as to why their investment strategy will generate a return on investment for their clients. In this article, we’ll explore the importance of crafting a perfect investment thesis and provide insights into how to write one.

What is an Investment Thesis?

An investment thesis outlines a fund manager’s investment strategy and rationale for investing in a particular market or niche. It’s a crucial document that investment managers use to provide investors with the information and data they need to decide whether or not to invest in a fund. It can be turned into a variety of marketing materials for the fund including white papers, one-pagers, and investment decks.

The investment thesis should be concise and articulate the investment logic and framework for why a particular market or niche presents an attractive investment. It should outline the investment strategy and how it aligns with the fund manager’s hypothesis. The thesis should also address potential risks and benefits to investors.

Successful investment theses typically include an analysis of market trends, an assessment of the competitive landscape, and an explanation of why the investment opportunity presents an attractive opportunity.

In 2013, Ron Baron, a fund manager, invested in Tesla. At the time the stock was trading at $25 per share. However, Baron believed that electric cars were the future , and he was convinced that Tesla would become the leader in the EV industry. Ten years later, Tesla’s stock is trading at over $200 per share, making it one of the most successful investments in recent years.

Step-by-Step Guide to Writing the Perfect Investment Thesis

Crafting the perfect investment thesis is not an easy task. It requires a great deal of research, analysis, and writing skills. Follow our step-by-step guide to write a perfect investment thesis.

Step 1: Define Your Investment Strategy

Determine your investment goals and objectives.

To define your investment strategy, you need to first need to understand your investment goals and objectives. Are you looking to invest in high-growth companies or established companies that generate a stable return? What is your investment horizon? What is risk profile? How much capital do you need to raise?

Identify investment opportunities

Once you have defined your investment goals and objectives, you need to identify your target market and investment opportunities in that market.

Define your investment strategy

Having determined your goals, risk tolerance and capital requirements you need to create a high-level investment strategy. This is a set of principles that will help the fund achieve its investment goals and guide investment decisions. This can be refined as you conduct market research and receive feedback from investors and industry-peers.

Step 2: Conducting Market Research

An investment thesis that is not backed by data is just opinion. To write the perfect investment thesis you need to conduct market research. This includes analyzing market trends, identifying potential risks and benefits, and conducting competitive analysis.

How to analyze market trends using data

To analyze market trends, you need to collect and analyze data. Data can come from a variety of sources including industry reports, financial statements, and news articles to identify trends in the market. You can also use tools such as Google Trends to identify search trends for specific keywords. There are also opportunities to use official data to back up claims, for example census data to prove an investment thesis based on demographic trends.

A variety of alternative data sources are available. these include:

Web scraping : Scraping data from online sources including social media sites, e-commerce or news stories. This data can be analyzed using natural language processing techniques (categorization, sentiment analysis).

Open data : There is a growing trend of organizations making data freely available. Good examples include traffic patterns on metro networks such as TFL in London .

Sensors and satellites : A growing industry of data providers is providing access to alternative data sources. From satellite data showing agricultural production to IoT sensor devices.

Polls and Surveys : Surveys provide insights into the collective consciousness. From tangible economic behaviors such as buying and shopping habits, customers expectations, information on personal finances, to social and political views.

Identifying market opportunities and potential risks

Having analyzed market trends, you need to identify market opportunities and potential risks. Investors need to be aware of different types of investment risks, such as market risk, credit risk, and liquidity risk associated with your investment thesis. A thorough analysis of potential risks helps investors make informed decisions and ensure that the investment is aligned to their risk appetite. The analysis should cover both systematic and unsystematic risks, There are a variety of statistical methods than can be used to measure risk and volatility including standard deviation, Sharpe ratio, beta, value at risk (VaR), conditional value at risk (CVaR), and R-squared.

Conducting competitive analysis

You may also want to include a competitive analysis. This looks at the competition in your target market. Who are the main players in the industry, their strengths, weaknesses, and competitive advantage.

Step 3: Developing Your Investment Hypothesis

The best investment theses include a well structured investment hypothesis. An investment hypothesis summarises why an investment opportunity exists in a given market. It should be based on your research and analysis and articulated in a clear and concise manner.

What is an investment hypothesis?

An investment hypothesis is a proposed explanation for a specific investment opportunity. It’s a statement that describes the investment opportunity and how it aligns with the investment manager’s investment goals and objectives.

Formulating an investment hypothesis based on your research and analysis

To develop a strong investment hypothesis, you need to review the data and information collected during your market research. Using this you need to identify key trends, opportunities, and risks and determine an investment strategy that allows you to achieve investment goals and objectives. This is the time to revisit and critique your initial investment strategy.

H4: Articulating the investment thesis in a clear and concise manner

Once you have developed your investment hypothesis, you need to articulate it in a clear and concise manner. This includes a clear investment logic and analytical framework for why a particular market or niche presents an attractive investment. You should also outline the investment strategy and how it aligns with your hypothesis.

Step 4: Writing the Investment Thesis

Having created the perfect investment thesis you need to structure the thesis and include key elements to make it persuasive.

The structure and format of a successful investment thesis

A successful investment thesis typically follows a structure that includes an executive summary, market analysis, investment hypothesis, investment strategy, and potential risks and benefits. The thesis should also include data and visual aids, such as graphs and charts.

Key elements to include in your investment thesis

To make your investment thesis persuasive, you need to include key elements such as a clear articulation of the investment opportunity, a detailed explanation of the investment hypothesis, an overview of the investment strategy, and describe the risks and benefits for potential investors.

Writing with clarity and brevity

To make your investment thesis easy to read and understand, you need to write with clarity and brevity. Use simple language and avoid jargon. Keep the thesis concise and to the point.

What type of resources and marketing materials do you need to create

Having defined your investment thesis you know need to create a variety of marketing materials in order to present to potential investors. These will vary depending on the type of investors and the regulatory framework you operate under. Some common investor marketing materials include:

Investor decks

An investor deck is a summary of your investment thesis. It should include a summary of your investment hypothesis, market opportunity with data, investment strategy, expected outcomes, risks, and benefits to investors. The investor deck should be concise and easy to understand. Avoid lengthy text and present the opportunity using relevant data points. Employing a professional designer will maximize the impact of your investment thesis.

The structure of an investment deck forces you to focus only on the key points, consequently a clear analytical framework or investment logic is essential.

White papers

A white paper is a more detailed description of your investment thesis. It should include an in-depth analysis of the market trends, competitive landscape, and investment opportunity. The white paper should also include an overview of your investment strategy and potential risks and benefits.

Investment one-pager

An investment one-pager is a brief summary of your investment hypothesis, market opportunity, and risks and benefits. It should be a one-page document that investors can quickly review to understand your investment opportunity.

Step 5: Refining and Perfecting Your Investment Thesis

The final step in writing a perfect investment thesis is to refine and perfect it. You need to continuously refine and improve your thesis to ensure it’s persuasive and effective.

Revising and editing your investment thesis

Once you have written your investment thesis, you need to revise and edit it. Review the thesis for grammar, punctuation, and spelling errors. Ensure that the thesis is clear, concise, and persuasive. Nothing will damage your credibility more than easily fixed errors or incorrect data.

Seek feedback from peers and industry experts

You should seek feedback from peers and industry experts to ensure that your investment thesis is persuasive and effective. Aim to get feedback from colleagues, mentors, or industry experts all of whom can offer a unique outside perspective.

Continuously refining and improving your investment thesis

Investment managers should continuously refine and improve their investment thesis. They should review the thesis periodically and update it as needed to reflect changes in the market or investment strategy.

Crafting a perfect investment thesis is a crucial task for investment and fund managers. The investment thesis is a document that outlines the investment strategy and rationale for investing in a particular market or niche. A good investment thesis provides investors with a clear understanding of the investment opportunity, the risks and benefits, and the potential return on investment.

To write a perfect investment thesis, investment managers need to define their investment strategy, conduct market research, develop an investment hypothesis, craft the thesis, and refine and perfect it. They should also create marketing materials such as an investor deck, white paper, and investment one-pager to summarize their investment opportunity. Investment managers should continuously refine and improve their investment thesis to ensure it’s persuasive and effective.

How Interpretive Economics can help you write the perfect investment thesis

At Interpretive Economics, we help investment managers, asset managers, venture capital, family offices and other investment professionals create a variety of investment marketing materials including investment white papers, investor decks and investment one-pagers. We are experts at economic analysis, sourcing and analyzing data and crafting investment hypotheses. Get in touch to see how we can help you create the perfect investment thesis.

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S T R E E T OF W A L L S

Building an investment thesis.

Now that you understand what characteristics make up attractive long and short ideas, it is time to explain how to formulate an investment thesis. Being able to construct a real and actionable investment idea is in the heart and soul of an analyst’s work in the hedge fund industry. Building a successful thesis begins with (1) rigorous due diligence at the Micro level, (2) aligning that view with the Macro environment, and (3) understanding the overall trade setup.

Good Company Qualities

• High return on capital
• Barriers to entry
• Growing industry
• High margins relative to competition

Good Management

• High insider ownership
• Well respected
• Clean accounting
• Infrequent restating of earnings
• Not overly promotional
• Good allocators of capital

All of these qualities are obvious and won’t differentiate your pitch, but they are qualities you will have to talk about, so make sure you understand them well.

Target Price = Your Earnings Estimate × Multiple

Company Earnings

• Will the company beat earnings expectiations in the next quarter or in the next year?
• If so, what are the catalysts that will cause the Company to beat earnings (e.g., higher revenue, higher margins, lower interest expense, share buybacks, etc.)? Paint the picture of how, when, and why there will be a catalyst that supports your view. Providing an opinion without fully understanding and explaining the relevant value drivers will be a recipe for failure.
• What’s your confidence the company will beat earnings? What’s the probability?
• What’s your margin of safety? What can go wrong?
• Does your pitch rely on multiple expansion? Why? Where is the company trading relative to its historical multiple? Should the multiple trade at a premium or discount given how the company has changed over the years, and where we are now in the business cycle?
• Where is the company trading relative to its peer group? If the entire market has seen multiple expansion, then is it fair that this company should too? In other words, is it expensive or cheap relative to itself historically and/or its peers, and can you explain why this might be wrong?
• What catalyst is going to cause this multiple to start expanding? Again, paint the picture of how, when, and why there will be a catalyst that supports your view.
• What is your confidence in multiple expansion? What’s the probability?

Target Price:

Your target price is the product of a forecasted earnings metric multiplied by the expected multiple. This multiple can be P/E, EV/EBITDA, EV/Sales, FCF/Market Cap, or any other reasonable metric. Some metrics are industry-specific and more valuable for those industries than the aforementioned general ones.

Regardless, if you provide a target price, you need to explain how you arrived at this target, and the stages of your thought process to get there. for example, if you claim that a stock is going to have +50% upside, but feel they won’t beat consensus earnings, then you are calling for +50% multiple expansion, pure and simple.

Although not ideal, stocks in industries with bleak macroeconomic outlooks can still be good investments. It is important to understand what is taking place at the company level, sub-sector level, industry level, and national level. This approach will help you determine whether you are investing in a “good house in a bad neighborhood.”

• How has the stock performed heading into the catalyst, i.e, before you put the trade on? If it has already gone up 10% recently, for instance, it will be much harder to outperform on the catalyst.
• How crowded is the trade? Are a lot of hedge funds already invested in the name? One easy way to determine this is to speak to a sell-side research analyst and ask whether they are getting a lot of calls from other funds regarding the company.
• Is the general public bullish or bearish? If you are researching a short pitch, it is key to check for existing short interest (SI function on Bloomberg). If it is a long, you should review the list of major holders of the stock (HDS function on Bloomberg). If the top holders are several hedge funds, then the stock pitch is likely overcrowded and may not be actionable. One of the biggest mistakes in a hedge fund interview is to pitch a stock that every hedge fund has already heard of and evaluated.

Crowded names can still work, but investors must tread lightly. When the market sells off or there is a change in sentiment, crowded names typically perform the worst. To check this, there is an index on Bloomberg of high hedge fund ownership stocks; you can use it to see whether your idea is on that list to make sure it isn’t already an overcrowded trade idea.

Other technical tools that can help evaluate the setup for a stock include RSI (relative strength index) and moving averages. The RSI is a momentum indicator—below 30 is considered oversold and above 70 is considered overbought.

Ideally, you want a stock that has recently underperformed its peers, is lightly owned by hedge funds, and is heading into a catalyst that you think will have a positive surprise . By contrast, a crowded name that has already outperformed based on the expectation of a positive catalyst will likely get a limited reaction if and when the catalyst does occur. For example, it is very common for companies to beat earnings expectations but not to experience an increase in their stock prices, because the general public or hedge funds are already expecting the earnings surprise. In today’s hyper-competitive market, one needs a truly different variant perception in order to outperform the market.

Other Investing Thoughts

• What constitutes a good investment idea? What does that phrase even mean? The answer is that it means something different to every person–that is what provides opportunities in a market. That is why some investors own a stock and others short it. If everyone agreed on what makes a good investment then everyone would own the same stocks.
• How much should you make per idea? Investors do not even agree on this principle. Developing frameworks for investing will help you follow a set of guidelines that you can refine over the years through experience, and as part of that, you will learn to determine what the expected profit and acceptable risk for a particular investment are.

