Following our series of learning to invest articles. We previously published Investment With a Strategy which is a Top-Down approach to investing, now we can look at another approach known as Bottom-Up;
What Is Bottom-Up Investing?
Bottom-Up investing is an investment approach that focuses on the analysis of individual stocks and de-emphasizes the significance of economic cycles and market cycles. In bottom-up investing, the investor focuses his attention on a specific company, rather than on the industry in which that company operates or on the economy as a whole. This approach assumes individual companies can do well in an industry that is not performing.
Breaking down bottom-up
Bottom-Up investing forces investors to first consider microeconomic factors. These factors include a companies overall financial health, financial statements, products & services, supply & demand, and other individual indicators of performance overtime. For example, a company’s unique marketing strategy or organisational structure may be a leading indicator that cause bottom-up investor to invest.
This is the opposite of top-down investing, which is a strategy that considers macroeconomic factors when making an investment decision.
An Example Of A Bottom-Up Approach
Bottom-Up investors are usually those that Emily long-term, buy-and-hold strategies. This is due to the fact that a bottom-up approach to investing gives an investor a deep understanding of a single stock, providing insight into the company’s long-term potential.
Bottom-up investors are most successful when they invest in a company they actively use. Companies such as Google, Facebook and Twitter are all good examples of this, since each company has a consumer product that can be used everyday.
Twitter is a good candidate for a bottom-up approach because investors intuitively understand its product and services well. Once a candidate such as Twitter is identified as a good company, one investor conducts a deep dive into its management and organisational structure, financial statements, marketing efforts, and price per share. If all these aspects checkout, the investor then looks at the industry to see if it provides opportunity for growth, and then analyses the economy as a whole.