Loading the player...

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.

RELATED TERMS
  1. Investment Analysis

    Investment analysis involves researching and evaluating securities ...
  2. Financial Analysis

    The process of evaluating businesses, projects, budgets and other ...
  3. Top-Down Analysis

    Top-down analysis is an investment strategy that looks at the ...
  4. Investment Ideas

    Investment ideas are specific views, plans or ideas on ways to ...
  5. Sector Analysis

    Sector analysis is an assessment of the economic and financial ...
  6. Organizational Structure

    An organizational structure is a system for how activities are ...
Related Articles
  1. Investing

    A Top-Down Approach to Investing

    Use a global view to determine which stocks belong in your portfolio with the top-down approach.
  2. Managing Wealth

    The Key To High Returns Is A Disciplined Strategy

    Learn about different investment strategies and how to pick the right one for you.
  3. Trading

    Technical Analysis Strategies for Beginners

    Technical analysis helps traders and investors navigate the gap between intrinsic value and market price by leveraging certain techniques.
  4. Investing

    Industry Analysts Bullish on Companies, Bearish on Markets

    Aggregating industry analysts' views on the companies they cover yields a 12-month S&P target almost 10% above the current level. Too good to be true?
  5. Financial Advisor

    How Holistic Planning Can Give Advisors An Edge

    A holistic value-added approach provides a compelling competitive advantage for advisors.
  6. Investing

    How To Analyze Real Estate Investment Trusts

    REITs are much like dividend-paying companies, but analyzing them requires consideration of the accounting treatment of property.
  7. Investing

    A Guide to Value Investing Strategies

    Learn the value investing techniques that legendary investors like Warren Buffett and Peter Lynch have used to identify undervalued companies that pay off.
  8. Insights

    Recession: What Does It Mean To Investors?

    Understanding the business cycle and your own investment style can help you cope with economic downturns.
  9. Trading

    Removing the Barriers to Successful Investing

    Learn how to stop using emotion and bad habits to make your stock picks.
RELATED FAQS
  1. How do hedge funds determine what assets to own?

    Learn about the various types of investments that hedge fund managers use, and explore basic hedge fund management trading ... Read Answer >>
  2. How should I analyze a company's financial statements?

    Discover how investors and analysts use a company’s financial statements to evaluate a company's financial health and investment ... Read Answer >>
Hot Definitions
  1. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  2. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  3. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  4. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  5. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  6. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
Trading Center