In my last post I wrote about a friend who is down over 20% and can't tell whether his idea is broken or just having a bad year. The reason he can't tell is simple. He never wrote down why he bought.
So here's the fix. It takes about five minutes per holding, and you don't need a finance degree.
Why bother writing it down
Memory edits itself. Six months in, with the price down, you tend to remember the reasons that match how you feel right now. A note you wrote on the day you bought can't be edited by your mood.
It also turns "do I feel scared?" into "has anything I wrote down actually changed?" That's a much easier question to answer.
The three lines
- Why this company? What does it do well, and why should that last?
- What would prove me wrong? The facts that would make me sell, decided now while I'm calm.
- When will I check? A date, so I review the facts and not just the share price.
That's it. If it's longer than a few lines, it's probably a story, not a thesis.
An example (made up)
This is a pretend company, so no one reads it as a tip.
Example Freight Ltd
- Why this company? It's the main carrier on two busy rural routes with few rivals. Customers rarely switch, so revenue should stay steady and grow with the population.
- What would prove me wrong? It loses a major contract. Or profit margins fall for two half-year results in a row. Or debt grows faster than earnings for two years.
- When will I check? After each results season, in February and August.
Notice what's in line 2. Facts about the business, not the share price.
A few tips
- A price drop is a reason to look, not on its own a reason to sell. The price tells you what people think today. Your thesis tells you whether the business changed.
- A theme isn't a thesis. "AI will be big" is a reason to start looking. It doesn't say which company, why it wins, or what would change your mind.
- Write it before you buy, while you're calm. If you already own it, write it today. Ask yourself: if I didn't own this, would I buy it for these reasons?
- Make line 2 specific. "If things get worse" is useless. "Two half-years of falling margins" is something you can check.
- When your reasons change, add a dated note. Don't rewrite the old one. The history is the useful part.
What it can't do
A thesis doesn't tell you the share price will go up. You can write a good one and still be wrong. What it does is make your decisions on purpose. Whether you hold, sell or move to something else, you'll know why.
Once you've done this for each holding, there's one more level up: a thesis for the whole portfolio. I cover that in how to write a portfolio thesis.
That's part of why FolioTrack lets you record a thesis for every holding, with saved history, so you can look back at what you were thinking at the time. It won't tell you what to buy or when to sell. It just helps you see your own reasons clearly.
What's the first holding you'd write one for?
— The FolioTrack Team
General information only. Not financial advice. The example company is made up.