Write a thesis for each position, along with the evidence that would make you sell it.
Marcus's colleague bought Larkspur shares at S$1.60 and set a stop order 15% below his purchase price, at S$1.36 (S$1.60 less 15% = S$1.36). All the figures here are made up, and Larkspur's price path is the made-up one from lesson 10.2, Trend, support and resistance as a description of past trading.
Larkspur's customers are cyclical. In the FY4 downturn they paused orders, and the price fell to a low of S$1.30. The stop triggered near the bottom and he sold. The customers then resumed their orders, nothing in the business had broken, and over the next year and a half the shares climbed to S$1.95. He now writes a thesis for each holding instead of setting stops.
A stop order sells your shares automatically when the price falls to a level you set in advance. It is one kind of price-based exit, where you sell when the price says so. With a thesis-based exit, you sell when the evidence about the business says so.
Prices move for many reasons that have nothing to do with what a company is worth. A fund may be selling to meet redemptions, a scare may hit the whole sector, the stock may be dropped from an index, or the whole market may fall. Lesson 4.7, Which headlines fade from prices and which do not, showed how often falls like these reverse. A stop order cannot tell these reasons apart. It treats a 15% fall caused by forced selling the same way as a 15% fall caused by losing the largest customer.
A thesis can tell them apart. When a holding falls, ask one question: has anything happened that contradicts my thesis? For Larkspur, a customer cutting its spending guidance for a year is part of the cycle the thesis already expects, so the thesis holds. A customer announcing it will move half its orders to the second supplier breaks the thesis, and at that point the price has no bearing on the decision.
The same question applies when the price rises. A rise is no reason to keep a holding whose thesis has broken, and a fall is no reason to sell one whose thesis still holds. A fall does make your position smaller and the potential return from here larger. Use it as a prompt to reread the thesis before you place any order.
A thesis is a short written statement of why you own a holding, what you expect to happen, and over what period. It is the investment memo from lesson 9.8, Build a comps table and write an investment memo, cut down to a paragraph you can reread in about a minute.
It has to be specific enough to be wrong. "Larkspur is a good company" cannot be disproved by any news, so it can never tell you to sell. "Revenue grows at a 13.5% margin while it keeps its two big customers" can be checked against each set of results.
Marcus owns Larkspur. His thesis says he owns it because the parts business earns about 19% on capital, protected by the months it takes customers to qualify a new supplier, and because the S$1.60 price implies revenue growth of about 1% a year, against about 7.5% over the last cycle. He expects revenue to grow roughly in line with customers' guidance, at an operating margin near 13.5% through the cycle, over three to five years. He will judge it on that period, and a single half-year will not settle it.
Under the thesis, write two or three pieces of evidence that would show it is wrong. Give each one a threshold you can check in a public document. Marcus took his from his memo. He would sell Larkspur if:
the top two customers fall below 50% of revenue and no new customer replaces them operating margin falls below 12% in a year when revenue holds up, which points to price pressure and away from the cycle the board spends its growing cash on an acquisition outside the parts business, as it did with coatings
Marcus also owns a US chip designer. Lesson 5.6, Short selling, borrow cost and what short interest tells you, and lesson 6.7, Results announcements, earnings calls and the 10-Q, both found its inventory growing faster than its sales. His thesis for that company says that if inventory days rise for a third straight quarter after the product launch management said it was building stock for, the demand story is wrong.
Next, write the triggers that send you back to the thesis straight away, without waiting for your next scheduled review. These events do not break a thesis by themselves. They are results announcements (twice a year for most SGX companies and four times a year for US companies, as lesson 6.7 described), a change of CEO or CFO, a change of auditor, any breach or renegotiation of a debt covenant, and events specific to the company. For Larkspur, that means the refinancing of its S$40 million term loan, due in three years.
Keep a second, shorter set of prompts to look closer: a large insider sale, a new related-party deal or a big jump in short interest. None of these is a reason to sell on its own.
Every review ends with one written output: thesis intact; thesis weakened, with the reason; or thesis broken. Only "thesis broken" leads to a sale.
The colleague's first review came after a poor set of results. He wrote: "thesis weakened: margin down with revenue, one more half-year to see if it's the cycle". It took fifteen minutes and involved no trade.
Many investors hold losing positions for years. One reason is the pull to wait until a loss gets back to the purchase price, covered in lesson 6.1, Selling winners too soon and holding losers too long. Another is that money already lost starts to feel like a reason to stay, the sunk cost problem in lesson 7.3, Sunk costs in policies, renovations and losing investments. Both lessons are in the course Behavioural Finance: why you make the money mistakes you make. A written thesis protects you against both, because you write the sell evidence down before any loss arrives, when it is easier to be honest with yourself.
To start, make a list of every stock you own. Next to each one, write the reason you bought it, however vague. You will turn each reason into a written thesis.
For each stock you own, write a one-paragraph thesis and two pieces of evidence that would make you sell.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).