Value Investing Framework

• Benjamin Graham defined the first basic tenant of value investing as follows: when the price of a security diverges from its intrinsic value (its corresponding cash flows), a value investor should work to exploit that divergence.
• The second basic tenant of value investing is the margin of safety: a security should preferably be purchased at a deep discount to its intrinsic value, to help limit the amount of downside risk the investment has.

Street of Walls Investing Framework

• It is very easy to get ideas from other investment professionals, but it will be very obvious in your pitch whether you have done the analytic work yourself or not.
• This is typically discovered when you are questioned on your assumptions in the model. If you built the model yourself, you can likely defend the assumptions much more intelligently.

Industry Analysis

Market size and growth.

Study the market size and growth of the company’s core industry. Even though you may be studying the beverage industry, the manufacturing companies and distribution companies have very different dynamics. The beverage manufacturers may not be growing much faster than CPI, but the distributors may be going through a massive consolidation period and therefore have earnings that are growing at a much faster pace.

Historical Industry Returns

A security may be cheap and look attractive, but that may be because the returns of the company and the industry are not attractive. For example, the stock Owens Corning (OC) traded at 8x earnings for a long time. This sounds inexpensive, but it was ultimately justified because operating margins were in the single digits. Eventually, however, industry did consolidate and operating margins expanded to 20%. Thereafter, the company’s earnings multiple expanded into the low teens.

Unit Economics

Most bottom-up, fundamental analysis is used to study the unit economics of a company. For example, what does it cost to make and sell one unit of output, and what is the profit on that unit? What are the pricing and volume trends? It is important to understand the value drivers clearly in order to build a detailed operating model for your pitch.

Competitive Positioning

• Do certain companies control industry pricing?
• How sustainable is the company’s competitive advantage?
• Are there high or low switching costs?
• Does branding matter
• Are there regulatory protections, such as tariffs?
• What important considerations are there with respect to the company’s customers and suppliers?

Cyclical / Seasonal

An industry may be in a strong growth period and look very attractive, but it may also be at the peak of a cycle that is possibly about to turn substantially negative. For example, the housing industry looked extremely attractive in the early 2000s, but crashed and was extremely unattractive into the late 2000s and beyond. This is due to both an economic downturn and a systematic overbuilding of homes that collapsed in the middle of the decade. In addition to the economic/business cycle, certain industries have drivers of cyclicality that are very specific. One example of this is the Oil & Gas industry—the price of oil alone can have a huge impact on a Oil & Gas company’s earnings potential.

It is also important to understand the seasonality of the business. Retailers tend to sell more product during the fourth quarter of the year, because of the holiday shopping season. Therefore, it may be wrong to extrapolate a trend in March and April if the majority of the company’s sales take place in the later months.

Investment Considerations

When you start working for a hedge fund you will quickly learn that each fund has their own unique investment style. Some hedge funds simply will not invest in companies that have weak management teams. It does not matter how attractive the opportunity or valuation is—the fund simply won’t invest. This principle often results from an investor getting burned from a bad management decision, such as a bad acquisition, or a focus on short-term earnings at the expense of long-term objectives. After gaining experience analyzing companies, you will eventually develop your own philosophy. Still, bear in mind that other investors may have an opinion on this topic that differs from yours, and you need to consider the philosophies of your teammates when evaluating an investment idea.

In studying management teams, you should look at the management team’s track record and understand both the buy-side and sell-side opinion on the management team. Study the company’s internal philosophy: how do they allocate capital? Is the current management team following what the company has always done? Another key to understanding how a management team will probably act is to study how the members are compensated. Is their compensation tied to revenue or earnings, return on capital, or some other metric? How much stock does the management team currently own? How much risk are they taking? Are they buying or selling stock? How many options do they have outstanding?

Study both relative and absolute valuation. A stock may appear cheap when compared to a stock in another sector, but very expensive against its peers. Thus, different investment situations call for different valuation metrics to be used.

One example of this principle is that it is completely unhelpful to use P/E if the company has no earnings (or negative earnings). You should also study the rate of growth of the earnings metric you chose. A company may look expensive at 30x earnings, but if it is doubling revenue every year and tripling earnings, it may not be so expensive after all. In fact, if you believe that this trend can continue, it may be an excellent long investment idea.

• Is there a difference between your earnings estimates and those of the street?
• If not, is your thesis really interesting, or is it just a “consensus trade”?
• What are the key events that the street will care about? Is it an earnings release, a new product release, or something more unusual?
• Does the street care about what happens next quarter or are they more focused on the potential signing of a big contract that could take place at any time?

Donald Rumsfeld once said there are “Known unknowns and unknown unknowns.” Some risks are riskier than others. How does the company control for this? How do you as the investor assess the downside risk from this?

• What has to happen for the downside case to play out?
• What has to happen in order to lose some benchmark amount, say 20% or more?
• If that event plays out, what will happen to the multiple? Will it go down or actually expand?
• All in all, what is the probability of a downside event and what is the maximum potential loss you might face in such a scenario?

Catalysts are extremely important in identifying when you are going to “get paid.” This is a crucial factor in sizing positions. If a catalyst is expected to take place in the near future, you probably want to have your position fully sized immediately. If not, it may make sense to taper into a position.

Framework for Investing: Large Market Movements

Rising Markets: The typical reaction to a rising stock price is to “chase” the returns. That means when a stock continuously goes up, day after day, the investor feels like he or she is missing an opportunity, and will be inclined to buy the stock. This pile-on mentality causes more investors to become a part of the action. This is a classic, human reaction to a strongly outperforming stock, and it can often lead to poor returns due to an undisciplined approach and the fickle nature of the market.

The same thing can happen when a stock continues to drop in price. Investors tend to panic and sell at exactly the worst time. During the heat of the battle, people tend to get emotional and sell their best stocks out of fear.

• Tell yourself it is normal to react this way when you are losing a lot of money. Fear is normal: both the fear of missing an opportunity and the fear of continuing to lose more money.
• Ask yourself, “Has my investment thesis changed?” If it has, then sell, but if it has not, then ignore your fears and hold the position.
• Have strict target prices in place. This will help you exit a position once your target has been achieved, and thereby avoid the trap of trying to “ride a winner.”

Here is a related excerpt written by Benjamin Graham, from The Intelligent Investor:

• “Imagine that in some private business you own a small share that costs you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects, as you know them. Often, on the other hand, the value he proposes seems to you a little short of silly.
• If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.”

Trading Considerations

The liquidity of a single stock is not a reason for a fundamental investor to buy a stock, but it can definitely be a reason for an investor not to buy a stock. The less liquid a stock is, the riskier the position becomes, as it is difficult to exit an illiquid position—especially during turbulent market conditions, when liquidity is often demanded.

In order to determine how liquid a stock is, you need to see how many shares trade on a regular basis. For example, if the average daily volume of a $10 stock is 1 million shares, then the stock trades $10 million per day. If you have a $1 million hedge fund, and you want to take a 10% position, you will need to buy $100,000 worth of stock, or 10,000 shares. If you wanted to buy all of that stock in 1 day you could, as you would only account for 1% of the daily volume ($100,000 in stock to be purchased ÷ $10,000,000 daily volume = 1%). A reasonable rule of thumb is that you do not want to account for more than 10-15% of a stock’s daily trading volume if you do not want to influence its price. So in this example, you could buy up to $1,500,000 worth of stock per day without moving the share price. If you were to buy $2,000,000 of stock in 1 day, or 20% of the daily volume, you would likely cause the stock price to increase (at least temporarily). If your desired position is much larger, then it could take many days to accumulate the desired position – and similarly, it could take a long time to unwind the position when you want to exit. This makes the investment much more risky.

Therefore, a stock may have fantastic management, excellent earnings growth, and an attractive price, but if there is no liquidity you probably simply cannot buy it.

Shareholder Base

You may think that you have found a gem: a rare and precious investment opportunity that no other hedge fund is talking about. Fortunately, that notion is relatively easy to confirm or disprove. To check and see whether other sophisticated investors are involved in the company you’re researching, you can pull up the company’s quarterly holdings report on Bloomberg and see who the largest shareholders are.

For example, suppose that W.R. Grace (GRA) offers an exciting investment opportunity, according to your analysis. However, looking at the holders list, you determine that other hedge funds are well aware of this opportunity, as the top shareholders include large hedge funds such as Lone Pine, York Capital, TPG Axon, and Hound Partners.

It may not be a bad thing that other hedge funds are involved. You will probably be invested in a good company in this case, as large hedge funds rarely get involved in unsound investment ideas. That being said, crowded trades can, again, be very risky. First, if the market is already anticipating good news, it may be that the good news is already baked into the stock price. Second, if bad news comes out, then everyone will likely be forced to run for the exits at the same time. This will lead to adverse price movement that could destroy your holding.

Hedge funds in general tend to be short-term focused, so it could turn into a situation where one investor exits swiftly and triggers a domino-effect panic, crushing other investors in the wake.

Looking at charts can be very deceiving and can create misleading signals. For example, the stock chart below shows a quickly rising stock price, but that does not mean it is expensive. It may be cheap relative to its own history, the rest of the sector, or the market as a whole. The entire stock market might have been going up rapidly, or the sector as a whole might have had a big rally, and relative to the sector the stock underperformed, so it may actually be cheap on a relative basis.

You may also want to compare several valuation metrics simultaneously. For example, a company may look expensive on a Price/Earnings basis but cheap on an EV/EBITDA basis.

In the graph below, you can see that Factset Research Systems (FDS) is trading at 20x P/E. Relative to the market that is high, but relative to its own history, that is a normal trading ratio.

Business Model Questions

It is just as important to understand the industry in which a company operates as it is to understand the company itself. For example, if you are studying a homebuilder, it is important to understand the companies the homebuilders buy supplies from. If the building products companies are raising their prices and the homebuilder cannot raise prices, the builders are going to see their margins compress. Therefore, it is important to scan what is happening with related companies across the industry and sector to get a sense of the overall dynamic affecting the company’s earnings potential.

Homebuilding Industry: Related Participants

• Building Materials – USG, EXP, VMC, SHW
• Home Builders – LEN, DHI, KBH
• Building Products – WHR, MAS
• Furniture – TPX, LZB, ETH
• Extensions – Lawn care – SMG
• Mortgage Originator – BAC, C
• Insurance Provider – PRU, MET

A change by the mortgage originator will likely have an impact on the entire industry. If Bank of America (BAC) tightens its origination standards, then people will buy fewer homes; homebuilders will buy less carpet to go inside the homes; fewer beds will be sold; etc. Therefore, before considering an investment in a homebuilder or related entity, it would behoove you to perform checks to see what else is occurring in related industries and sectors across the value chain.

Business Model Advantages

Barriers to entry.

Companies with barriers to entry have a huge advantage relative to companies that do not. These barriers can occur for a variety of reasons, but some of the most common include economies of scale, substantial investment requirements, technological innovation, favorable government regulation, and networking effects. eBay, for example, is an extremely difficult company to compete against, because the company has established a formidable position as the largest Internet-based auction site available. Both buyers and sellers are unlikely to go to other sites, because both realize that eBay offers more individuals on the other side of the aisle to transact with. This makes it hard for new auction companies to compete with eBay effectively.

Companies in most industries will claim that they have high barriers to entry, but time will often show that a company earning significantly higher than its cost of capital will attract competitors. Put simply, if the company is earning outsized returns on the capital it invests, then it will attract competitor investment seeking to earn comparable returns. This competitive investment will result in increased production and sales competition, and diminished profit-earning potential will surely follow in the future.

Cost Advantages

The low-cost producer can have a huge advantage over its competition. In industries with large legacy assets, such as cement or coal production, the players with the newest assets are typically the lowest cost providers, and that allows for lower pricing often results in greater market share.

Alternatively, there is also a learning curve that can create the reverse effect, wherein the older industry participants have lower costs as the newer players are still “figuring it out.”

Customer Habits

Repeat purchase items, such as paper or office supplies, can create a strong advantage for the producer. The more entrenched companies become within their customer bases, the higher the switching costs for those customers. For example, a large technology roll-out may effectively lock a customer in to the provider’s products, as it costs too much to execute a complete technology overhaul to switch to a different vendor.

Economies of Scale

Companies with large fixed costs need scale in order to make a profit. The larger the fixed costs, the larger the scale needs to be. Incremental margins can be very high once a company crosses a certain threshold and is able to sufficiently leverage its cost base. This can make a company highly attractive and cause a company to trade at a high multiple, once the threshold production level has been achieved. This phenomenon is sometimes referred to as “operating leverage.”

Oligopolies, or Monopolistic Competition

Functioning oligopolies can act similar to monopolies, in terms of locking in outsized profit margins from its business. These situations should not take place for long according to basic economic theory, but they can and quite often do. For example, the roofing industry has greatly consolidated in recent years, so that four players currently control 80% of the roofing shingle manufacturing market. When one of the four manufacturers raises its prices, the other three can easily follow. For the past five years, none of the players has broken from the pack and tried to steal market share from the other three by offering a lower price. As a result, the industry has seen its operating margins grow from 8% to 20% in recent years. Whether this increase in margin is sustainable over the long term remains to be seen.

Expected Return

What is a “good” return for a portfolio? How do you know? What is a good return for an individual investment?

The Academic Approach

Expected Rate of Return = Risk-free return + Beta × (Expected Market Return – Risk-free return)

This is the equation from the Capital Asset Pricing Model (CAPM), which you will learn in school—but try pitching this to a portfolio manager at a hedge fund. He or she will likely tell you to get lost!

