What is 'Bottom-Up Investing'
Bottom-up investing is an investment approach that focuses on the analysis of individual stocks and deemphasizes 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 even in an industry that is not performing.
BREAKING DOWN 'Bottom-Up Investing'Bottom-up investing forces investors to first consider microeconomic factors. These factors include a company's overall financial health, financial statements, products and services, supply and demand, and other individual indicators of performance over time. For example, a company's unique marketing strategy or organizational structure may be a leading indicator that causes a bottom-up investor to invest.
This is the opposite of top-down investing, which is a strategy that first considers macroeconomic factors when making an investment decision. Top-down investors instead look at the broad performance of the economy, and then seek industries that are performing well, investing in the best opportunities within that industry. Conversely, making sound decisions based on a bottom-up investing strategy entails picking a company and giving it a thorough review prior to investing. This includes becoming familiar with the company's public research reports.
An Example of a Bottom-Up Approach
Bottom-up investors are usually those that employ long-term, buy-and-hold strategies. This is due to the fact 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. Top-down investors are more opportunistic in their investment strategy, and may seek to enter and exit positions quickly to make profits off of short-term market movements.
Bottom-up investors are most successful when they invest in a company they actively use. Companies such as Facebook, Google and Tesla are all good examples of this, since each company has a consumer product that can be used every day. When an investor looks at a company from a bottom-up perspective, he first inherently understands its value from the perspective of relevance.
Facebook is a good candidate for a bottom-up approach because investors intuitively understand its products and services well. Once a candidate such as Facebook is identified as a good company, an investor conducts a deep dive into its management and organizational structure, financial statements, marketing efforts and price per share. If all of these aspects check out, the investor then looks at the industry to see if it provides opportunities for growth, and then analyzes the economy as a whole.