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.

RELATED TERMS
  1. Pilot Fishing

    Pilot fishing is a type of pre-marketing of an IPO that involves ...
  2. Valuation

    A valuation is the process of determining the current worth of ...
  3. Value

    Value is the monetary, material or assessed worth of an asset, ...
  4. Business Valuation

    Business valuation is the process of determining the economic ...
  5. Tragedy Of The Commons

    Tragedy of the commons refers to an economic problem in which ...
  6. Relative Valuation Model

    A relative valuation model is a business valuation method that ...
Related Articles
  1. Investing

    Alphabet, Inc. Helps Crack Down On Illegal Fishing

    Google has partnered with non-profits to use a big data approach to solve the illegal fishing problem.
  2. Investing

    Waste Management Appoints New CEO (WM)

    Waste Management Inc. (WM) has announced James Fish will serve as the company's CEO.
  3. Trading

    Forex: Finding Your Trading Style

    Determine your own trading style, and the versatile currency market will accommodate it.
  4. Investing

    Is Warren Buffett Really A Value Investor?

    Warren Buffett has long been hailed as a value investor. But is that statement still accurate?
  5. Investing

    What Is The Intrinsic Value Of A Stock?

    Intrinsic value reduces the subjective perception of a stock's value by analyzing its fundamentals.
  6. Investing

    Top Reasons IPO Valuations Miss The Mark (MS, ZNGA)

    The costly services of investment banks don’t necessarily guarantee accuracy in IPO pricing.
  7. Investing

    Relative Valuation: Using Stocks To Value Other Stocks

    This effective approach will help you understand which stocks you should be investing in.
  8. Investing

    Buy High, Sell Much Higher

    Value investing may seem fool-proof, but it carries more risk than you might know.
RELATED FAQS
  1. Intrinsic Value vs Current Market Value

    Discover the differences between intrinsic and market values, what makes the former difficult to determine, and how investor ... Read Answer >>
  2. What do you do if the intrinsic value of a stock is significantly lower than the ...

    Discover how the intrinsic value and market price of a stock are related and why a stock that appears overvalued may still ... Read Answer >>
  3. When does a growth stock turn into a value opportunity?

    Learn how fundamental analysts use valuation measures, such as the price-to-earnings ratio, to identify when a growth stock ... Read Answer >>
  4. What is the difference between economic value and market value?

    Learn about the differences between economic value and market value. Discover how they serve different purposes for businesses ... Read Answer >>
  5. Why should an investor understand accounting?

    Learn why an investor should understand business accounting to perform investment and credit analysis. Find out about asset ... Read Answer >>
Trading Center