Lesson 7 of 7
Writing the investment memo
One page, five sections, the business, why it is mispriced, what it is worth, what could break it, and what you will watch.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A memo is one page: the business, why it is mispriced, what it is worth, what could break it, and what you will watch.
- If it cannot be written in plain words on one page, the research is not finished, only accumulated.
- The memo becomes the thesis once section four's reasons are each given a figure, a level and a review date.
A memo is the research written down in the order it has to convince someone else, including a future version of the person who wrote it.
Five sections, one page
- The business, three lines: what it sells, to whom, and how it earns a return.
- Why it is mispriced, three lines: the variant view, and the evidence behind it.
- What it is worth, two lines: the method used, and the range it produced.
- What could break it, three lines: the two or three ways the thesis could be wrong.
- What you will watch, three lines: each guardrail, its level, and the filing that tests it.
Why one page
A memo longer than a page is usually hiding an unclear thesis behind more words, not defending a clearer one. Lynch's two-minute drill is the same test: if the case cannot be said briefly, the research has produced notes, not yet a thesis. Say it out loud first. If it needs jargon, or runs past two minutes, the page will not be shorter for being written down.
The business, in the fewest words that stay true
What it sells, to whom, and how the money comes back, one sentence each where possible. If the first section already needs a paragraph, either the business is genuinely complex or it is not yet understood well enough to write about. Fisher's fifteen points feed this section and the one after it: they are questions about the business and its management, not about the price, so they belong here and in section four, never in section three.
Why it is mispriced, stated as a difference
This is the variant view: the one or two inputs believed to differ from what the price assumes, and the evidence for the difference. Not "it is cheap." Cheap compared with what, and on what basis.
What it is worth, and what could break it
Buffett's three questions from the 2000 letter (how certain the cash is, how much arrives and when, and the risk-free rate, which he took as the long-term US bond yield) are what section three answers in two lines. The same letter prefers a range of values to a precise number. Section four then lists the two or three ways the business itself, not the price, could prove that answer wrong.
Check yourself
Why keep the memo to one page?
- Because longer memos are against the discipline described here
- Because length that hides an unclear thesis is not the same thing as thoroughness
- Because a one-page limit is required for a thesis to be valid
Show the answer
Answer: B.
The page limit is a forcing function. A thesis that cannot be stated briefly usually has not been thought through yet.What turns section four's reasons into guardrails?
- Writing them in the past tense
- Attaching a filed figure and a level to each one
- Ranking them from most to least likely
Show the answer
Answer: B.
A reason with no figure attached is not a condition anyone can check later. A level and a figure are what make it testable.Buffett's three questions from the 2000 shareholder letter, applied to section three, ask about
- The company's market share against its two largest competitors
- How certain the cash is, how much and when it arrives, and the risk-free rate
- Whether management has met its own prior guidance
Show the answer
Answer: B.
Buffett takes the long-term US bond yield as the rate and puts the uncertainty into the first question, not into a separate discount rate.Sources
- Lynch with Rothchild, One Up on Wall Street, 1989 (millennium edition 2000), chapter 11: the two-minute drill.
- Fisher, Common Stocks and Uncommon Profits, 1958, chapter 3: the fifteen points, questions about the business and its management.
- Berkshire Hathaway shareholder letter, 2000: Aesop's bird in the hand, the three questions every valuation asks.
What this leaves out
- The filled-in memo is illustrative. No filed company appears in it.
- A memo is not the thesis's monitoring. Its guardrails still need a level and a review date set against the filing calendar.
- Compressing judgment onto one page does not remove the judgment, or guarantee it was right.
- Nothing here is advice about any security.