# Understanding Investment Thesis: Strategic Decisions Backed by Research

## What Is an Investment Thesis?

An investment thesis is 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 to guide their strategic decisions.

These formal written documents may be prepared by analysts or other financial professionals for presentation to their clients. It is important to specify the assumptions underlying an investment thesis, as unexpected events may challenge its conclusions.

### Key Takeaways

*   An investment thesis is essential for both individual and corporate investors to guide their investment decisions by analyzing potential profits, risks, and strategic alignment.  
    
*   A well-structured investment thesis typically includes the investment goals, viability, associated risks, potential returns, and aligns with the investor's objectives.  
    
*   Investment theses can vary in complexity and detail, depending on factors such as the investor's experience and the nature of the investment, ranging from simple individual portfolios to complex corporate acquisitions.  
    
*   Notable investment thesis examples from firms like Morgan Stanley and Connetic Ventures illustrate different approaches and considerations, emphasizing quality assessments, financial strength, and diversification.  
    
*   Documenting an investment thesis in writing aids investors in making informed and objective decisions, helping to achieve better financial outcomes and providing a reference for evaluating success.

## Breaking Down 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](https://www.investopedia.com/terms/p/privateequity.asp) 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](https://www.investopedia.com/terms/a/acquisition.asp) 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. Writing down your thoughts can significantly influence the course of a potential investment.

Let's say an investor purchases a stock based on the investment thesis that the stock is [undervalued](https://www.investopedia.com/terms/u/undervalued.asp). 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](https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp) 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.  

> **Tip**
>
>  If you believe your investment thesis is strong, remain committed to it despite challenges.

## Key Factors to Consider for Your Investment Thesis

An investment thesis is generally formally documented, but there are no universal standards for the contents. Some theses demand quick decisions and are simple in structure. When a thesis concerns a big trend, such as a [global macro](https://www.investopedia.com/terms/g/globalmacro.asp) 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](https://www.investopedia.com/terms/p/portfoliomanagement.asp) 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.  

> **Important**
>
> Like any thesis, an idea starts vague, but detailed research turns it into a plan for action.

## Essential Components of an Investment Thesis

Although there's no industry standard, there are usually some common components to this document. An investment thesis is usually a plan grounded in 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](https://www.investopedia.com/terms/r/risk.asp) 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](https://www.investopedia.com/terms/t/targetfirm.asp) vision aligns with the acquirer or it may identify opportunities for growth in the market.

The complexity of an investment thesis varies with the investor type and 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.  

## Real-World 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](https://www.investopedia.com/markets/quote?tvwidgetsymbol=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](https://www.investopedia.com/terms/r/riskmanagement.asp), 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](https://www.investopedia.com/terms/v/venturecapital.asp) 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.

## The Bottom Line

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. This can also help you make clearer decisions and remain confident during periods of market volatility.

> **Article Sources**
>
> 1.  Harvard Business School. "[Writing a Credible Investment Thesis](https://hbswk.hbs.edu/archive/writing-a-credible-investment-thesis)."
>     
> 2.  Lanturn. "[What is an Investment Thesis and 3 Tips to Make One](https://www.lanturn.com/sg/blog/what-is-an-investment-thesis-and-tips-to-make-one#)."
>     
> 3.  Morgan Stanley. "[Global Opportunity](https://www.morganstanley.com/im/en-la/intermediary-investor/strategies/active-fundamental-equity/global-opportunity.html)."
>     
> 4.  Medium. "[The Data That Built Our Fund's Investment Thesis](https://conneticventure.medium.com/the-data-that-built-our-funds-investment-thesis-239109709b42)."