Quite simply, bottom-up investing focuses on individual securities rather than on the overall movements in the securities market or the prospects of particular industries.
The bottom-up approach assumes that individual companies can do well even in an industry that is not performing very well. This is the opposite of another approach, called top-down investing. Making sound decisions based on a bottom-up investing strategy entails a thorough review of the company in question, explains Mark Cortazzo, a certified financial planner and senior partner at MACRO Consulting Group.
A bottom-up investing approach focuses on the analysis of individual stocks. In bottom-up investing, therefore, the investor focuses his or her attention on a specific company rather than on the industry in which that company operates, or on the economy as a whole, Cortazzo said. This includes becoming familiar with the company’s products and services, its financial stability and its research reports.
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Bottom-up investing is likely to provide better returns over longer periods for investors, but at the same time, it might show extreme variations from the market returns. As a result, such investors typically tend to be long-term focused.
Cortazzo explains that a bottom-up investor will overlook broad sector and economic conditions and instead focus on selecting a stock based on the individual attributes of a company. So they tend to be less diverse because broader industry conditions are of no concern.
As an investor, it’s very important to take the time to get a better grasp of how to approach the market from a long-term view.