It Only Takes One Data Point to Disprove an Investment Thesis
Correctly solving the answers to critical investment debates requires a thesis and checkpoints along the way. It also requires testing to prove the opposite view.
Welcome to the Data Score newsletter, composed by DataChorus LLC. The newsletter is your go-to source for insights into the world of data-driven decision-making. Whether you're an insight seeker, a unique data company, a software-as-a-service provider, or an investor, this newsletter is for you. I'm Jason DeRise, a seasoned expert in the field of data-driven insights. As one of the first 10 members of UBS Evidence Lab, I was at the forefront of pioneering new ways to generate actionable insights from alternative data. Before that, I successfully built a sell-side equity research franchise based on proprietary data and non-consensus insights. After moving on from UBS Evidence Lab, I’ve remained active in the intersection of data, technology, and financial insights. Through my extensive experience as a purchaser and creator of data, I have gained a unique perspective, which I am sharing through the newsletter.
This entry in the Data Score Newsletter is going to go deeper into the use of data for investment decision-making, focusing on how to set up an investment thesis1 and incorporate data.
Know the right questions to answer
Design the investment thesis
Design the counter-factual test
Build a data mosaic
Look for new questions to answer
It only takes one data point to disprove an investment thesis. By testing for the counterfactual, it allows for the uncovering of data points that disprove the thesis. That’s a good thing. Knowing that a thesis isn’t playing out as expected earlier than the rest of the market is a win.
The question-driven approach to investing
In the question-driven approach to investing, the focus is on formulating the right questions to understand the investment landscape deeply. This method prioritizes curiosity and critical thinking, encouraging investors to explore beyond surface-level observations. Techniques like the “5 Whys,” “Question Bursts,” and “Jobs to Be Done” interviews are employed to extract nuanced insights.
This approach is crucial in the financial markets, where understanding the core issues and underlying trends, which are constantly changing, influences investment decisions.
For more details, check out this prior entry in the Data Score Newsletter:
Once you have the right questions to answer, formulating a thesis is the next step.
Design your thesis
“Everyone is right in the long term” is a nice way of saying “the investment lost money because the timing was estimated incorrectly.”
What is your opinion on what the answer is? Write it down so you don’t let confirmation bias2 and hindsight bias3 shift your recollection of the original thesis to match the reality that happens later.
Here are some key factors to consider when setting up your investment thesis: