What Bottom-up Investing is
Bottom-up investing is an investment strategy that aims to analyze individual stocks and does not consider the macroeconomic outlook of the industry.
When using this approach of studying a potential investment opportunity, the investor focuses on the company and its corporeality rather than on the industry and its economic performance. This approach basically disregards the performance of the industry as a whole but realizes the potential profitability of the company and how it will fare in the market regardless of the industry outlook.
Furthermore, this approach enables investors and analysts to delve into microeconomic factors. The health of the company, financial statement analysis, products and services offered, supply and demand, and other indicators of corporate performance over time are some of the microeconomic factors investors look into.
For instance, the company’s unique strategy in selling goods and offering services is the most salient indicator that an investor considers to invest in the company. Despite the glaring economic struggle of the industry the company revolves, the bottom-up investor ignores it and focuses on the company’s strength.
How Bottom-up Investing works
Technically, bottom-up is the exact opposite of the top-down investing approach as top-down focuses on the macroeconomic factors when investing. The top-down investing approach prioritizes the broad or general performance of the industry before scouting the best company in that booming industry. On the other hand, using the bottom-up approach when making a sound investment entails thorough scrutiny of the company’s health, background, and practices.
However, the bottom-up approach does not mean relying on the private, singled-out study of the investment. The bottom-up approach also includes macroeconomic factors in the analysis. In essence, the term ‘bottom-up’ implies that the path starts and focuses on the bottom dimension of analysis, working its way up in scale as the study progresses.
Investors who employ the bottom-up strategy are usually the ones who also utilize long-term, buy-and-hold schemes which heavily depend on fundamental analysis. This is because the bottom-up approach yields the investor a deep understanding of a particular company and its stock which gives a clear picture of the long-term growth track of the investment.
Top-down investors meanwhile are the ones who take advantage of the opportunity out in the market by investing in stocks that are currently performing and quickly shift from one capital to another to make profits based on the market trends.
Bottom-up investors thrive by investing in a firm where they feel secure at primarily because of the company’s formidable reputation and outlook. Companies like Google and Facebook are an excellent bottom-up approach investment choice as these firms are established and known to be useful in daily living. In conclusion, investors who use the bottom-up approach are the ones who have a knack in realizing a company’s value in the sense that the services or goods the company provides are always relevant and demanded daily by consumers around the globe.
How the bottom-up approach applies
As mentioned above, Google is the right company choice using the bottom-up approach as the investor knows the product and its profitability and stability over time. From the outside appearance of the company, the bottom-up investor starts to analyze Google on a deeper level, knowing how it operates, looking into its organizational structure, and considering its financial statements and price per share. From there, the analysis goes even more profound, calculating financial ratios using formulas and venturing into all other dimensions of the company.
The study does not end there as the perspective of the analysis grows bigger in scale, this time comparing Google and its essentials with the rest of the search engine operators out on the internet. By doing this, the investor sees how Google fares and stands in the industry and might yield significant setbacks of investing in Google. After the comparison, the study scope goes even wider by including the market conditions, identifying if the stock market is in a general bull market. Lastly, the part of the study that will seal the investor’s decision in investing is looking at the economic implications, including inflation, GDP growth, and many others.
When all the horizons of analysis are put together, the investor looks at the plated factors starting from the bottom up, before finally deciding to invest stocks in the company at the focus.
How Bottom-up differs from Top-down
While the top-down approach enables investors to consider the broad market and economic conditions at present when choosing stocks to invest in, the bottom-up approach directs the investor to using microlenses by studying the over-all appeal of the company, considering every detail under scrutiny before jumping to the broader aspect of the study to come up with an investing decision.
Using both approaches when considering a stock investment is a good practice given that the investor exerts willingness, effort, and time.