Where and How to Find Evidence That Could Disprove Your Investment Thesis
Go beyond confirming an attractive story by defining observations that could overturn it. Learn to test falling costs, customer expansion, and order-to-revenue conversion using different disclosures.
Disconfirming evidence is evidence that a necessary condition of the investment thesis does not hold, rather than simply news you dislike. Express the thesis in observable terms and define failure criteria, evidence sources, and review dates in advance to reduce selective use of information that favors your conclusion.
Turn claims into numbers and observation periods
A claim that competitiveness is improving is difficult to challenge. Narrow the thesis to something such as increasing repeat orders within the same customer group with stable discount rates. If cost reduction is central, check the cost-of-sales ratio, production yields, and inventory recognition lags rather than raw-material prices alone. If order growth is central, examine total contract value, the revenue-conversion schedule, and cancellation terms separately. Disconfirmation criteria must be observable in actual data. If they depend only on unavailable figures, such as undisclosed customer-level costs, explicitly acknowledge that the thesis cannot be tested.
Check evidence independence and the location of the original material
Do not count several articles repeating the same management announcement as multiple independent pieces of evidence. Compare material from different authors with different purposes, such as company filings and notes, official customer information, and regulatory documents. Use analyst reports as a starting point for interpretation, but distinguish recommendations from underlying source material. SEC guidance on analyst recommendations also explains the need to verify opinions independently. Tracking corrections to past announcements and changes in next-quarter explanations can reveal changes in assumptions that initially appeared minor.
Separate price movements from evidence against the business thesis
A falling share price alone does not disprove a business thesis, and a rising price does not erase deterioration in disclosures. To distinguish a simple delay in revenue recognition from canceled customer demand, examine contract terms and collectibility. When a disconfirmation condition is met, record which estimates need recalculation rather than mechanically prescribing an immediate trade. When evidence is ambiguous, distinguish unconfirmed from disproved, and do not extend the verification deadline indefinitely.
Worked example
Hypothetical example: An analyst assumes that 60% of cumulative orders of KRW 20 billion, or KRW 12 billion, will convert to revenue over the next two quarters. If delayed customer acceptance leaves actual conversion at KRW 7 billion, the shortfall is KRW 5 billion. First use disclosures and notes to establish whether that KRW 5 billion represents cancellations or deferral to the next quarter. If all of it is deferred, reassess the evidence for maintaining the annual assumption. If KRW 3 billion is canceled, remove the associated revenue and expected profit. The analyst’s chosen tolerance and deadline are not official company guarantees; retain the dates of the supporting material as well.
What to check
- Write one sentence for each thesis stating a condition that must hold.
- Choose the disclosure items and dates for checking disconfirming evidence.
- Do not count articles repeating the same announcement as independent evidence.
- Distinguish an unconfirmed thesis from one that has actually been disproved.
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.