Chapter 20: How I Form an Investment Thesis

This is Chapter 20 of my book Mastering Value Investing: Practical Strategies for Real-World Results. Go there for links to the other chapters.

 

Investors often spend enormous effort analysing revenue growth, margins, ROIC, cash flow and competitive advantages. But after all those spreadsheets and charts, one question still matters: Is this company actually investable? 

My approach is to turn all that fragmented analysis into an Investment Thesis Matrix built around two dimensions.

First, absolute performance: Can the company grow profitably, earn attractive returns on capital and reinvest effectively?

Second, relative performance: How does it compare with competitors — and is it gaining or losing ground?

Put the two together and a company generally falls into one of four categories: Compounder. Turnaround. Laggard. Value Trap.

But there is a catch. A company that looks like a Compounder may still be a poor investment if its balance sheet is weak. Conversely, a less impressive business may deserve another look if strong finances give it time to improve.

That is why I add a financial resilience overlay to the matrix. And then comes the question that changes everything:

What if you correctly identify a great business - but the market already knows it?

This is where many investment theses fail. Business quality tells you what you would like to own. It does not tell you what you should pay.

In Chapter 20 of Mastering Value Investing, I bring these elements together and apply the framework to The Mosaic Company.

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Disclaimer & Disclosure

I am not an investment adviser, security analyst, or stockbroker.  The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies.   Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. 

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. 

I may have equity interests in some of the companies featured.

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