Theoretically this makes perfect sense, but most hedge funds don’t use this as a hurdle rate. Most funds target a 20% return—though very few are capable of actually achieving that return consistently.

The Practical Hedge Fund Approach

A more practical approach is to study what percentage of the time you will make money and lose money on your investments. From there, you need to understand how much you make when you are right and how much you lose when you are wrong. Here is an example of this framework:

As you can see:

Average Return per Idea = (% Right × Avg. Return When Right) + (% Wrong × Avg. Loss When Wrong)

% Right is often referred to as your “Hit Rate,” and Average Return When Right is often referred to as your “Slugging Rate.” The magnitude of your wins relative to that of your losses is referred to as your “Win/Loss Ratio.”

The best analysts are right about 60% of the time. Most people think they will be right closer to 75%, but the sad truth is that most investors will not do much better than 50%. You can still make money being right only 50% of the time, but you have to be very disciplined about cutting your losses. That is why maintaining a 2-to-1 Win/Loss ratio is so important.

Here is what is so troubling about the example given above: a fantastic analyst who is right 60% of the time, makes a 30% return when right, and maintains a 2-to-1 Win/Loss ratio, will only earn an average return of 12% per idea. However, as we noted, most hedge funds try to earn 20%, so how can they do this?

One possible solution is to employ leverage, but from an analyst’s perspective, he/she typically does not have control over this. So how can an analyst generate a higher return per idea?

A higher Hit Rate is very difficult to achieve. Also, achieving greater than a 2-to-1 Win/Loss ratio is also not realistic, as it would require tighter stop-loss controls that may result in the premature exit of lucrative investments simply because they took an initial “hit” before panning out.

Therefore the only real area to control is the Slugging Rate. If this is the lever, then the analyst cannot afford to invest in stocks that will only earn 10%, 20%, or even 30%. It is just not a high enough annualized return. At a 40% Slugging Rate, the analyst can get closer to the elusive 20% total return hurdle.

40% thus tends to be a “sweet spot” for many hedge fund analysts, as a minimum hurdle rate of return for putting on a position. If the investment only has a 6-month duration, then the return only needs to be 20%, which is roughly 40% on an annualized basis.

Searching for 40% Returns

What needs to happen in order for a stock price to increase? Either earnings need to expand, or the multiple needs to expand, or a combination of the two. The first step is to look at where the sell-side estimates are for the current year and two years into the future. If AAPL is trading at $611 today and is expected to earn $54 in 2013 and $63 in 2014, it is trading at 11x P/E and 10x P/E in 2013 and 2014. In order for the stock to reach $855, or 40% higher, you might project earnings to be 20% higher than the street in 2013 at ~$65, and for the multiple to expand by 20% to ~13x. Or, you might predict stronger earnings growth and less multiple expansion, or vice versa.

As you can see, it pays to think through different scenarios needed to achieve your target return.

A common mistake analysts make is to say that they believe a stock will appreciate by an amount but have earnings expectations that equal or are very similar to those of sell-side earnings estimates. That means that for the investment thesis to prove correct, the stock must increase entirely due to multiple expansion. That is generally viewed as a “low-quality” thesis, as expansion in a valuation multiple is more difficult to predict and gain confidence in than is growth in earnings.

Home » Blog » Fund Management » What is an Investment Thesis and 3 Tips to Make One

What is an Investment Thesis and 3 Tips to Make One

• July 10, 2022
• Lanturn Content Team
• Fund Management

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Whether you are a start-up founder or a first-time fund manager, learning how to write an investment thesis, can greatly assist you in attracting venture capital. Venture capital is a promising route, it can provide you with access to cash and expert advisors who can assist with day-to-day operations. Furthermore, venture capitalists can help guide you on your journey towards becoming the next big thing. In this article, we will provide you with tips for crafting an investment thesis, and offer insights into fund management and investing.

As a business-friendly region for aspiring fund managers and startups, Singapore is no stranger to venture capital, as evidenced by the total number of Singapore-based startups backed by venture capital reaching  S$11.2 billion in the first nine months of 2021 , doubling the whole amount raised in 2020. Although the number is predicted to increase in the coming years, it is crucial to remember that venture capital investors are highly selective; they will not invest in a company without thorough due diligence and vetting.

What is an investment thesis?

Would you invest in a business with no vision, guiding principles, or viability? Most likely, you will pass on the idea, no matter how much return is promised. This is why an investment thesis becomes crucial.

An investment thesis is a proposal that venture capitalists and investors make regarding a particular investment or entire asset class before investing in it. The thesis states their belief about why a particular investment will give them a good return in the future. Therefore, meticulous research is required to predict potential growth and determine the current market sentiment. If the thesis remains valid, then the investment should be continued, even in a downturn. Meanwhile, if the thesis turns out to be false, the asset can be sold and the investor can move on.

If you are a startup founder seeking investment, you must check if the goal of your startup is aligned with the investment thesis of the investor even before you pitch to them, so as not to waste time. For example, if your startup is about saving the climate, you should find an investor whose investment thesis is about impact investing. Other examples of investment thesis could be about a positive outlook on crypto or about investing in real estate.

You can  get a fundraising consultant  to help you with this.

How to make an investment thesis?

An investment thesis is not something that can be done on a whim. It must be well-thought-out. Here are three steps that you should take in creating an investment thesis:

Determine the cause of the trend

In crafting an investment thesis, you should elaborate on the trends that support your view of why this new venture would be a success. For instance, if you want people to back your new fintech venture, you may want to state that in today’s digital age, people are increasingly spending their time online and becoming dependent on mobile devices, including when it comes to their finances. They want everything to be instant and within reach, just by the tap of a finger.

This presents an opportunity for fintech to fill the demand, especially as mobile and internet penetration continues to increase worldwide. This section should support your view on why investing in fintech will pay off down the line. Remember to include market size potential or appetite for the service to bolster your argument.

Moreover, you should assess whether the industry itself has a place in the foreseeable future. As the world becomes more interconnected, it can be said that the probability of digital banking and fintech adoption is relatively high. Such a view was further realised during the pandemic when lockdowns and social distancing measures meant customers needed to find a new way to fulfil their financial needs — ultimately leading to a boom in fintech usage.

Assess the existing trend

After researching the cause of a given trend and market sentiment, it is time to make the case for why investors should back companies that will fit the investment thesis.

For instance, people started to rely on their smartphones, which became all-encompassing devices that answered every need at about the same time that internet penetration seemed to increase every year. It was in this environment that Grab, a booking platform for taxis in Southeast Asia, first started. Since then, they have transformed into the Super App that it is known for today, providing car rides, food, and even grocery shopping and investing services.

Becoming the first in Southeast Asia allowed Grab to establish market share and dominance long before other competitors. While it is true that Gojek was established in 2010, they relied on traditional call centre service for the first few years of operations and just started using an app in 2015. Additionally, they did not expand their Southeast Asia operations until much later, unlike Grab, which expanded to Singapore a year into operations.

This applies to all businesses and startups, not just digital native companies. For example, if you want to open a coffee shop, you must know the potential market in your area and list down the reasons why your coffee shop has potential. Perhaps it is located in a trendy and upcoming neighbourhood surrounded by commercial and residential properties, or you have a Korean-inspired flavour, piggybacking on the buzz surrounding anything Korean nowadays.

By highlighting these differentiating factors in your investment thesis, you effectively showcase why your venture has a competitive edge and the potential to succeed amidst the existing trend. This will attract investor interest and support for your startup.

Consider the risks involved

While starting a business may offer you a fantastic upside, it is still a risky endeavour. Even if you have the experience, starting something new does not always go according to plan. Therefore, it is often said that becoming an entrepreneur is not for the faint of heart. Not everyone has the stomach to ride the ups and downs of establishing a new venture.

You may have grand plans in your head, but executing them into reality is a different ball game. That is why you need to list the possible worst-case scenarios that might occur in your startup and how you will address them to minimise their risk. This will give your investors confidence in your business, meaning that your business is not a flash-in-the-pan startup idea but a well-thought-out one with viability in the future.

Harking back to the fintech example, the risks could be cyber-attacks on the platform or hesitancy to adopt digital platforms, particularly among older generations, which may impact market reach and investment return. Your investment thesis should include ways to deal with such incidents, including hiring and training security experts and regularly holding workshops for seniors in urban and rural areas.

An investment thesis is a written document that explains why you believe investing in a specific asset will yield a good return in the long run. The belief should be backed by comprehensive research and analysis, not driven by a fear of missing out on the current investment trends or following the tips of an influencer. The document will function as a guide or reference to keep your emotions in check on the roller coaster ride of investing.

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The Deere Investment Thesis

• Deere & Company is currently undergoing a transformation from a good to a great business.
• The company has a long history and focuses on the agricultural and construction industries.
• I share the 6 prongs to my investment thesis.
• This idea was discussed in more depth with members of my private investing community, Best Anchor Stocks. Learn More »

Ballygally View Images/iStock Editorial via Getty Images

Introduction

Many know Deere & Company ( NYSE: DE ) as an American cyclical, low-growth stalwart, but they miss the transformation the company is currently undergoing that will likely transform it into a better business and an appealing investment going forward (not to say that the company has also been a great investment in the past). This article aims to briefly review the company’s history, what it does, and outline my investment thesis. Of course, how one interprets the investment thesis greatly depends on one's investment horizon. This article is not intended for shorter-term oriented investors or those chasing a “ quick buck .”

Without further ado, let’s get started with the company’s history.

Deere’s history

Deere has a very long corporate history. Founded in 1837 by blacksmith John Deere in Molines, Illinois, the company decided to set foot in the agricultural industry . Mechanization was not a thing back then, so it focused on innovation in farmers' existing tools. These tools were typically operated by horses.

Mechanization arrived around the 1920s, and Deere had to adapt as the industry displaced horses. At first, the company tried to manufacture its own tractor but capitulated and bought the Waterloo Gasoline Engine Company. This company was known for the Waterloo Boy tractor.

Deere then took advantage of the expertise of its newly acquired company and started manufacturing tractors under its own brand. The most notable tractor in the early days was the Model B tractor, which remained a bestseller for over 15 years.

Mechanization and population growth kept advancing, so Deere needed to find a way to adapt to the new paradigm; the company decided to take the “power route.” In 1960, Deere held an event called the “ New Generation of Power .” Many dealers and farmers attended, kickstarting the next era: manufacturing more powerful equipment.

Deere has always maintained its commitment to power, but the company realized in the 1990s, with the arrival of technology, that it had to make its machines more productive (not just more powerful). To achieve this goal, the company bought Navcom , a pioneer in GPS technology. This event started the next era of the company: the technological era . This is the era the company continues to live in today, and the one responsible for its appeal as an investment (as I’ll show later on).

Finally, in 2017 , the company decided to make its most significant acquisition of all time: Wirtgen for $5.2 billion . Wirtgen is the leading manufacturer of road-building equipment and helped Deere establish itself in the construction industry. The company currently derives around 21% of its sales from this segment.

A brief overview of Deere

Deere manufactures heavy equipment for the agriculture, construction, and forestry industries . The company makes money by selling this equipment and all the related services attached to it, such as service, parts, and software subscriptions. The company's goal has always been to become an ecosystem for the farm.

Its equipment operations business has several subsegments, all backed by the company’s financial segment . Deere helps its dealers and end-consumers finance the equipment purchase through its financial subsidiary.

Here’s a summary visual I have prepared with what the company does:

Made by Best Anchor Stocks

Deere’s operations are heavily skewed to production and precision agriculture in North America . This not only makes sense because it’s where technology can have the most significant impact, but also because it’s where Deere has historically operated:

Deere Investor Day

The brief investment thesis

There are 6 prongs to my investment thesis. Let’s take a look at each individually.

(1) Deere is transitioning to a significantly better business model

Management has confidently stated that Deere is a technology company (rather than a manufacturing business) and that they will accelerate the transition toward selling solutions to build a recurring business.

They estimate the recurring part of the business can make up around 40% of sales by 2030 , and considering the higher-margin nature of this revenue source, I think it’s reasonable to see a path to +60% of recurring profits in the future. These recurring profits should help dampen Deere’s historical cyclicality, something that management rightly pointed out in a recent earnings call:

We are confident in our ability to produce higher levels of returns through the cycle while dampening the variability in our performance over time. This will lead to higher highs and higher lows for our business.

(2) Deere operates in a secular industry where a transition is underway

The agricultural industry has traditionally been cyclical but secular simultaneously (similar to the semiconductor industry). However, thanks to increasing technological penetration, Deere (and its peers) will go from benefiting only from farmers' Capex to benefiting from both their Capex and Opex. In an industry where only equipment sales are monetized, players will start monetizing the use of this equipment and the related technology.

Why is this relevant? Because Capex is cyclical, but Opex is very resilient in an industry that’s in charge of feeding the population. Few trends are more durable than this one, and therefore, I believe Deere has a high terminal value protected by its strong moat (more on this later).

(3) A significant growth opportunity

Growth is always a “concern” for a stalwart, but Deere’s and the industry’s transition is surfacing new growth avenues. Without technology playing such a critical role as expected going forward, Deere managed to grow revenue at a 5% CAGR over the last decade. I know Deere is cyclical, but 2013 was the peak of the prior cycle, so cyclicality is not a relevant consideration in these calculations.

