Investing term

What is Invalidation?

What would have to happen for you to admit the thesis is wrong and exit.

Invalidation is the specific thing that would prove your investment thesis wrong and tell you to sell. Defining it before you buy is what separates disciplined investing from hoping — it gives you a pre-agreed exit instead of inventing excuses to hold a deteriorating position. When the invalidation condition hits, the decision is already made.

For example

"I'm wrong if revenue growth turns negative for two straight quarters" is an invalidation point — a tripwire that overrides any temptation to keep holding.

Invalidation is taught hands-on in Stage 13 — Active Investing: Should You Even Bother?.

See the lesson →

Related terms

Active investingPicking individual stocks (or actively-managed funds) instead of just buying the index.CatalystThe event or condition that will close the valuation gap — and an estimated timeline.Circle of competenceThe set of industries, business models, and types of companies you actually understand well enough to evaluate.ConvictionHow strong your evidence is for a thesis — and therefore how much capital it earns.
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