Are there certain words you avoid because you don’t like how they are interpreted by other people? There are for me.
Even when I am literally doing yoga, I will find other words. “I’m working on my range of motion.”
Sometimes this is to avoid my own biases – I am already the vegetarian in San Francisco, add the yoga label and I’m one step closer to the hippie stereotype.
Biases by others can lead to an interpretation I did not intend. No, I do not have a yoga mat that I take to a studio, I am just doing 5 minutes of stretching in my living room. No, I have not and will not ever use the word namaste.
By not using the word yoga, I can avoid the other interpretations that someone might have.
Which brings me to the word THESIS.
Cringe. It brings to mind essays and homework. I can see you about to close this tab based on that one word.
It is a word that has room for interpretation and thus loses its power.
Instead of asking about your investment thesis, let’s put it another way.
What Are Your Set of Beliefs?
Anything smart I say is just a regurgitation of what someone smarter said.
Reid Hoffman (a Silicon Valley baller) in a recent talk spouted this nugget of wisdom:
Here’s my set of beliefs that make me believe this startup is a good idea. It’s like the list of the investment thesis. The kinds of things that would say why it is … this is a world changing company.
An investment thesis is just a set of beliefs. Things that you believe to be true about the future that lead you to the conclusion it is a good investment.
Elon Musk (definitely smarter than me) talks on this theme as well, which he calls reasoning from first principles:
First principles is a physics way to looking at the world. What that really means is, you boil things down to the most fundamental truths … and then reason up from there.
Picking the right investment is predicting the future. Predicting the future is hard. Start at the beginning and reason up.
Back to Reid:
What is human nature? What is humanity like now and where is it going? And how does your product or service fit into that?
That doesn’t sounds so hard. For example, think about the trends you keep hearing about millennials. What will happen if a greater portion of the population gets married later or hops around from job to job?
The chance for the greatest returns are when your beliefs are different than everyone else’s beliefs. If you just arrive at the same conclusion as everyone else, the potential return is much smaller.
As Peter Theil (smarter than me, but seems really dumb sometimes) puts it:
Tell me something that is true that no almost nobody agrees with you on.
Once you have a set of beliefs, you can follow them to their logical conclusions for investments.
Do I Need an Investment Thesis? I Invest in Index Funds
Regardless the investment, there are some underlining assumptions that go with it. You need to know what those assumptions are, otherwise they may not match up with your beliefs.
Let’s look at an example of a investor in 401k mutual funds. This is perhaps the most common type of investor.
What is the thesis behind this? What are the underlying assumptions?
- It is beneficial to defer taxes on the money
- The fees don’t outweigh the benefit of deferred taxes
- You won’t need the money until you are 60 or are ok with paying a penalty
- The mutual fund options will produce a satisfactory return compared to outside investing options
Each of these could be broken down further. For example, which mutual fund you choose indicates beliefs about how to diversify to reduce risk, as well as balance categories like international, small businesses, technology, etc. Do you have any beliefs about these categories? Did you know you are investing in them?
The same goes for Vanguard index fund investors. You are prioritizing low fees, assuming the fees are more important than generating a greater return.
Maybe you agree with these beliefs. I hope you do, because based on your actions, they are your investment thesis.
My Set of Beliefs
- The zero-effort default approach to investing will not produce enough results, so some effort is required. It is ok to pay someone for that effort when the return is worth it.
- Taxes hurt, but the net return is what is important. It is ok to pay taxes when the return is worth it.
- My 20+ year timeline of investing is an advantage. Investing in stocks with quarterly goals is a mismatch with my timeline and doesn’t use my advantage.
- Access to leverage is a huge advantage given my timeline. Controlling 100% of the asset for only 20% invested with a 30 year fix-rate loan will allow me to invest earlier to start the compounding effect.
- The United States will continue to be an attractive place to live, people will prefer to be near cities, single family homes are preferred over shared living.
- The number of renters will continue to be strong as student loan debt is larger than ever and families are started later.
Conclusion: rental properties for me! Most people don’t understand the returns and that time spent to set up a passive investment is well worth it.
What are some of your beliefs that go into your investment thesis?