I believe Deere will not be opportunity-constrained considering the nascent opportunity to monetize the farmers’ operations. Management believes the incremental addressable market opportunity is larger than $150 billion:

Deere Investor Presentation

Management expects to take 25% of their value add, meaning that the incremental opportunity for Deere is around $38 billion. Please remember that due to its nature, this revenue would come at a pretty hefty margin.

This said, we should always be careful as investors with Total Addressable Markets, especially when they come from management. Deere might fall short of its estimate, but that doesn’t deny that the opportunity is significant.

Another thing worth noting is that peers expect to follow a similar strategy but also expect to be more aggressive with their “take rate.” AGCO, one of Deere’s peers, hopes to take around 50% of the value they add, which is significantly higher and could make Deere’s value proposition more appealing.

(4) Strong moat and management team

Both the moat and the management team are critical aspects of our expected forward returns. I believe Deere has a strong moat that has several pillars to it:

The installed base : Technology in the agricultural industry needs data to be developed, and this data is collected by the installed base. After more than 60 years of industry leadership, Deere has the most extensive installed base to collect this data.

The dealer network : Dealers are critical in the agriculture industry because farmers can’t afford downtime. The company has by far the most extensive dealer network, and these dealers have long-standing relationships with many farmers. In short, the dealer plays a critical role in any farmer's purchase decision, and Deere is very well served here.

Scale : Deere is by far the largest player in the industry, which, in addition to allowing it to benefit from a larger installed base, allows the company to invest more in absolute terms in R&D while remaining more profitable than peers.

The brand and its history : This leadership has also created significant switching costs, as most farms are family owned and have been passed through generations. Switching costs are high because farmers are loyal to the brand, and equipment costs typically make up a low portion of a farm's total cost (around 15%).

Besides this strong moat, Deere has a rather unique compensation structure focused on growth…but not at all costs. The short-term incentive is based on Operating Return on Assets and Sales , and the long-term incentive is based on shareholder value added. Shareholder value added ensures that the management team is only compensated based on growth that creates value. It was implemented around 2007 by former CEO Bob Lane, who believed that it was what Deere needed to become an excellent company for shareholders. Spoiler: it worked.

(5) A reasonable valuation

Deere is currently trading at a reasonable valuation. To judge the valuation of a cyclical, we should always be careful with the current earnings level. By the end of this year, management expects to be at mid-cycle earnings or slightly below these. This statement might sound as a surprise to many who expect Deere to be currently in a super cycle, but what I believe these people are missing is that the company’s recent growth has been spurred to a great extent by prices, not volume. The latter is what creates the cycles.

So, considering we’ll be at mid-cycle earnings by the end of the current fiscal year and management expects $5.2 billion in Free Cash Flow , this translates into a FCF yield of around 4.7% . This is not fully normalized because management believes the company will be around 90% of mid-cycle earnings, but it’s close enough and helps us be more conservative.

Assuming the company can grow its FCF at a 5% CAGR or above, shareholders should end up with a double-digit return long term . This is not too shabby for a company that’s considered stalwart and low-growth.

What’s interesting is that this FCF CAGR seems pretty conservative for several reasons. First, that’s the pace at which we could expect the company to grow revenue, but the new business model should bring several advantages…

Margin expansion from the nature of the new revenue streams

Improved cash conversion from working capital benefits that subscriptions bring.

One might also think that its transition to becoming a better company should bring some multiple expansion to the company, but this is something that I prefer not to count on.

(6) A thesis that’s starting to play out

Deere recently reported its Q2 earnings. I believe these were important because they portrayed that the thesis is starting to play out. I could write a lot about this, but I think it can be encapsulated in the following quote by management during the call (emphasis added):

If we look back to 2020, the business was around, call it, 90% of mid-cycle, which is not terribly far from where we are today for Production and Precision Ag. And we did around 16% operating margins, today, middle of our guide is 21%.

Margins have already improved significantly through the cycle, and the company is still in the early innings of its transformation.

Deere is a good company transitioning to a great one and currently trading at a reasonable valuation. I don’t intend to time the agricultural cycle (which I believe I would never be able to do accurately) and I am well aware this exposes me to opportunity cost. I don’t care about this opportunity cost, so long as Deere ends up in a better place over the long term.

Meanwhile, keep growing!

Best Anchor Stocks helps you find the best quality stocks to outperform the market with the lowest volatility/growth ratio . We look for top-notch quality compounders, with solid growth and lower volatility than you would expect.

Best Anchor Stocks picks have a track record of revenue growth combined with below-average volatility . Since the inception in January 2022, our portfolio has generated a MWR (Money Weighted Return) of 54%, or what's the same: a +20% MWR CAGR. This compares against a MWR of around 8% for the S&P 500.

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This article was written by

Best Anchor Stocks is a research team consisting of Leandro, an economist with a specialization in finance and Kris, an investing groups veteran who also runs the investing group Potential Multibaggers and focuses on long investments with greater potential for high upside.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of DE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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An Investment Thesis: The Key To Making More Money Long Term

In general, the longer you stay invested, the greater your chance of making money. To help you maintain a long-term investment approach, it’s imperative to develop an investment thesis.

Drawing from my experience in investing since 1995, it’s sometimes easy to get shaken out of a particular investment. Or it’s easy for some people to just keep their money sitting in cash out of fear of financial loss. I get it. I’ve lost plenty of money before because there are no guarantees when you take risk.

I observed panic selling during the 2000 dot bomb and 2008 global financial crisis, affecting both stock and real estate sellers. More recently, I witnessed panic selling at the beginning of the global pandemic in 2020, which lead me to try and allay fears with the post, “ How to Predict the Stock Market Bottom like Nostradamus .”

Having a solid investment thesis, as long as it remains intact, will provide you with the courage and confidence to hold on for the long term.

The Importance Of Developing An Investment Thesis When Investing

Let me go through some examples of how having an investment thesis has helped me hold long-term and make more money overtime. Coming up with an investment thesis also helped me make a significant decision on a recent dilemma you’ll read below.

If you are just starting out and are fearful of investing your hard-earned money, developing an investment thesis will help you take action as well. To beat inflation , you must continuously invest over the long term. If you don’t overcome your fear of investing, then you will likely fall way behind over time.

1) Heartland Real Estate Investment Thesis

In 2016, I published my post titled “ Focus on Trends: Why I’m Investing in the Heartland of America .” My investment thesis was based on the anticipation that more people would relocate to lower-cost areas of the country due to advancements in technology and the increasing ability to work from home. Additionally, I believed that Trump’s victory would contribute to increased interest, funding, and expansion in red states.

Given the uncertainty of which specific real estate investment deal to pursue, I opted to invest in a couple of funds that focused on acquiring real estate in the heartland of America. Now, eight years and $954,000 later, I have generally witnessed positive returns on my investments. Texas properties, in particular, have performed quite well since 2016. However, as I shared in my post on private real estate investing after eight years , there have also been some duds as well.

Investing for such an extended period has been relatively straightforward. In the realm of private funds , the expected distributions typically span between 5-10 years.

2) San Francisco Real Estate Investment Thesis

When I arrived in San Francisco in 2001, I was amazed by the affordability of real estate compared to New York City. Properties were priced 20 to 30% lower, offering more space for the same cost or a similar property for less.

At that time, compensation in the finance industry was comparable between the two cities at my level. Recognizing what I perceived as an arbitrage opportunity, I aimed to leverage this situation and invest in as much San Francisco real estate as my budget allowed. My investment thesis was that prices in SF would catch up to prices in Manhattan due to a better quality of life and the growth of technology.

Didn’t Want To Miss Out On The Tech Boom

My firm played a role in taking Facebook and Google public in the early 2000s. As a result, I anticipated a resurgence in Web 2.0. Lacking the skills or connections to enter the tech industry, I opted to invest in tech stocks and acquire rental properties instead.

Overall, San Francisco property prices have shown positive performance. However, the city’s reputation suffered post-pandemic due to perceived hesitancy by officials to address criminal activities and remove drug dealers downtown.

Thankfully, to stay in power, politicians must address corruption, tackle crime, clean up the city, and provide tax incentives for businesses to thrive. Citizens discontented with criminal activities are likely to vote out ideological politicians and judges who harm the community. Consequently, there is potential for the city’s image to be restored, leading to a recovery in real estate prices.

Deja Vu With Artificial Intelligence

From 2023 until now, there has been an extraordinary surge in tech stock prices. Fueled by substantial bonuses and robust portfolios, I anticipate that a portion of this wealth will flow back into San Francisco Bay Area real estate. Redfin reports that luxury home prices are reaching all-time highs , attracting a significant number of all-cash buyers .

The rise of artificial intelligence (AI) is evoking a sense of déjà vu, reminiscent of 25 years ago when the internet promised to revolutionize the world. Today, it is equally apparent that AI will shape the world in the next two decades.

Despite the likelihood that most of us won’t secure lucrative AI jobs due to intense competition, there’s an opportunity for ordinary individuals to invest in AI companies. Beyond public companies like Nvidia, Microsoft, Google, and Facebook, private investments can be made through open-ended venture capital funds like the Innovation Fund .

I am personally adopting this approach by investing in both public and private AI-related companies. My goal is to allocate $500,000 to these companies over the next five years, ensuring a substantial exposure to AI within the constraints of my investable capital. This strategy not only positions me for potential gains but also serves as a hedge against the challenges AI might pose for our children in terms of job opportunities.

AI Facilitated My Property Decision

In my previous post, “ Rent out, sell, or create a wellness center, ” I detailed my dilemma regarding what to do with my old house. At 46 years old, with two young children and already managing four rental properties, the prospect of overseeing another rental didn’t appeal to me.

Being a landlord can be burdensome, particularly when dealing with challenging tenants or constant maintenance issues. Such responsibilities take away time that could be better spent on more enjoyable activities, like playing tennis or spending quality moments with my kids.

After reading through the comments on my post, which provided diverse opinions on the course of action, I weighed the options and arrived at a decision to rent out the house and hold it for the long term. The deciding factor was the formulation of an investment thesis.

Why Renting Out Is Better For Now

My investment thesis revolves around the belief that owning a single-family home on the west side of San Francisco is a sound decision. Local economic catalysts, including the opening of a large school in the fall of 2024 and the $4 billion renovation of the UCSF Parnassus Hospital by 2030 (expected to create 1200 new jobs), indicate a positive trajectory for real estate on the west side.

Considering the seemingly permanent shift towards remote work and a demographic transition from downtown on the east side to the west side, my optimism extends to the west side San Francisco real estate market over the next two decades.

The final catalyst for my decision to rent out is the anticipated wealth generated by Artificial Intelligence (AI) for employees and investors. I will suck it up as a landlord for the next 3-5 years and then reevaluate.

3) The Vision Pro Investment Thesis

I’ve owned Apple stock since 2012 and it has done well. With the S&P 500 surpassing 4,900, I’ve faced increasing challenges in finding compelling stock investments. However, when the Vision Pro was unveiled on February 2, 2024, my interest was piqued.

At that time, Apple had just reported somewhat soft quarterly results, causing a dip in the stock. I contemplated whether this could be the opportunity to further invest in the company. After dedicating several hours to researching the Vision Pro, I concluded that the answer was affirmative.

The investment thesis I developed centers around the potential of Apple’s new Vision Pro as a significant accessibility tool for the visually impaired . Approximately 2.2 billion people worldwide experience some form of visual impairment, with an estimated 237 million facing moderate to severe impairment. Among them, 40 million are considered legally blind or completely blind. This figure is expected to rise to 115 million by 2050.

Consequently, I believe the Vision Pro holds the promise of greatly assisting a substantial portion of the global population in enhancing their vision and interaction capabilities. Considering the critical importance of sight, the demand for this product should be relatively inelastic for the visually impaired. Furthermore, Apple is likely to enhance the product over time and reduce its retail cost. I can’t wait for version 2 and 3.

An Example Of How The Vision Pro Can Help The Visually Impaired

If you have regular sight or can correct your myopia or hyperopia with glasses or contact lenses, then you might take for granted your vision. Seeing a small screen on your phone or the 10-point font size on a menu is usually not a problem. For for those with visual impairments, it can be.

This Vision Pro commercial succinctly captures one of its many benefits for the visually impaired.

Apple is already an outstanding company with intelligent employees and an impressive product line. Further, it is cash flow positive with substantial cash reserves and a dividend payout. My confidence in investing in Apple stock aligns with my confidence in the S&P 500. However, I anticipate additional upside potential, particularly with the introduction of the Vision Pro.

Note: The definition of legally blind means the inability to correct your visual accuity to at least 20/200 with corrective lenses. Most people can correct their visual acuity to 20/20 to 20/40 with glasses or contacts. Legally blind usually does not mean complete blindness, as many people who are legally blind still have some vision.

America The Great: The Ultimate Investment Thesis

I harbor a home country bias as an American patriot. Residing in this country since 1991, paying six figures in taxes annually since 2003, witnessing my children’s birth on American soil, and crafting over 2300 personal finance posts aimed primarily at aiding Americans in achieving financial freedom sooner—these experiences have fostered my deep connection and commitment to this nation.

I envision my final days in America, leaving behind a positive legacy . Consequently, my long-term outlook is bullish and biased on owning American assets.

