Stock investments strategies – Bottom up investing strategy
Bottom up investing strategy is a strategy used by investors who ignore the market trend on a broader basis and concentrate only on a particular stock. Their decision to buy or sell a security depends solely on the performance of that security and they discount any upward or downward trend on the overall market of even that particular index.
This type of strategy is completely opposite to top down approach which basically starts with an index and then zeroes down to a stock. Therefore, this strategy is not suitable for investors who believe in long term investments in a particular stock. This is because ultimately the overall market sentiment will pull this stock to its own level. This particular stock is going against the tide either due to a new killer product or extra ordinary earnings report. In any way, it will outperform the broader index only for some time. And this is the time the investors make money in these stocks. The investors remain invested in these securities only for a few days or maximum a few weeks therefore a long term investment is never in their mind.
However, this type of strategy will require that the investor studies the stock in a thorough manner. He should understand the financial of the company in detail and is aware of its competition as well as its upcoming products. Only then he will be able to go against the trend. Bottom up investors are true stock pickers. They don’t need to understand the trends of basics of stock market. Neither do they need to know the inner workings of various markets like bonds, options etc. They do not believe in buy and hold strategy.
Bottoms up investing gives great returns especially in bears market since the investors are the first to take long positions. They do so because they are able to pick stocks which recover quickly. Since most of the other investors are going with the trend and selling off their securities these bottom up investors buy in the hope of quick recovery. This allows traders to buy stocks cheap after major corrections in the market. Long term investors have to wait a long time even to get to a break even point. It could take as long as a few years for them to make some money in this case.
The other way around can also happen. In case the investor goes with the trend, chances are that he would make profit even if he chooses an average performing stock since the sentiments will pull it up. But in bottom up investing, you could loose on the best stock in broader market.
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