how bottom up investing works
the bottom up approach 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 before investing this strategy includes becoming familiar with the company s public research reports most of the time bottom up investing does not stop at the individual firm level although that is where analysis begins and the most weight is given the industry group economic sector market and macroeconomic factors are eventually brought into the overall analysis however the investment research process begins at the bottom and works its way up in scale bottom up investors usually employ long term buy and hold strategies that rely strongly on fundamental analysis this is because a bottom up approach to investing gives an investor a deep understanding of a single company and its stock providing insight into an investment s long term growth potential on the other hand top down investors can be more opportunistic in their investment strategy and may seek to enter and exit positions quickly to make profits off short term market movements bottom up investors can be most successful when they invest in a company they actively use and know about from the ground level companies such as meta formerly facebook google and tesla are all excellent examples of this strategy since each has a well known consumer product that can be used every day the bottom up perspective involves understanding a company s value from the perspective of relevance to consumers in the real world example of a bottom up approachmeta meta is a good potential candidate for a bottom up approach because investors intuitively understand its products and services well once a candidate such as meta 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 this would include calculating financial ratios for the company analyzing how those figures have changed over time and projecting future growth next the analyst takes a step up from the individual firm and compares meta s financials with that of its competitors and industry peers in the social media and internet industry doing so can show if meta stands apart from its peers or if it shows anomalies that others do not have the next step up is to compare meta with the larger scope of technology companies on a relative basis after that general market conditions are taken into consideration such as whether meta s p e ratio is in line with the s p 500 or whether the stock market is in a general bull market finally macroeconomic data is included in the decision making looking at trends in unemployment inflation interest rates gross domestic product gdp growth and so on once all these factors are built into an investor s decision starting from the bottom up then a decision can be made to make a trade bottom up vs top down investingas we ve seen bottom up investing starts with an individual company s financials and then adds increasingly more macro layers of analysis by contrast a top down investor will first examine various macro economic factors to see how these factors may affect the overall market and therefore the stock they are interested in investing in they will analyze gross domestic product gdp the lowering or raising of interest rates inflation and the price of commodities to see where the stock market may be headed they will also look at the performance of the overall sector or industry these investors believe that if the sector is doing well the stocks they are examining should also do well and bring in returns these investors may look at how outside factors such as rising oil or commodity prices or changes in interest rates will affect certain sectors over others and therefore the companies in these sectors for example suppose the price of a commodity such as oil goes up and the company they are considering investing in uses large quantities of oil to make their product in that case the investor will consider how strong an effect the rise in oil prices will have on the company s profits so their approach starts very broad looking at the macroeconomy then at the sector and then at the stocks themselves top down investors might also choose to invest in one country or region if its economy is doing well for instance if european stocks are faltering the investor will stay out of europe and may instead pour money into asian stocks if that region is showing fast growth bottom up investors will research a company s fundamentals to decide whether or not to invest in it on the other hand top down investors consider the broader market and economic conditions when choosing stocks for their portfolio 