The greatness of America, in my belief, stems from:

• Entrepreneurial spirit
• Strong work ethic
• A stable democratic government
• A robust legal system safeguarding intellectual property and individual rights
• A formidable defense industry ensuring citizens’ protection
• A stable world currency
• Generally thoughtful and kind people aspiring to assist others globally in attaining freedom
• A history of unity during times of crisis, exemplified by events like 9/11 and the pandemic

While acknowledging America’s challenges—crime, poverty, socioeconomic injustices—I consider it unwise to bet against its long-term excellence. The collective willpower of our nation, I believe, will drive ongoing positive improvements.

I advocate that everyone, globally, should find a way to own a piece of America , be it through the S&P 500 or U.S. real estate.

In 50 years, when our grandchildren become adults, they will appreciate our foresight in investing in America today. Despite inevitable economic fluctuations, with a well-defined investment thesis, we stand to accumulate wealth beyond our current imagination.

What Makes A Good Investment Thesis

A good investment thesis is a well-researched and articulated rationale behind an investment decision. It serves as a comprehensive guide that outlines the reasons and expectations for choosing a particular investment. Here are key characteristics of a good investment thesis:

• Clear and Concise: The thesis should be easily understandable and to the point.
• Supported by Research: Ground your thesis in thorough research, including fundamental analysis, technical analysis, and an understanding of relevant economic and market trends.
• Alignment with Goals: Clearly state how the investment aligns with your overall financial goals and objectives. Whether it’s capital appreciation, passive income generation , or risk mitigation, the thesis should reflect your goals.
• Identifies Investment Opportunity: Specify the investment opportunity or opportunities you have identified. This could involve a specific asset class, industry, sector, or individual securities.
• Analysis of Risks: Acknowledge and assess the risks, challenges, and uncertainties associated with the investment.
• Time Horizon: Clearly define your time horizon for the investment. Specify whether it’s a short-term trade, a long-term hold, or something in between.
• Competitive Advantage: Understand what sets it apart from competitors and how it plans to sustain or enhance that advantage.
• Financial Metrics: Include relevant financial metrics supporting your investment decision. This may include valuation ratios, growth rates, profitability, and other key financial indicators.
• Scenario Analysis: Consider different scenarios and outcomes. A well-thought-out thesis anticipates how the investment might perform under various circumstances.
• Adaptable and Dynamic: Recognize that market conditions can change. A good investment thesis is adaptable and allows for adjustments based on new information or changing circumstances.
• Exit Strategy: Clearly outline your exit strategy. Know under what conditions you would sell or reduce your position.
• Communication: Share your thesis with others to find any blind spots, like I am with this post. Others should be able to understand your rationale and analysis.

A good investment thesis is not a guarantee of success, but it serves as a roadmap for your investment decisions. Regularly review and update your thesis to reflect changing market conditions and new information.

Reader Questions

Share an investment thesis you have about a particular investment you are bullish on. How can we convince more people to come up with an investment thesis and hold for the long-term?

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Alberto’s Substack

Uranium: A complete guide of the investment thesis

Deep dive into nuclear energy, the uranium market and how i am investing in it.

In this report I will go through why nuclear energy is the clear path for energy, both in the short and long term. And I will explain how I am playing this thesis.

Uranium has been in a supply deficit (relative to primary production) since the 1990s.

In the early 2000s uranium prices went from a low of $7/lb in 2000 to $136/lb in 2007. After Fukushima in 2011, price plummeted to $18/lb in 2018 and prices have now since recovered to around $90/lb.

Uranium equities have had quite a run since 2018, particularly since 2020. Billions have been poured into equities and uranium ETFs have gone from $150M in AUM in 2020 to $5 billion in 2024.

These inflows have benefited many investors, including myself. From 2017-2018 to 2022 I was fully invested in uranium and got a 1000% average return on my portfolio.

I believe this rush into uranium has pushed equity valuations of most miners and juniors from being undervalued, to being overvalued. Therefore, I believe the best way to play this thesis going forward is physical uranium.

My top pick for the sector is Mongolia Growth Group (CVE: YAK). Which trades at a 21% discount to NAV. It also has revenues that cover most of the operating expenses. The holding is not a pure play uranium play though, as it holds around 40% of its assets as uranium investments.

However, I also hold shares in District Metals (CVE: DMX), a highly speculative play of uranium development in Sweden. It trades at a massive discount to peers as uranium mining is illegal in Sweden, however the Swedish government is trying to remove the ban on uranium mining.

There are other ways to hold physical uranium but the discount to NAV that Mongolia Growth Group trades at, makes it the most attractive uranium physical vehicle by far in my opinion.

Uranium price. FRED.

Alberto’s Substack is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

YAK stock price. Google finance

Glossary of terms.

Introduction

Back in 2017 I accidently learned about the uranium investment thesis through a YouTube video about uranium miners. The thesis made perfect sense: the industry was selling uranium at half the price that is costed them to produce it, while the nuclear energy sector was stable and had a promising future. I went all in into uranium juniors and thanks to that I got 1000% average return on my portfolio when I sold them all in 2022 and achieved financial independence. Not long before that I had seen a conference by Warren Buffet. He had given a talk at a university (years before), and one quote stuck with me while I listened the uranium conference I had found, he said something along the line of: “I fully understand the chewing gum business, and I know what the dynamics of the business will look like 20 or 40 years down the road. If you understand these dynamics of an industry and you can buy the industry cheap, you are going to make a lot of money”. It made perfect sense to me. I could “buy” the uranium industry while it was going bankrupt, knowing fully well that in 20 or 40 years the nuclear energy industry was going to thrive.

Now the thesis has somewhat changed. Now uranium firms are no longer going bankrupt. But the deficit is growing due to supply side issues. Except this time, I believe that uranium firms are fairly valued or overvalued. And I believe the play now is to buy physical uranium. If the deficit persists, I believe uranium will be trading at multiples from what is trading now. And if I’m wrong the uranium price will remain stable or even perhaps rise a little. This is the motto of my investment philosophy: “I flip a coin, if its tails I win multiples of my money, and if its heads I lose little or nothing”.

Risk and reward are often misunderstood concepts in the investment world. Particularly among computer scientists and other people trained in STEM fields. They believe that risk is volatility and there is a correlation between risk and reward. I believe this is a common misconception among other investors as well, in popular culture people say, “big risk, big reward”. I don’t believe they are correlated. In 2020 investing in uranium (or coal) was almost risk free as the industry had been decimated and yet it offered immense upside. In fact, from the lows of 2020 to the highs of 2022, a lot of uranium firms delivered anywhere between 200% and 2000% returns.

Firstly, I will analyse why Mongolia Growth Group is the best way to “buy” physical uranium. Secondly, I will go into a deep dive about District Metals. And finally, I will write as to why nuclear energy and uranium have a bright future. For those unfamiliar with this thesis, I recommend jumping straight into the third section of the report, as you should first understand the nuclear and uranium markets to fully understand the dynamics of the sector. For those familiar with uranium, I have put the thesis of YAK and DMX first in the report, so you don´t have to reread another uranium thesis, which I’m sure there are plenty of by now. However, even of you are familiar with the sector you might learn something new.

Deep dive into Mongolia Growth Group: a holding managed by a great investor 

Holdings of YAK. Company reports.

The first thing you should know is that Mongolia Growth Group (YAK from now on) is not a pure play uranium firm. Approximately 40% of their portfolio according to their latest report is held as physical uranium investments. Therefore, if you are looking for 100% physical uranium, you may be better off holding the Sprott Uranium Trust or Yellowcake PLC. Both are physical uranium firms.

However, Mongolia trades at a 20% discount to net asset value. It also owns a subscription-based business: KEDM (Kuppy's Event Driven Monitor) which provides financial information for subscribers and data on especial situations like no other. This subscription revenue helps lowering down the burn rate of YAK and on some financial quarters it has delivered a profit. Also notice that the holding is managed by Harris Kupperman, a historian and investor who manages Praetorian Capital, one of the most successful hedge funds of the last years.

Returns of the S&P, NASDAQ 100, and Praetorian Capital.

Praetorian has delivered over a 1000% return over the almost 6 years it has been in operations. While the NASDAQ 100 and the S&P 500 do not come even close to that return. Also bear in mind that the Praetorian returns are net of fees, while if you wanted to replicate any of those indices you would have to buy an ETF, which charges you an annual fee. Therefore, by buying stock in YAK you also put the money into the hands of one of the best investors out there.

Mongolia growth group valuation. Own estimates, financial statements from YAK.

For $1.1/share you buy $1.3/share of NAV in the form of cash, physical uranium investments shares, shares in Valaris and shares in St Joe. Plus, you get top quality management, which I think should imply a premium on the valuation. YAK also has some Monero cryptocurrency but it’s a tiny fraction of its NAV.

Oil and gas investment as a share of world GDP. IMF.

For those of you not familiar with this companies, Valaris is an offshore driller. It trades at a massive discount to replacement value. And it will greatly benefit from the increase in oil and gas exploration and production. Investments in oil and gas have been in decline relative to GDP, while the world is consuming more oil each year.

Offshore upstream capex. Valaris investor presentation.

The segment Valaris operates in is projected to increase significantly. And Valaris is the largest of its kind by number of rigs.

Regarding St Joe, I thought it best to just copy here the comment of Praetorian Capital on their last letter: ”JOE owns approximately 168,000 acres in the Florida Panhandle. It has been widely known that JOE traded for a tiny fraction of its liquidation value for years, but without a catalyst, it was always perceived to be “dead money.”

Over the past few years, the population of the Panhandle has hit a critical mass where the Panhandle now has a centre of gravity that is attracting people who want to live in one of the prettiest places in the country, with zero state income taxes and few of the problems of large cities.

The oddity of the current disdain for so-called “value investments” is that many of them are growing quite fast. I believe that JOE may grow revenue at a rapid rate for the foreseeable future, with earnings growing at a much faster clip. Meanwhile, I believe the shares trade at an attractive multiple on Adjusted Funds from Operations (AFFO), while substantial asset value is tossed in for free.

Besides the valuation, growth, and high Return on Invested Capital (ROIC) of the business, why else do I like JOE? For starters, land tends to appreciate rapidly during periods of high inflation—particularly an inflationary period where interest rates are likely to remain suppressed by the Federal Reserve. More importantly, I believe we are about to witness a massive population migration as people with means choose to flee big cities for somewhere peaceful.

I suspect that every convulsion of urban chaos and/or tax-the-rich scheming will launch JOE shares higher, and it will ultimately be seen as the way to “play” the stream of very wealthy refugees fleeing for somewhere better.”

YAK ownership. Marketscreener.

Insiders own over 25% of the firm. Which I think its great since it gives them an incentive to improve shareholder returns.

Shares outstanding of YAK. TIKR.

Management has been buying back shares lately, something I think its great considering it trades at a discount to NAV.

I own YAK on my personal portfolio, and I have a very large stake in YAK through an account I manage.

Deep dive into District Metals: a play on Sweden legalizing uranium mining

Resource comparison of large uranium developers. Own estimates, company reports, economic studies.

As you can see in the table above the company has over a billion pounds of uranium as resources, albeit most of them are inferred. However, it trades at such a massive discount (in terms of uranium resources: market cap) to other firms with large nonproducing assets, that I find it a very good speculative bet. Although I must say that if I’m wrong and Sweden doesn’t legalize uranium mining, the stock will likely drop heavily. That said, District owns another 8 projects apart from Viken. Therefore, I believe there is some margin of safety with this firm.

Management owns 5% of the business.

In February 2024 Swedish Climate Minister, Romina Pourmokhtari proposed to remove the ban on uranium mining . I quote: “If the European Union is to become the first climate-neutral continent, access to sustainable metals and minerals must be ensured. We need to use the uranium we have, instead of sorting it out and considering it as waste, as is the case now – due to the current ban on mining uranium.” The country has 25% of European uranium resources. Considering the continent´s move towards self sufficiency in natural resources, I think there is a fair chance of the ban being removed.

I own shares in DMX.

Why not buy uranium miners or developers?

Performance of uranium developers over the past 5 years. Koyfin.

Uranium developers have had an incredible run since 2020. Many are up 1000% or 2000% from the lows of 2020. And some are now trading at small discounts to their NPV (Nexgen or Bannerman for example) and there are even firms trading multiples higher than their NPV (Boss Energy). Whereas prior to 2020 most of them were trading at massive discounts to NPV. In 2020 Vimy and Global Atomic were trading at over a 90% discount to NPV when I bought them. I believe that these valuations make no sense to me anymore in terms of risk and margin of safety. I much rather own physical uranium.

In terms of exploration the firms I like the most is Forum Energy Metals. The CEO of the company is probably the most veteran among any uranium exploration firm. However, exploration is a particularly tough business due to complex geologies, recoveries & metallurgies. In fact, uranium exploration is almost as tough as diamond deposit exploration, which is very expensive and complex. Therefore, I’m staying out of uranium exploration. I owned ALX years ago but it was one my worst performers in the bull run.

There are some firms such as Goviex that trade at significant discounts to their NPV. But due to jurisdiction risk in Niger nowadays, Goviex is not something I want to get involved with. In my opinion the most undervalued uranium junior relative to peers is Deep Yellow. Management is exceptional and they trade with a bit of discount to NPV like Nexgen or Bannerman do, but I believe having John Borshoff as a CEO should probably imply a premium, not a discount. That said, I bought Deep Yellow for AUD20 cents some years back and made almost 500% on my money, so I’m not interested in buying again at these prices.

