When I first started investing, I always overlooked this key step – writing the investment thesis.
Let’s face it, navigating the stock market, especially for beginners, feels like being thrown into a whirlpool of information, numbers, and opinions.
But hey, there are ways to up your odds of hitting success.
One such strategy is to explain your reasons for making that investment.
Remember what Peter Lynch said in 'One Up on Wall Street'? Take two minutes to craft the story before diving in.
Now, writing a whole saga in two minutes? Sounds tough. I mean, I can’t even pull that off.
But the idea here is to create a plan for investing. This plan should help you gain clarity, manage risks, and stay focused.
By writing it down, you understand what needs to happen for the company to succeed. Most importantly, it makes you aware of the potential pitfalls.
Even when things don't go as expected, an investment thesis remains helpful.
The thesis serves as a reference point during uncertainty. Instead of reacting impulsively to market fluctuations, the thesis encourages a more measured response.
So, what are the key things to consider while crafting your story?
While there may be some exceptions, most often, a company needs to take dynamic actions to continue earning money. Understanding these actions provides insights for shaping your story.
This is why it is crucial to research and learn as much as possible about the company and its industry.
Keep in mind that insider selling is not always a valid reason to avoid investing in a stock. Similarly, while successful cloning can turn a small business into a successful franchise like Taco Bell, it is worth waiting until the business has proven that the concept works in various locations before investing.
Companies go through three distinct growth phases: start-up, rapid expansion, and maturity/ saturation.
During the start-up phase, the company works out the kinks in its basic business, making it the riskiest phase for investors. The rapid expansion phase is the safest and most profitable for investors because the company is growing simply by duplicating its successful formula. The maturity/ saturation phase is the most problematic because the company reaches its limitations and needs to find ways to increase earnings.
Understanding where a company is in its life cycle can help investors make better decisions. It is also never too late to wait for evidence of success if you are considering investing in an unproven enterprise.
To ensure that your investment remains sound, it's a good idea to check up on the company's story periodically.
This can involve reading the latest reports, and inquiring about the earnings and whether they are meeting expectations.
As you keep tabs, watch if the company’s shifting gears from one phase to another.
Always remember, the heart of successful investing lies in one thing: writing that investment thesis before taking the plunge. It’s your plan in the stock market maze.
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