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Bottom-Up Approach
The Bottom-Up approach is precisely the opposite of the top-down approach that we covered previously. So in this unit, we will discuss the bottom-up approach.
What is the Bottom-Up Approach?
In a bottom-up approach, an analyst typically follows an industry or industries and forecasts fundamentals for the companies in those industries in order to determine relative valuation. In this method of investing, the investors:
- Start their analysis by looking at individual companies and then building a portfolio based on their specific attributes.
- The investors tend to focus on the micro-economic factors in this method of investing.
- They select their stocks on the basis of their stock selection criteria such as price to earnings multiples, debt to equity ratio, cash flows, management integrity, etc.
- Evaluate analyst reports and other research papers available on those stocks before taking an investment decision.
- They tend to buy-and-hold their investments being investors since they invest a lot of time researching individual stocks. This means that their investments may take a longer time to play out, but could be more effective at managing risk and ultimately increasing risk-adjusted returns being focussed more on fundamental parameters.
The above three types of analysis are essential for conducting both top down and bottom up approaches of fundamental analysis. We will discuss Economic analysis, Industry analysis and company analysis respectively in the next subsequent sections.