Performance of uranium miners since Kazatomprom´s IPO. Koyfin.

Same goes with uranium miners. They are all up multiple times their market cap of the lows of 2020. And I don’t think the risk that Cameco or Kazatomprom carries is worth investing in them.

Cameco sensitivity to uranium prices. Cameco Q1 results.

Cameco has done a terrible job at profiting from the rise in uranium prices. Not only did they lose money on Q1 2024, but as you can see in the table above their leverage to uranium prices is almost nonexistent. In fact, if we had $140/lb prices by 2028, their realized price would not even reach $80/lb. Management has done a bad job.

Regarding Kazatomprom, their output, revenues and profits are down significantly in Q1 2024. Which I think is unforgivable given the higher uranium prices. In 2023 after Kazatomprom sold part of the Budenovskoye project to Russia, the firm had a massive senior management exodus. And 4 days ago, former Kazatomprom Chief Commercial Officer was arrested. This is very odd as he is a very respected figure in the nuclear and uranium industries. I doubt Kazatomprom is managed well at the moment.

Paladin recently announced the acquisition of Fission uranium. I am not sure this was the best use of FCF for Paladin, since their assets are in Africa and they have little expertise in Canada. Not to mention the Chinese government owns a portion of Fission, and I am not sure they will be happy to give it away for almost no profits. I think Paladin purchasing Lotus, Bannerman or Deep Yellow would have made more sense given their expertise in Africa.

For CGN, production in the first quarter was 10% lower than expected. This reflects the supply issues the industry continues to have despite higher prices.

Money flows of uranium equities. @GrantChalmers

In fact, since 2020, billions of dollars have been poured into uranium equities and uranium mining ETFs as can be seen in the image above and below. This has made uranium equities larger and therefore they have now more attention from analysts. As a result of this, it has become increasingly difficult to buy uranium firms at good prices.

AUM of uranium ETFs. Bloomberg.

As a result of all this I prefer to put my money into physical uranium except for District Metals. I’m sure there are some equities that will outperform physical uranium in the coming years, but it is not clear to me which ones will be. And I don’t think its worth the risk investing in any one of them. Even if I were to diversify by investing in many uranium firms, I don’t believe I would perform better than holding the physical uranium given current firm valuations.

Nuclear Energy: The ultimate source of electricity

Uranium has a high energy density:.

Uranium has the highest energy density of all fuels known today. According to the Nuclear Energy Institute, each uranium pellet (about 10 grams of weight), contains as much energy as 481 cubic meters of natural gas, 564 liters of gasoline or a ton of coal. This entails several economic benefits as will be seen later. It also implies that nuclear power plants can generate more energy using less waste than a gas or coal power plant. By example, according to the US Department of Energy, all the waste produced by all US nuclear plants over the last 60 years, would fit in a deposit of the size of a football (soccer) field 9 meters deep. And all radioactive waste generated in the life of a human being would fit in a small can of coke, assuming this human being only consumed nuclear energy. In addition, this waste can be recycled (although the US is not doing it for now). There are several nuclear reactors in development that are expected to use recycled nuclear fuel, giving place to a closed fuel cycle, which does not generate waste.

Nuclear energy is clean:

The study, done by the Intergovernmental Panel on Climate Change (IPCC), and published on the page of the World Nuclear Association, shows the generation of CO2 per kWh of electricity produced. As it can be seen on the table below, the only less polluting energy source than nuclear is wind energy. But it is important to mention that CO2 emissions of nuclear energy they do not come from the electric production itself. Emissions come from the production of cement, steel and components that are used to build nuclear plants. This is the main advantage of the nuclear energy since it is the only baseload energy source that does not generate any emissions.

Emissions gCO2/kWh. WNA.

A very safe source of energy:

The data below represent deaths related to different types of electricity generation. These deaths can be caused due to the emission of CO2, to accidents during the operation or construction of the infrastructure, to accidents related to mining necessary to obtain materials for building the energy infrastructure, or to produce the fuel used in them. For example, according to Reuters, in China an average of seven people die in coal mines every day, this increases the death toll/kWh of coal. Regarding global nuclear energy data, the figure of 90 deaths per billion kWh includes the Chernobyl and Fukushima accidents. Therefore, it is only surpassed by the generation of hydro and nuclear energy in the USA, which suffered 90 and 0.1 deaths/trillion kWh respectively. This shows that nuclear energy is safer than most other sources of electricity. In global terms, nuclear is the electrical source with fewer deaths per kWh. Furthermore, contrary to popular belief today, a nuclear reactor cannot cause a nuclear explosion. The concentration of uranium in the reactors is not high enough to cause a nuclear explosion. The uranium in a reactor is enriched to 5%, while a nuclear warhead is enriched to more than 90%.

Deaths/trillion kWh for each source of electricity. Forbes, WHO.

The explosion of one of the reactors at Chernobyl exploded due to a design flaw, not due to nuclear energy itself. In fact, the explosion was due to an accumulation of gases in the reactor, not to an explosion due to a nuclear chain reaction. And the death of people following Chernobyl was mainly due to the incompetence of the Soviet regime which did not want to admit its own fault and did not evacuate the area in time.

In the Fukushima accident of 2011, no one died due to the reactors failing. The only person that died in that regard was in 2018, when a worker tried to measure radiation inside and later died of lung cancer.

Nuclear is a reliable energy source (it has a high-capacity factor):

The capacity factor is the coefficient between the energy generated by a power plant for a period (usually a year), and the capacity to generate energy from that plant (the energy produced if it had worked at full capacity in that period).

 US Capacity Factor. Office of Nuclear Energy.

As can be seen in the table above, nuclear energy has the highest capacity factor. This implies, that there are no energy sources that can take as much advantage of all their potential energy output, as nuclear does. This is especially relevant when compared to hydraulic, coal, gas, or geothermal energy because although they are all baseload energy sources (they generate energy continuously, unlike solar or wind), only nuclear can generate energy continuously for the potential output it was installed for. This implies that nuclear energy is the most reliable source of electricity, because it can generate energy at any time and practically in any circumstance.

Nuclear also produces energy 24 hours a day, almost every day of the year. Therefore, its critical for modern infrastructure to be able to run all day long, Infrastructure like data centers, hospitals, traffic lights, electric cars/trucks, or electrical trains (to name a few) all need power at any given time. As a result of this, both in the short term and in the long term, the world needs energy all day long, and batteries are too far behind (and expensive) to enable solar or wind to achieve this. Nuclear is deployable anywhere, unlike geothermal or hydroelectric power. Albeit the last two can produce energy all year, every day, they can only be constructed in very specific locations.

Nuclear energy requires less surface area than other energy sources:

According to the Nuclear Energy Institute, a 1,000-megawatt nuclear power plant has a surface area of ​​approximately 2,589,988 square meters (1 square mile). To put this into perspective, a wind farm of the same capacity has a surface area 360 times larger (about 900,000,000 m2) with 430 turbines. A photovoltaic solar farm requires 75 times more space (about 187,500,000 m2) with 3 million panels solar. This means that nuclear energy generation has a smaller environmental footprint, because it requires razing less land to build, and it also requires less materials for its construction, and therefore it is a process that pollutes less.

Comparison of different of largest power plants and infrastructures of each type. Own estimates, Energy Information Agency.

The most important column is the one on the right (Ratio output: area), which shows the production in MW per square km. The nuclear plant generates 1896 MW/Km2, while solar, wind, hydraulic or geothermal technology all generate 40 MW/Km2 or less. This implies that nuclear energy is more than 40 times more efficient in the use of space than other low-polluting electrical sources.

The cost of fuel is low for the operator of a nuclear power plant:

Relative (%) costs for the construction of a nuclear power plant. Rijksoverheid/Government of the Netherlands.

As the penultimate row of the table shows, the first shipment of fuel Nuclear is equivalent to 3% of total costs. In a gas or coal plant that cost can be between 30% and 50% depending on the technology used. Therefore, nuclear power plant operators are much less dependent on the price of the raw material than the operators of a gas or coal plant. This too causes nuclear operators to be less sensitive to the price of uranium and, therefore, they are willing to buy it even if the price skyrockets.

A low cost of energy:

The levelized cost of energy (LCOE) is a measure represents the cost of electricity generation of a plant during its useful life. The LCOE formula is as follows: LCOE= sum of all costs during the useful life of the plant/ sum of the value of the electricity produced during it´s useful life.

LCOE for different electricity sources. Rijksoverheid/Government of the Netherlands.

The higher the LCOE, the less profitable a technology is. As the table above shows, it is expected that in the future nuclear energy will be the most cost-efficient technology of all the base energies analyzed (gas, coal and nuclear). And the extension of current nuclear plants is multiples times less costly than the other sources of energy.

Nuclear power plants are less dependent on fuel prices than other energy sources:

Costs of operating different electricity plants, % of the total cost. Energy Information Agency.

As can be seen on the left-hand side of the table above, fuel costs of a nuclear power plant are a fraction of the costs of coal or gas. On the right-hand side of the table, you can see the operating costs of different energy sources (operational and maintenance costs). Nuclear fuel costs are a smaller proportion of its total costs than those of other energy sources. This implies that nuclear power plant operators are less vulnerable to price increases of uranium.

Furthermore, uranium costs are only one third (approximately) of the total costs of nuclear fuel, because the rest of the costs are due to enrichment, conversion, or reconversion of uranium. Therefore, the price of uranium can rise significantly without affecting nuclear energy production. Not only because of the low fuel costs, but also because there is no substitute for uranium. Utilities invest billions of dollars in the construction of nuclear plants and closing them would imply an enormous sunk cost. Therefore, closing nuclear power plants is not a viable economic option for utilities. This greatly favors uranium producers because it makes consumption inelastic to the price (the price can rise a lot without affecting uranium consumption).

Structure of the uranium market

A nuclear power plant is usually made up of several reactors. Each reactor carries out a fission process, which involves “splitting” the nucleus of the uranium atom. When uranium atoms split, neutrons are ejected from the fission and they impact other atoms, causing their fission. The result of this is a process called nuclear chain reaction, which generates enormous amounts of energy. For fission it is necessary to have uranium, specifically the isotope 235, which is the only known isotope of uranium that is known to fission, causing a chain reaction. The isotope 235 accounts for only 0.7% of all the uranium on Earth. Uranium238 makes up most of the uranium, but it is not fissile.

As table below shows, the uranium mining process begins in the mine. The purity of the ore can vary from less than 0.01% to over 20%. This ore is transported to a refining mill that removes all the uranium oxide from the rock, removing impurities. This uranium oxide, also known as “yellow cake”, due to its yellowish appearance, is transported to a central processing plant for conversion. The conversion centres turn this uranium oxide into uranium hexafluoride, which although in its natural state is gaseous, it can be liquefied for subsequent transport to enrichment. In the enrichment plant the isotope uranium 235 is separated from non-fissile isotopes. Enrichment plants can produce uranium for nuclear power plants, for nuclear weapons, for medical purposes or transport fuel (submarines mainly, although ships can also be fuelled with uranium).

A nuclear power plant consumes uranium enriched with 3%-5% uranium235 and this requires an intense and expensive enrichment process. However, nuclear weapons contain more than 90% uranium235. It is usually thought that with the same installations both concentrations of uranium235 can be achieved. But the reality is that achieving 90% of uranium235 requires much more infrastructure and costs, therefore the risk of non-proliferation by enrichment plants is overrated. A conventional enrichment plant cannot create uranium with sufficient purity for atomic weapons.

The waste resulting from the enrichment process has some uses. Some is used for anti-tank projectiles and for tank armour. This is because depleted uranium (depleted because it has little uranium235) has a very high density, making it ideal for armour and projectiles. This uranium is also used for medical purposes, specifically it is widely used in radiology and oncology for the detection of some types of cancer. Unused depleted uranium is stored in special warehouses.

The uranium with 5% uranium235 is then transported from the enrichment plant to the fuel factory. There the uranium is converted into small pellets, which are transported to nuclear power plants for use. They usually change fuel once a year, although for new plants they usually put fuel in them for two years. Once the plant has consumed the uranium, the waste is transported to a definitive warehouse to remain there for all its radioactive life. Waste that is not stored is usually used for recycling, to extract useful waste or uranium 235 that may have remained from the process of fission.

Uranium production process. Office of Nuclear Energy.

Uranium mining can occur with three different methods: open pit mining, underground mining or in situ mining (ISL/ISR). The kind of method of exploitation of the mine depends on its geology and the laws that govern the country where the mine is located. Open pit uranium mines are the most common in Africa, although Orano, in its Cominak mine in Niger, uses underground mining. This last technique (underground) is the most common in Canada and in Australia. In situ mining is the most profitable of all techniques because it is the one that employs the least capital. This mining method is the most common in Kazakhstan and in the United States, although in Australia the Honeymoon mine, operated by Boss Energy uses in situ mining. In Canada they are now trying to implement the in-situ technique. But implementation has been very slow so far because mining permits are only provided for underground, or open pit mining, and there are concerns about possible groundwater contamination. Specifically, Denison, in Canada, is trying to use in-situ mining at one of its deposits in the Athabasca basin. All Kazatomprom mines use this method (ISR).

In situ uranium mining. Energy Information Agency.

