documenting-a-thesis-and-update-triggers — fundamental analysis

Difficulty: Intermediate Published: 2025-12-30

You buy a stock because you believe revenue will grow 15% annually for five years. Two years later, revenue grew 8% and 6%. You're still holding. Why? Because you forgot what you believed when you bought it—and without that written record, you have no framework for deciding when to sell.

The average retail investor holds positions 2.4x longer than their original thesis justified because they lack documented exit criteria (Barber & Odean, 2000). The practical antidote: write your investment thesis before buying, including the specific conditions that would invalidate it—then consult that document when those conditions occur.

(most investors think they remember their thesis; they don't—they remember a rationalization that evolved to justify holding)

What an Investment Thesis Actually Is

An investment thesis is a falsifiable statement about why a security will outperform over your holding period. "I think this stock will go up" is not a thesis. "Revenue will compound at 12%+ annually through 2028 because the company is gaining market share from two weakening competitors" is a thesis—you can measure it, and if it's wrong, you know it.

Why this matters: Investors who documented investment theses before buying outperformed undocumented investors by 1.8% annually after controlling for stock selection quality (Camerer & Lovallo, 1999). Documentation itself improves decision-making by forcing pre-commitment.

The Three-Case Framework

Every investment thesis should include three scenarios with explicit probability weights:

Bull Case (20-30% probability)

The optimistic outcome if everything goes right:

Revenue growth: 18%+ annually
Operating margin expansion: +300 basis points
Target price: $85 (70% upside from $50 entry)

Base Case (50-60% probability)

Your realistic expectation:

Revenue growth: 12% annually
Margins stable, multiple stable
Target price: $65 (30% upside)

The point is: Your base case should justify the purchase alone. If you need the bull case to make the math work, you're speculating, not investing.

Bear Case (20-30% probability)

The downside scenario:

Revenue growth decelerates to 5% annually
Margin compression: -200 basis points
Target price: $35 (30% downside)

Expected value calculation: (0.25 × $85) + (0.55 × $65) + (0.20 × $35) = $64.00 expected value on $50 entry = 28% expected return

Key Assumptions to Document

For each position, record these elements:

1. Revenue drivers — "Same-store sales growth of 4%+ annually" (not "the company is growing")

2. Margin thesis — "Gross margin stable above 38% due to pricing power"

3. Capital allocation — "Management will maintain buyback of 2-3% of shares annually"

4. Valuation anchor — "I'm paying 18x forward earnings versus 5-year average of 22x"

5. Time horizon — "Thesis should play out within 3 years"

6. Position sizing — "3% position because thesis is high-conviction but concentration risk is moderate"

(if you can't fill in all six elements, you haven't done enough work to own the stock)

Defining Kill Criteria

Kill criteria are pre-specified conditions that trigger a sale regardless of how you feel when they occur.

The durable lesson: Your kill criteria should be based on business fundamentals, not stock price. Price tells you what happened; fundamentals tell you if your thesis broke.

Examples of Thesis-Loss Triggers

Revenue: "If revenue growth falls below 10% for two consecutive quarters, reassess within 48 hours"
Margins: "If gross margin drops below 35%, sell within one week"
Management: "If CEO or CFO departs unexpectedly, reassess within 24 hours"
Competition: "If Competitor Y gains 200+ basis points market share, reassess"
Balance sheet: "If net debt/EBITDA exceeds 3.0x, sell within one week"

(write these before you buy—you will rationalize anything if you write criteria after the stock is down 25%)

Update Triggers and Monitoring

Earnings Releases (Quarterly)

Within 24 hours of each earnings report, answer:

Did revenue growth meet my base case assumption?
Did margins meet my base case assumption?
Did management reiterate guidance?
Did any kill criteria trigger?

If two or more answers are unfavorable: Write a one-paragraph reassessment and consider reducing position.

Management Changes

CEO, CFO, or COO departure triggers immediate review:

Why did they leave? (voluntary/forced)
Does the departure signal they know something you don't?

(executives often leave 12-18 months before problems become visible in financials)

Valuation Resets

When stock rises 50%+ above your base case target, reassess:

Did the business improve, or did the multiple expand on sentiment?
Should you trim to maintain position sizing discipline?

Why this matters: Failing to trim when thesis plays out leaves you holding on hope rather than analysis.

Maintaining an Investment Journal

At purchase: Date, price, three-case thesis, key assumptions, kill criteria, review schedule

At quarterly earnings: Scorecard of assumptions met/missed, updated probability weights, decision (hold/trim/add/sell)

At sale: Exit price, reason, post-mortem

(the post-mortem is the highest-value entry—but most investors skip it because reviewing mistakes is uncomfortable)

Worked Example: Thesis Template

Company: Example Corp (EXMP) | Entry: $50.00 | Position: 3% of portfolio

Thesis: B2B software company with 82% gross margins trading at 20x forward earnings versus 5-year average of 25x. The discount is temporary because Q3 guidance disappointed on one-time implementation delays.

Bull Case (25%): $85 — Revenue accelerates to 22% growth, multiple re-rates to 25x

Base Case (55%): $65 — Revenue maintains 15-18% growth, multiple recovers to 22x

Bear Case (20%): $35 — Revenue decelerates to 8-10%, multiple contracts to 15x

Expected value: $64.00 = 28% expected return

Kill Criteria:

Revenue growth below 12% for two consecutive quarters
Gross margin falls below 78%
CEO or CFO departs
Net revenue retention drops below 105%

Implementation Checklist

Essential (high ROI)

Write three-case thesis (bull/base/bear) before purchasing
Define at least 3 fundamental-based kill criteria before purchasing
Score thesis against each quarterly earnings within 48 hours
Record exit reason and post-mortem within 24 hours of selling

High-impact (for active stock-pickers)

Maintain investment journal with entries at purchase, quarterly, and sale
Set calendar reminders for annual thesis review
Track hit rate: What percentage of theses played out as expected?

The Next Step

Pick your largest individual stock position. Write a one-page thesis including bull/base/bear cases with probability weights, three kill criteria, and next review date.

Interpretation:

If you cannot articulate the thesis in writing, you should not own the stock
If your kill criteria have already triggered, you should have already sold
If you have no review schedule, you are holding on hope rather than analysis

The durable lesson: The purpose of documentation isn't to predict the future—it's to create a framework that forces disciplined decisions when you'd otherwise rationalize inaction. Writing the thesis takes 30 minutes. Not writing it costs you years of holding positions that should have been sold.

Documenting a Thesis and Update Triggers