Part 3 – Lesson 2


In this lesson, we will present the key elements of formulating an investment write-up for a stock.  An investment write-up is a short summary describing the company and the investment thesis for the company.  Investment write-ups are used extensively by investment analysts to communicate an investment idea to the rest of their investment fund’s team.

A good investment write-up will clearly and succinctly communicate why the analyst is positive (or negative) on the company, what the analyst believes the stock is worth, and what the analyst views as the timeline for the investment.  The key element of the write-up is usually the “divergent view” or “variant view.”  The divergent view articulates how the investment thesis on the company is different than what investors believe about the company today.

Below are the key reasons to always create an investment write-up for every position:

  1. Gather your thoughts – Even if you are not sending your write-up to anyone, creating a write-up helps an investor gather his or her own thoughts by putting it down on paper. By writing down the investment thesis, it helps to test the validity of your thesis.  If you can’t clearly communicate an idea on paper, then, you should question how strong of a thesis you really have.

  2. Create a system and stick to the process – Creating a write-up for every position helps you to inject discipline into your investment process. As an investor becomes more experienced, it is easy to become lazy and take short-cuts in the investment process.  By always putting pen to paper, an investor can make sure that he or she is evaluating all aspects of the thesis in a methodical manner.

  3. Create an ongoing record – By saving all your write-ups in a folder, an investor can keep an ongoing record of all their positions, which helps to test their hypothesis over the course of the investment horizon. For example, if you buy shares of Facebook today but are suddenly facing a 20% loss in the stock in three months, your conviction in the stock may be shaken.  It is often helpful to refer to your original write-up to remind yourself of why you invested in the position in the first place.

  4. Avoid “thesis creep” – Thesis creep is when an investor buys a stock based on a specific thesis, but even after that thesis is proven incorrect, the investor continues to hold the stock based on a newly formed thesis. The thesis continues to “creep” and morph into different justifications for owning the stock despite the original thesis having been proven incorrect.  By referencing the original write-up, investors are in a better position to exit losing positions when he or she is incorrect.

  5. Reduce emotion and avoid impulse purchases – It takes time to create an investment write-up. By taking the time to write your thoughts down and complete your financial model prior to making the purchase, it reduces the likelihood of an investor purchasing a company before the research is complete or purchasing a stock based on impulse.

Key Sections of the Investment Write-Up

We are showing the outline of the investment write-up now since this is the final product that we are working towards in our investment process.  Our goal is to show you the destination now, so you have a better grasp of the journey along the way.

An investment write-up will generally follow the below format:

Facebook (FB)
Recommendation: Long
Price Target: [insert price target]


In this section, an investor should discuss the following key items:

  1. Summary of the company’s business
  2. Any relevant strengths or weaknesses of the business
  3. Overview of the industry if relevant
  4. Recent news or events if relevant to the thesis
  5. Any other relevant information needed to understand the investment thesis.

Typically, the level of detail in this section will depend on the company.  For example, most people don’t need an in-depth discussion of Facebook’s product.  However, if the write-up was on a biotech company, a detailed description of the company’s drugs would be very helpful.

Divergent View / Variant View / Investment Thesis

This is the core of the write-up.  This section highlights what the investor believes about the company vs. what other investors believe about the company.  It should highlight the following:

  1. What is the bull case on the company? In other words, for investors that are positive on the company, what do they believe?
  2. What is the bear case on the company? In other words, for investors that are negative on the company, what do they believe?
  3. What is the consensus view on the company? Are most investors bullish, bearish, or neutral on the company?
  4. What do you (the investor) believe about the company that is “divergent” or “variant” vs. other investors? If you are bullish on a company whereas other investors are bearish, then, what are the key reasons for why you are bullish?  And what do other investors misunderstand about the company?

While the formulation of your investment thesis is critical to the investment process, it is important to not getting carried away trying to craft a brilliant investment thesis that no one else has thought of.  For example, for the last 5 years, Amazon has been a consensus long.  Institutional and individual investors love the stock, and it is hard to argue that anyone who owns the stock has a view that is much differentiated from anyone else.  Yet, the stock has been an all-star performer.

You don’t need to have thought of something that no one else thought of to justify owning a stock.  Sometimes, an investment thesis can be as simple as demonstrating that a company will continue to grow at a healthy growth rate and outlining the reasons for why that growth will continue.

However, it is important to understand how your view stacks up vs. other investors.  For example, if you are positive on Facebook and believe their revenue will grow at 25% for the foreseeable future but other investors believe Facebook’s revenue will grow at 50%, then, you should question the strength of your thesis.  Although it is great for a company to compound revenue at 25%, if expectations are for much higher than 25%, then, expectations (and therefore the stock) may need to reset before it makes sense to buy it.

On the flip side, if you are bullish on a stock when everyone else is bearish, these situations are usually outstanding set-ups to own a company’s stock particularly when you have good reason to be bullish.  For example, following the Facebook IPO, the stock fell to $20 and many investors were extremely bearish on the prospects of the company.  Investors that had a more positive view of the company while everyone else was negative were rewarded handsomely for taking risk when others were nervous on the stock.

In summary, knowing how your expectations compare to other investors will provide an investor with context as to how the stock will react once consensus expectations change.

Valuation / Financial Model

In this section, an investor may copy and paste a summary of their financial model and valuation of the company in question.  The valuation provides support for how the price target was derived.  Importantly, financial models and valuation summaries are best when they are short and sweet.

If the investor is using a P/E ratio or P/FCF ratio, this section should highlight the multiple being used and the underlying earnings or free cash flow that this multiple is being applied to.  Alternatively, if a DCF valuation was performed, this section should display the details of the DCF.

This section can also build on the investment thesis section by highlighting an investor’s financial expectations vs. consensus.  For example, if sell-side consensus revenue growth for Facebook is 40%, but you believe Facebook will grow at 50%, this section can highlight your forecasts vs. consensus.

Ultimately, if your financial modeling suggests that consensus financial estimates for a company are too low, this is usually great justification for owning a stock.

However, it is very important to not becoming overly confident in your financial forecasts.  Many investors make the mistake of assuming a level of precision and knowledge that is unknowable.  For example, if your thesis for owning Facebook is that they will grow revenue at 42% vs. 40% consensus estimate, this investment thesis comes across as a gamble.  No investor has the foresight to forecast to this level of precision.

It is much more useful to look at estimates in terms of long-term directionality and magnitude rather than try to forecast small near-term movements.

Catalysts / Timeline / Investment Horizon

While our investment style is long-term in nature, it is still helpful to highlight how long you believe it will take for the investment thesis to play out and the key events or steps to get there.

For example, if your expectations for Facebook earnings are higher than consensus, when do you believe consensus expectations will move higher and what are the key events that need to occur for that to happen?  Here are a few of the important catalysts that can occur for a public company:

  1. Quarterly earnings
  2. Analyst day
  3. Investor conference presentations

For hedge funds that have short-term investment horizons, the “catalyst path” for an investment is extremely important.  Hedge funds want to know exactly when the investment thesis will be realized so they can move on to the next idea.  Since many hedge funds report results on a monthly basis, hedge funds are under enormous pressure to consistently put up strong results, so hedge funds want to know that they won’t be stuck in an investment that has no catalyst that will cause the stock to move higher.

For longer-term investors, we would argue that the precise catalyst path is a bit less relevant.  However, even for long-term investors, it is important to understand the expected investment horizon.


This section should outline the key investment risks in taking on this investment.  It should highlight not just risks to the company’s business and the industry, but it should also highlight where your investment thesis could potentially be incorrect.