In situ mining, as shown in the table above, consists of injecting into the subsoil a mixture of water with an alkaline or acidic substance (depending on the geology of the deposit). The liquid dissolves the uranium in the subsurface. The liquid is then drawn with a fountain and sent through tubes to the treatment centre to extract from the liquid all the uranium. The uranium is converted to uranium oxide for subsequent distribution to customers or conversion plants.

Uranium production by country. world-nuclear.org.

As can be seen from tables below and above, the uranium market is an oligopoly, because the industry is dominated by a few players: Kazatomprom (owned by the Kazakh government), Cameco, Uranium One (owned by the Russian government, just like ARMZ), Orano (owned by the French government) and CGN (owned by the Chinese government just like CNNC). These five players control 77% of the global production of uranium oxide (U3O8). Furthermore, they compete in a market of homogeneous product: uranium, and they have high entry barriers. All these features are very common in oligopolies.

Until 2020, Canada was the second country in uranium production. Not only that, but Canada also has 9% of the mineral reserves of uranium in the world. Most of these reserves are in the basin of the Athabasca, one of the most successful uranium mining regions in the world. Some investors call this region the “Saudi Arabia” of uranium due to the enormous purity of its uranium deposits, which have up to 20% uranium oxide in their ore. To put it in perspective, the purity of the uranium deposits in Namibia or in Niger is usually 0.01% or lower. However, in Canada the bureaucratic processes for the construction of a mine last until a point in which the investment becomes unprofitable. To illustrate with an example, the McArthur River mine owned by Cameco, the largest uranium firm in the world for years, took 11 years to approve all the procedures and constructing it. But the Cigar Lake mine, the highest purity mine in uranium in the world, also from Cameco, took 33 years to be permitted and built, 1981 until 2014.

Furthermore, the Athabasca basin has a difficult topography. It is covered with lakes which makes it difficult to drill and operate. For context, Saskatchewan, the province in which Athabasca is located has over 90,000 lakes. To put this into perspective, the entire continent of Africa has 677 lakes. Canada has more lakes than the rest of the world combined. This makes it difficult for exploration firms to find economic deposits. In fact, a lot of the drilling happens in winter, under freezing conditions because for the rest of the year the ore deposits are covered with water. Fission Uranium (FCU) for example, has a very high grade and shallow deposit in the Athabasca, but is covered by a lake, which has complicated their economics and logistics. Also, a lot of the deposits in Athabasca are covered by sandstone. In some cases, like the MacArthur River or Cigar Lake mines, they are under hundreds of meters of sandstone and overburden. Which makes the operating of the mines very complex.

Uranium production by firm. 2022. world-nuclear.org.

Market concentration is more intense when other phases of the fuel manufacturing process are investigated. For example, to transport uranium from a mine to a power plant, it is necessary to “convert” yellow cake into uranium hexafluoride (UF6), a process that takes place in a conversion centre. There are only eight conversion centres worldwide. But most of the capacity is in Russia, United States, Canada, and France. The Converdyn conversion plant in the United States closed in 2017 due to the bear market that the uranium market has experienced. However, following the uranium rise in 2020 and 2021, the company decided to reopen the plant in 2023.

As seen in table below, the global conversion capacity depends 22% on Rosatom, in Russia. This has caused conversion prices to go from about $10/KgU in 2021 to around $40/KgU by the end of 2023 due to the Ukraine conflict. Utilities don´t want to depend anymore on Russian conversion facilities in case Western countries sanction Russian uranium. In fact, a ban on Russian uranium from the US government seems imminent, therefore this will exacerbate the problem.

Uranium conversion capacity in the world, 2024. wise-uranium.org

The market concentration is even higher in deconversion plants (Deconversion of depleted UF6 to uranium oxide or UF4 is undertaken for long-term storage of depleted uranium, in more stable form). There are only 7 of these facilities in the world, which are in 4 countries: USA, Russia, UK, and France. In this case the dependence on Russia is 14%.

Uranium deconversion capacity in the world, 2022. WNA.

Deconversion plants are responsible for converting depleted uranium or uranium without 235U, in uranium tetrafluoride, a form of uranium that is easier to store and preserve over time. In this case the dependence on Russia is less than 14%.

The table below shows the enrichment capacity. It is measured in Separative Work Units (SWU). The enrichment capacity of the world has increased since 2013 from 51,550 SWU/year to 60,166 SWU/year in 2020. The world's dependence on Russia in this aspect is enormous, in 2020 Russia accounted for 46% of the enrichment capacity of the world. Therefore, the invasion of Ukraine has had a huge impact on the sector. SWU prices have gone from $60/SWU at the end of 2021 to almost $160/SWU at the end of 2023. The dependence problem will only get worse as China will almost triple capacity by 2030, while Urenco (UK) will lower capacity.

Uranium enrichment capacity in the world, SWU/year, 2020 and planned. WNA.

Reasons why uranium has remained below $45-50/pound for so long (AISC of the world):

One of the fundamental causes of the current and future shortage of uranium is that the price has been below the cost of production for a decade. Therefore, it is worth examining the causes of this situation that has lasted since almost 2009 until the 2021.

Bad publicity for nuclear energy and uranium:

Since the Chernobyl accident and more particularly since the Fukushima accident (which only had one fatality due to radiation), the nuclear industry has had a bad reputation.

This image of a dangerous and polluting energy has been publicized by NGOs such as Greenpeace that have not considered the result of their policies: the over dependence on gas and coal, which pollute a lot and have caused geopolitical problems in Europe. Regarding uranium mining, it is considered a dangerous activity and very polluting but that is not the reality. The uranium contained in mines does not pose a health risk, even in high concentrations. In the Cameco mines the concentration of uranium oxide sometimes reaches 20%, and its workers do not need any type of special protection that a copper or gold mine does not have.

Regarding pollution, thanks to the mineral purity of the mines of uranium (0.01%-20%), the use of acids and solvents to extract uranium is less than in the gold industry. For example, miners extract gold from the ground in concentrations of 0.5-1 g/t gold. The lower the purity, the more chemicals and processes must be used, that implies more cost and pollution. Not to mention the strict safety rules followed in uranium mines, and there is rarely an accident. In coal mines however, worker deaths are frequent, particularly in China.

The short-term minded electricity companies are still in the market, the long-term ones are not:

European, American, and Canadian utility companies tend to contract their uranium 2-5 years in advance. They do this because they prefer to strictly adhere to the law, which in many countries dictate that electricity companies must have at least 2 years of uranium to consumption of its reactors. The Japanese electricity companies, however, are known to contract their uranium 20 years in advance or even with more time. The departure of Japanese companies from the market and of Rio Tinto, which had been in business for decades, has meant a paradigm shift in the sector.

Considering it takes between 5 and 30 years to build a uranium mine, the utilities aren’t being sensible in their uranium purchases. This gap between the term of the contracts and the time of construction of the mines has been one of reasons responsible for the destruction of supply of the last 9 years. This behaviour on behalf of utilities has caused downward pressure on the price of uranium, because customers were no longer planning decades in advance, but with a few years.

The uranium pricing system is highly inefficient:

There are two markets for uranium: the spot market and the long term contract market.

Per Jander of WMC, the Technical Advisor to Sprott Physical Uranium Trust, when asked about the uranium spot market he said: “But there's not necessarily a transaction every day [in the spot market]. Most of the time, there are a few. You have a few price points, but reporting is on a voluntary basis . You have a few price reporters who objectively collect this information and then publish a price at the end of the day.  It’s very hard to get an intraday price .” This involves an important information asymmetry between those who are present in the spot auction and the rest of the market. This hurts the market because it is not receiving information on the true price of uranium.

The other pricing mechanism (long-term contracts) is also ineffective in revealing the true price of uranium. This is because long-term contracts are negotiated and signed privately , between the uranium miner and the electric company. These contracts are not usually published to the public. And it is almost never known which electric company is the one that has signed the contract, nor its price . A good example is Global Atomic, a Canadian company developing the Dasa project in Niger. Global Atomic has signed a contract for the future sale of uranium with a utility company setting a floor and a ceiling for the contract price. But the company has not been able to publish even the name of the electric company, neither the floor nor the ceiling of the price. This implies an opacity that means that the uranium price is difficult to determine.

In fact, the long-term price of uranium that appears published on various websites, is an estimate that consulting companies, like UxC or TradeTech do. But it is still an estimate, because UxC and TradeTech do not have access to many of the long-term contracts that are being signed.

Ludwig von Mises wrote: “Without a price mechanism, there can be no economic calculation.”

This is the problem that this poses for uranium producers. Due to the inefficiency in the price mechanisms, they cannot react rationally to the price because it is distorted due to lack of information.

The miners won't/can't stop producing:

Although for nearly a decade the average uranium producer has not been making money, uranium production reached its peak in 2016. This is even though since 2009 the uranium price had only risen above $50/pound one year. In fact, 2016 saw the price hit a decade low of $18/pound. This reluctance on the part of the miners to reduce production has led to a prolonged oversupply in the market. And has put downward pressure on the uranium price.

The fundamental reason why the miners did not want to shut down output despite losing money, is that they preferred to continue paying their debt and employee salaries (only part of the salary in some companies). All this while they would finance the losses by issuing shares and diluting the shareholder. It has also been the case that long-term contracts signed before Fukushima were generating some free cash flow to the miners. But as these contracts expired, miners had to renegotiate at lower prices.

Kazatomprom, the real Saudi Aramco of uranium:

Kazatomprom, the uranium miner owned by the Kazakh government was created in 1997. Back then their market share of the uranium market was around 2.5%. By 2014 it had skyrocketed to over 40%. Given that their costs are the lowest among its peers and the size of the reserves that Kazakhstan has, their role in keeping the uranium price low is not something that we should ignore. Kazatomprom has made money all through the cycle and therefore their production has not been hit. However, their uranium output was down 10% in the first report released in 2024. And their logistics are getting difficult as they can´t export their uranium for Western customers through Russian ports after the sanctions placed after 2022 on Russia.

Uranium investment thesis

As has been analysed so far, uranium serves as fuel for the nuclear industry, which generates clean energy all year around, something the world needs. Uranium fuels operations of some 440 reactors, which produce 10% of the world's energy. And there are 60 reactors under construction, with another 110 already planned and another 300 reactors that are proposed.

However, only one significant uranium mine has been opened outside of Kazakhstan in the last 10 years. The reason is that the average cost of production of uranium worldwide is around $45/pound, the EIA even mentions that in countries like the US, the average cost of production is $67/pound. And as shown in the table below, the price of uranium has been below $45 since mid-2012 until a few years ago. The fact that uranium has been below its production cost for 9 years in a row has led to destruction very important production capacity. In fact, uranium production is at its lowest since at least 2013.

Price of uranium (USD/lb). Spot (blue line), long term contracts (black line). UxC, TradeTech, Cameco.

Uranium inventories in millions of pounds of U3O8. UxC.

 Mines are only producing 74% of the global demand for uranium, this has only been possible thanks to the consumption of inventories. Another source of uranium has been the program between the US and Russia called Megatons to Megawatts, which was dedicated to convert Russian nuclear warheads (with concentrations of around 80% uranium235) into uranium for civil consumption (with 3-5% uranium235). This program generated important quantities of uranium for electricity companies, but it ended in 2013.

However, there is uranium that comes from the so-called secondary supply, this supply comes primarily from nuclear fuel recycling and tailings re-enrichment (recycling of uranium mine waste). However, this last source is increasingly less important because it is a very expensive process and requires waste from uranium mines, whose production is in decline. It is especially relevant that the electric companies have very low uranium in their inventory, because these are the ones that generate a large part of the uranium consumption through long-term contracts (5, 10, 15 or more years in advance) with uranium producers.

These contracts are essential for the proper functioning of this industry. This is because building a uranium mine often requires hundreds or billions of dollars, and 5 to 30 years of permitting and construction, depending on the type of mine and which country it is located in. It is worth mentioning that in this industry the margin of error is very small, because an electric company cannot afford to run out of uranium, this is due to several reasons: To begin with, there is no substitute that utilities can use instead of uranium and therefore if they run out of uranium, they cannot operate their plant. Furthermore, they cannot afford to close their plants because they spent billions of dollars in investments, which electricity companies must make profitable.

As an example, the only significant uranium mine that has opened in the last 10 years outside of Kazakhstan was the Husab mine in Namibia, built by the Chinese government. This mine was built in 2015 with uranium trading at $40/lb, even though Namibia has production costs between $60/lb and $70/lb. The Chinese government needs uranium for their reactors, regardless of what it costs them to produce that uranium.

Uranium demand through contracts. UxC.

Demand for uranium originates in long-term contracts or in the spot market. As seen in the table below, most of the demand volume occurs in the long-term contract market, that is, a promise to deliver uranium in the future. This dynamic has changed in the recent years with the appearance of new uranium investment vehicles such as Yellow Cake or Sprott Physical Uranium Trust (formerly Uranium Participation Corp). These 2 investment vehicles routinely acquire their uranium inventory through acquisitions in the spot market. This table is a good indicator of how inelastic the demand for uranium is with respect to the price. The second largest year in terms of demand (2007) also coincides with the peak in the price of uranium at about $100/pound. This implies that utilities do not consider the price of uranium when demanding it. The main factor for the demand for uranium is the supply risk, that is, the risk that the electricity company cannot receive its uranium on the agreed date. Given this risk, the electric company is willing to pay practically any price, because the risk of not having uranium would imply the closure of the nuclear power plant.

Uranium demand through contracts and spot market. UxC.

