Investment thesis

A written statement of what you believe about an investment, at what price it is worth owning, and what specific observation would tell you that you were wrong.

Example

'This business will hold its margin as it scales because its costs are fixed; if margin falls for three consecutive periods while revenue grows, I am wrong.'

Important

A thesis without a falsifier is a story you agree with. Writing the disconfirming observation down before you commit is the only version of the test you can trust later.

Related terms

  • Disconfirming evidence — Information that would make your thesis wrong - facts you would have to explain away rather than cite.
  • Due diligence — The work of independently verifying the claims made about an investment before committing money to it - the documents, the counterparties, the registrations and the numbers.
  • Variant perception — A view that differs from what the market price already reflects, in a specific way you could check.

Lessons that explain it

  • The best opportunities are rarely the ones being shown to everyone — Deal flow is not one thing. It arrives through channels with very different quality, and the channel an opportunity came through tells you something before you have read a word of it. (10 min)
  • A process you actually run beats a better one you do not — Screening only compounds if it is written down, identical every time, and produces a record - which is what turns a year of declined opportunities into knowledge about a category. (11 min)
  • Spend the first meeting listening for what is specific — A first meeting is for finding out whether the opportunity fits your thesis and whether the founder's claims are specific enough to check. Structure it, ask for facts, and leave with a clear next step. (11 min)
  • When to walk away, after you have already spent — By the time walking away is the right answer, you have usually spent money, months and a quantity of public commitment - and all three argue in the same wrong direction. (12 min)
  • Would you invest in this round if you had never met the company? — A follow-on decision should be judged as a new investment at today's price and today's evidence. What you already invested is gone either way and should not decide what you do next. (9 min)
  • Write the follow-on policy before the requests arrive — Deciding in advance what would earn more capital removes the pressure, relationships and urgency that distort follow-on decisions when a request is already on the table. (10 min)

All 578 terms in the Investing glossary