THESIS DEVELOPMENT: "WHAT'S A THESIS?" The first semester that I taught the buy-side analyst process in the classroom to Arizona State undergrads...it didn't go very well. Our world is so filled with jargon, and I tend to speak quickly, that it became very apparent to me that I
was speaking over the heads of the majority of the students. One evening, about 90 minutes into my lecture on Thesis Development, a student raised his hand. "Brett, sorry I missed this, but what is a thesis?" Face meet palm. My bad. My initial ineptitude in communicating these
concepts aside, situations like this really made me reflect and work to try to make buy-side concept more easily accessible for naïve audiences. SO, WHAT IS A THESIS? Investopedia had a nice, simple definition of a thesis: "an investment thesis is a reasoned argument for a
particular investment strategy, backed up by research & analysis". I view a thesis as a package of research & analysis, distilled to it's key elements, highlighting where the research is differential, communicated to the decision maker succinctly.
A thesis is not a book report on a stock. Let me repeat, A THESIS IS NOT A BOOK REPORT ON A STOCK. A common pitfall for junior analysts is to go away for 1-2 weeks, learn everything they can about that stock, they report back on the findings. This doesn't help the PM at all,
and is actually a quite frustrating situation. The PM will ask "so what, why do I care?". So, from the beginning, have the end in mind. I have a module called PITCH LIKE A PRO which is it's own thread, but I'll preview some key elements here. A good thesis has a structure &
science to it. Go into your PMs office and drone on for 20 minutes and there's no shot that idea is going into the portfolio. So a good thesis has one of two things, ideally both. A GOOD STORY. Levered to an exciting theme, exciting product, believable vision of the future,
compelling catalyst path, compelling reason stock is under-valued/over-looked, on and on. Some narrative web that can be spun around the situation. COMPELLING MATH. A story is not enough. Can I make a lot of money in this situation? What is my upside case? Walk me through the
the 3-year double case. Do I have a low chance of losing money / good downside protection? What is the risk/reward? What is the EPS variance vs. street? Layer in hard numbers and compelling math into the story.
So, that's great. That's what we're aiming for. But how do we get there? How do we go from initial ticker to structured, compelling thesis? 8 STEP PROCESS TO THESIS CREATION IDEA GENERATION. As discussed on these two threads, without a compelling stock idea, the thesis won't
be good. A thesis doesn't exist in a fairly valued stock. So as analysts we must have a very good front end screening mechanism for ideas, and "fish where the fish are." https://t.co/N6KAplG7H8 https://t.co/4LZMrkQY9B MODEL CREATION. You will ultimately be making the
incredibly hubristic claim that you see something about this stock that the rest of the world is missing. Yes, reply guys, some PMs can build models on a cocktail napkin and crush the markets. I know people like that too. Elon Musk can also design a rocket ship on the back of
a cocktail napkin. Mathematicians talk about simplicity on the other side of complexity. It's unlikely, however, that Elon Musk or Steve Mandel is reading this. For the rest of us, a detailed financial model is critical in assessing key drivers, monitoring business momentum,
and deriving an accurate assessment of valuation. Circling back to compelling math, a good thesis generally has a differential view on estimates, growth, or terminal value duration. A model is key in assessing those dynamics. https://t.co/92ZMvVXkUr https://t.co/sgVDscCP1g
https://t.co/tcnYBnN6te KEY DRIVER IDENTIFICATION. Figure out what matters. Don't make your thesis a book report! If you can't figure out who the patsy is at the poker table, it's you! And if you can't figure out the 3 key drivers of your stock, you don't have a thesis! You
have a book report. DEEP DIVE RESEARCH PROCESS. The key to a good thesis is differential vision, also commonly called the "variant perception". Variant perceptions only come about by deep industry knowledge and careful, disciplined research.
See my threads on Quick Dives and Primary Research here: https://t.co/c4lsabrK2C https://t.co/OxEBzsQrsQ BAR ASSESSMENT. Having a view is not enough. Your view must differ from what is currently baked into the stock. You might think that ZM is a great company that is
changing the corporate meeting market, but if you buy it at $500 when all of that goodness is baked into the stock, you are doomed. I have a multi-faceted BAR ASSESSMENT module that I will discuss at some point including multiples analysis, reverse 30 year DCF, divining the
buyside whisper, and common extrapolation buckets (mean reversion, business momentum, mid-cycle frameworks, etc). So it's not enough to have a view, your view must differ from what is baked in. This dynamic is where a lot of retail investors get into trouble. First order
thinking on "goodness" is where many newbie investors end. "Everyone I know uses Spotify, buy SPOT!..."I like Barstool Sports, buy PENN"..."I just got a Peloton and love it...buy PTON!". Yes, those can be helpful signals, but that thinking is very incomplete in stock selection,
and can be a fatal approach in bull markets. VISION & CREATIVITY. After the research process, you really are trying to use your own crystal ball to see better than the average market participant. There is an art to thesis creation, a creativity necessary to pattern recognize,
use Munger's "latticework of mental models", use your own case study library looking for relevant priors, and ultimately make a call on the future of the key drivers of this business. We aren't building LBO models here with corporate-derived forecasts. This isn't a fully
scientific process. It's a creative, intuitive, multi-disciplinary vision-creation process where you are working to have the clearest vision about the 3-5 year future of the business. THESIS CREATION. Once you have all these elements. The front end research overlay, the
model with forecasts, a clear view on the Key Drivers, a clear view on what's backed in, differential vision on the future progression of the Key Drivers supported by your research process, guess what? you have a thesis! THESIS COMMUNICATION. Even if you are a solo investor,
I encourage you to create your own thesis. See 15 page thesis deck above. I will address this more in the future. This framework is the critical distillation of your deep dive process. I'll add another too. 9) TRADING PLAN. Avoid thesis creep at all costs (more on this later).