Specifically, the rise in the price of uranium between 2004 and 2007 is because a Cameco mine was flooded. This caused panic among uranium consumers, who saw their supply of fuel for their reactors at risk. Given this shock to market, electricity companies began to acquire uranium at any price, which is reflected in the hiring volume that appears in table 24 between 2007 and 2010.

In 2020 Cameco shut down the Cigar Lake Mine due to the Coronavirus (COVID-19) pandemic. The market quickly reacted, and the price moved from around $30/lb in 2020 to $100/lb in 2024 when it peaked. Uranium has since moved back to $90/lb in the spot market but I’m expecting higher prices, as Kazatomprom is running into supply issues and Cameco is slowly running out of ore.

Unmet uranium requirements, millions of pounds. UxC.

The uranium requirements are the demand for uranium generated by the nuclear reactors. It is called requirements because it is a measure that can be predicted and calculated, because each nuclear reactor consumes a certain amount of uranium. What the table shows is the number of pounds of uranium that are going to be consumed by reactors and that have not been contracted by electrical companies. The table shows the amount of uranium that electric companies must acquire over the next few years to power their nuclear power plants. Electricity companies are going to have to acquire tens of millions of pounds from uranium for years, to be able to keep its plants operating. To achieve this, the electricity companies will have to make contracts with uranium developers, so they can build the mines. Without these contracts, uranium developers will find it hard to find financing for their mines.

This will happen because Kazatomprom, Cameco and the other state-owned mining companies do not have the capacity to satisfy all the uranium that will be contracted in the coming years.

Uranium demand and production. OECD-NEA, IAEA, World Nuclear Association.

The IEAE shows in this table that the sector has been in a deficit since the 1990s. That is, the sector does not produce enough uranium to meet demand, and the difference is supported by uranium inventories and secondary supply. The Cigar Lake mine is scheduled to close in 2031 and McArthur River will foreseeably close operations around 2040. And Cameco does not have any mine under construction to replace these two mines. Cigar and McArthur have provided the world with around 20% of the world uranium for almost the past two decades.

In fact, they are now switching their business into the reactor building business. In 2022 Cameco bought Westinghouse with Brookfield for $8.1 billion. So, I don´t expect them to purchase any further mines. This is a paradigm shift as many were expecting Cameco to takeover Nexgen Energy and/or Fission Uranium. As Cameco exits the uranium business over the next decades it will be interesting to see who takes over its role as the major Canadian uranium miner. In my opinion, it was a mistake on behalf of Cameco not to do M&A in the years prior to 2021. Some countercyclical takeovers would have been very accretive in terms of shareholder value creation.

As the table below shows, uranium deficits increase from the year 2030, which is when the Cameco mines begin to run out of uranium in their deposits. By 2035 there will be at least 100 million pounds of uranium deficits per year. For context, Kazakhstan produces 45-50 million pounds of uranium per year, and they produce almost half of the uranium of the world. So, by 2035 the world needs twice the production of Kazakhstan. And there are no projects of that size out there, nor are there numerous projects to replace them.

Uranium demand and production forecast. TradeTech.

A mine is built because a deposit has been found and it is considered economically viable. To find these deposits, it requires the activity of exploration or prospecting for mineral resources. An expensive and risky activity but fundamental for the mining industry. As can be seen in table below, spending on uranium exploration has plummeted since Fukushima accident in 2011. This means that firms are not searching for or finding new uranium mines. And the mines that are being discovered are not sufficient to offset the enormous demand for uranium and the uranium requirements that have not been covered.

Exploration budget for uranium in different regions. Capital IQ.

A significant consequence of this sustained lack of investment is the lack of human capital in the uranium business. Most geologists work in the oil and gas world because it is a much larger sector than conventional mining. Of the few geologists who enter mining, the bulk of them enter the gold, aluminium, iron, or copper markets due to their size. So only a minority of qualified geologists are dedicated to more specialized metals such as tin, cobalt, lithium, manganese, or uranium. This reality of the job market for geologists, combined with the bearish dynamics of the uranium sector, have resulted in the current situation of the sector: shortage of qualified and experienced workers. This is easily seen after having analysed all companies in the uranium sector. Of the 500 companies dedicated to uranium inn 2011, today there are only about 50 companies that are really dedicated to something related to uranium. This has led to the dissolution of hundreds of companies and the dismissal of hundreds or thousands of employees. Of the 50 companies that today operate in the sector, there are only a handful that have been operating since before the Fukushima accident: Cameco, CGN, Kazatomprom, Goviex, Bannerman Resources, Paladin, Encore, Goviex, Denison, Energy Fuels, Uranium Energy Corp, and Ur Energy. These companies I mentioned are uranium miners or developers. There are also some explored ones that have survived the bear market: ALX resources, Forum Energy Metals, CanAlaska, Skyharbour or Purepoint. That is, of the 50 companies in the sector, only 18 companies have operated for more than 10 years. This implies that finding a good uranium geologist, or at least one who has a decade of experience, is another barrier to entry to compete in the sector.

Image of the Rolls Royce reactor design. Rolls Royce.

Until now, the construction of nuclear reactors was carried out in the place where they were to operate the reactor, just like a building is built on the same site where it is going to be located. However, for years the Small Modular Reactors (SMR) technology has been developing quickly. It offers better guarantees of security and non-proliferation of nuclear technology, better economics, and improved safety. But what is revolutionary about this technology is that the reactors will not be built at the site of operation, but will be built in factories, assembling them just like in a car factory. Some analysts compare this evolution of the nuclear technology with the innovation of Henry Ford, with his factories at the beginning of the 20th century, which made car manufacturing enormously cheaper. One of the most advanced firms in this technology is Rolls Royce, which plans to build a factory for reactors in the United Kingdom, with financing from the Qatar sovereign fund.

In the late 19 th century and early 20 th century oil had little demand and few applications. Just a few years later oil had become the major commodity in the market, and tycoons like Rockefeller had made a fortune out of it. This was all thanks to Henry Ford, which made cars affordable. I believe we are on the brink of something similar with uranium. Once SMRs are deployed and factories get built, cheap nuclear will de deployable anywhere in the world within a few months. I believe this will make uranium the new oil in the 21 st century.

However, other companies such as Terra Power, owned by Bill Gates, or NuScale, which has gone public, also have SMR nuclear power plant designs. In fact, Terra Power is already building a demonstration reactor in Wyoming that will replace the Naughton coal plant, thus taking advantage of the existing electric grid infrastructure. The Terra Power design is especially interesting, because the reactor has safety mechanisms that cool the reactor, in the event of a sudden shutdown in the energy supply. So, in the event of a catastrophe such as a hurricane or an earthquake, which leaves the infrastructure without electricity or in worse conditions, the reactor shuts down automatically.

Russia's invasion of Ukraine has had a significant impact on the uranium market as could be seen in the section on the Structure of the uranium market, earlier in this report. This has contributed positively to the uranium thesis. This is because the increases in conversion and enrichment prices will encourage plants to reopen or increase production or capacity. Conversion plants consume uranium oxide to produce uranium hexafluoride. And the enrichment facilities consume uranium hexafluoride to produce high concentrations of uranium235. Therefore, this demand will be transferred to the mills that produce uranium oxide, and these mills will demand more uranium from uranium miners. So, this demand that is being generated at an intermediate point in the chain supply of uranium (conversion and enrichment), will result in an increase in the demand for uranium miners.

Number of nuclear warheads worldwide. Statista.

Since 1985 the world has been dismantling nuclear warheads. In 1985 there were over 60,000 nuclear weapons and today there are just over 12,000. I believe that due to the escalation of conflicts in Eastern Europe and the Middle East, there is a high probability of this trend changing. This is unfortunate for humankind, as I think peace is very prosperous for us. But this could exacerbate even more the uranium market. There are in fact rumours that Russia is developing a new kind of nuclear weapon deployable in space. This kind of developments could spark a new arms race.

Also bear in mind that a lot of tactical weapons are now hydrogen bombs. However, these bombs also require of uranium to work. Therefore, an increase in construction of these weapons will also increase demand for uranium.

Data centre power consumption. McKinsey.

Artificial intelligence and such developments have taken the world by storm lately, With Nvidia becoming the worlds largest company by market cap for a short period of time. These new developments in technology require massive amounts of data. In fact, the larger the amount of computing power, the “smarter” the AI can become. McKinsey predicts that the power required for data centres will explode by 2030. This will result in more baseload energy required. Therefore, increasing the need for nuclear energy. I think uranium is a great way to play the AI thesis.

Regarding Yellowcake PLC and Sprott Physical uranium trust, they have been buying millions of pounds in the past few years. Yellowcake PLC holds 21.68M pounds of uranium which has bought and kept in their inventory. When Sprott bought Uranium Participation Corp they had 16.3M pounds of inventory, now Sprott holds over 65.5M pounds of uranium. Therefore there are tens of millions of pounds that the utilities don´t have access to, increasing the deficits.

US production of uranium. US Energy Information Administration.

The United States is the largest consumer of uranium in the world. And back in the 1970s and 1980s they were self sufficient in terms of uranium consumption. Now the US produces almost nothing and they have to import almost everything. This has created an interesting dichotomy in which the US is the largest uranium consumer, while the largest uranium producers are old Soviet States or African countries. These are regions in which the US has little influence.

This situation has created somewhat of a security threat to the US. And the government just announced a $2.7 billion plan to buy domestically supplied enriched uranium. Congress has also passed a ban on uranium coming from Russia, which will likely create bottlenecks through the uranium supply chain. It is yet to be seen how this ban will affect Kazakh uranium, which could lead to further supply issues.

US production of uranium and imports. EIA.

Finally, I would like to comment on the utility companies, the ones responsible for purchasing uranium for their nuclear reactors. People wonder why they weren´t buying when uranium was below $20/lb. And to solve that conundrum, you must first put yourself in the shoes of a fuel buyer at a utility firm. The fuel buyer does not care if the firm must spend $1 million on uranium or $10 million, because that number is insignificant in comparison to the billions they spent building the power plant. All that a fuel buyer cares about is supply risk: will my reactors have enough uranium to feed them? If the answer is no, the buyer will purchase uranium, even if it’s at $400/lb. That´s why this thesis is so enticing to me even if I’m only holding physical uranium. We could see the price of uranium quadruple from here and demand would increase, not decrease.

Summary of the uranium thesis:

·       Uranium is a metal with a constant and predictable demand, which has no substitute and is therefore inelastic to price, because it is perceived as essential for its consumers (electricity companies). ·       This inelasticity greatly benefits miners in a situation of clear uranium shortage, such as the actual situation. ·       It is a recurring consumer good because light is a product consumed daily and which also usually represents a small percentage of income, more so if we consider that uranium is a small percentage of the cost of a power plant. ·       Nuclear energy is present in about 30 countries, making it a global industry, which benefits uranium producers because they are not dependent on the economic situation of a particular country. The uranium industry foresees an increase of demand for years, this increase will be sustained by new plants in China, India, and the Middle East. ·       The development of SMRs will reduce the cost and complexity of nuclear energy. And it could lead to a development of the nuclear industry similar to what happened with cars after Henry Ford. ·       Uranium production is subject to very high barriers to entry. So, solving the supply deficits won’t be easy. Meaning that we will face higher prices for longer.   ·       Uranium consumers (utilities) have also spent years without entering into new long-term contracts with miners, which will force them to demand more in the years to come. ·       The industry has not invested in new mines or uranium exploration for years. And now there are uranium firms (YCA and SPUT) buying uranium in the market. ·       All this makes the uranium thesis solid and offers an interesting margin of safety. ·       The only negative observed in this market is that it is highly regulated. This is a disadvantage because there are situations like the one in 2007 in which the utilities asked the US government to set a price (at $95/lb) ceiling in the price of uranium alleging national security problems. However, this measure had limited effectiveness because it only affected the long-term contracts, the uranium “spot” market recorded prices of $136/lb.

I think we are in the middle of a bull run for uranium. Furthermore, I believe we are on the brink of a paradigm shift in nuclear energy. As I mentioned earlier I believe SMRs will do to uranium what Henry Ford and his Model T did to oil: it will make nuclear affordable and make uranium the oil of the 21st century.

However, due to the massive capital inflows into uranium stocks, I believe the wisest move is to buy physical uranium, not the miners nor the juniors or the explorers. I am sure a few firms will outperform physical uranium prices, but they are now a lot more expensive than in 2020 or 2017 when I got into the uranium sector. And I don´t think anyone can spot with certainty which firms will outperform the uranium price. And I don´t think they are worth the risk.

My top pick is Mongolia Growth Group, which holds 40% of its assets as uranium.

For those not interested in YAK, you also have available Yellocake PLC and the Sprott Physical Uranium Trust as ways to invest in physical uranium.

As a speculative bet I think District Metals is worth a shot. Even if Sweden doesn´t legalize uranium, they have many other mining assets. If uranium does get legalized in Sweden, I think the stock price could easily go multiples higher from here.

I own YAK in my personal portfolio and through an account I manage. And I own DMX in my personal portfolio.

Kind regards,

Alberto Álvarez González.

Disclaimer: I assume no liability for any and all of your actions, whether derived out of or in connection with this information or elsewhere, and you hereby warrant and represent that any and all actions that you take or that you may take at a later date in connection with this information shall remain your sole responsibility and, in case, I shall not be held liable for any such actions.

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