What is Bottom Fishing
Bottom fishing is the process of investing in assets that have experienced a decline due to intrinsic or extrinsic problems. A bottom fishing trader or investor speculates that an asset's depressed price is temporary and will recover to become a profitable investment over time, based on either technical or fundamental analysis techniques.
BREAKING DOWN Bottom Fishing
Bottom fishing may be a risky strategy when asset prices are justifiably depressed or a savvy strategy when asset prices are trading at irrationally low valuations. Many prominent value investors, such as Warren Buffett and Benjamin Graham, have amassed fortunes by purchasing assets that are trading at low valuations relative to their intrinsic valuation and waiting for valuations to recover to normalized levels.
Examples of bottom fishing include:
- Investing in the stock of an aluminum company when aluminum prices are depressed.
- Buying the stock of a container shipping company during an economic depression.
- Investing in a print media company when the Internet is putting such companies out of business.
- Buying shares of a bank during a financial crisis.
In each of these cases, it is unclear when or if the stock's price will recover, although arguments could be made in either direction. Investors that purchased banking stocks during the 2008 financial crisis generated significant returns, while investing in print media companies may have produced losses since the industry has never managed to fully recover from the intensifying competitive pressures.
Bottom Fishing Strategies
Bottom fishing is attractive due to the greater profit potential relative to fairly valued or overvalued assets.
The most popular bottom fishing strategy is known as value investing. By looking at valuation ratios and projecting future cash flows, value investors focus on identifying opportunities where the market may be mis-pricing assets. A great example would be a company that experienced a bad quarter due to a supply chain issue and experienced a significant decline. Value investors may determine that the incident is isolated and purchase the stock in the hopes that it eventually recovers to trade at a valuation that's more comparable to its peers.
Many traders also use technical analysis to identify oversold stocks that may be attractive bottom fishing opportunities. For example, a company may report lower than expected quarterly financial results and experience a significant price decline. Traders may notice that selling pressure is starting to subside and decide to take a long position to capitalize on the short-term rebound. Often times, these traders may use technical indicators that are helpful when assessing whether a security is oversold or look at candlestick or chart patterns to make similar determinations.