Bottom Up Investing – Concept, Working, Suitability, Example, Benefits & more
A Bottom Up Investing strategy is a well-liked approach for investors. If you’re willing to invest in the individual stocks of a company, this strategy is for you.
We all know that it isn’t a good idea to plunge into the financial market without taking any strategic standpoint into account.
In general, if you’re planning to put a few portions from savings into investment, then, of course, you should come up with the right strategy.
For instance, if you’re buying the stocks of a company, you should first go through an in-depth analysis. Here the Bottom Up Investing Strategy comes to light.
Hence, in this article, we’ll talk about this most critical strategy that traders are using for a very long time.
What is a Bottom Up Investing Strategy?
The Bottom Up Investing strategy is a great investment style adopted by many investors. However, the strategy doesn’t take the economic and industry data into account.
The core focus of this strategy is the image of the company and its stock value. The strategy ensures an in-depth analysis of the individual company.
In this, the analysts check out the micro-economics and idiosyncratic conditions of a company. The Bottom Up investing strategy assumes that the company can perform well.
Even though the condition of the industry and economy isn’t good, the strategy points out that investment in this company are safe.
Whilst, it’s critical for an analyst to figure out the returns first that the company has offered in the past. How this company earns profits?
From the expense management to revenue output, analysts should get a clear-cut insight into all such things.
Along with that, what are the assets and liability position of a company? One must take all these factors into account.
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How Bottom Up Investing Works?
If you’re familiar with the Top-down investing approach, you’ll find the Bottom Up Investing strategy right opposite of it.
The top-down strategy considers numerous macroeconomic factors. At the same time, it takes economic and industrial factors into account too.
The top-down strategy ignores how a company performs. On the other hand, the Bottom Up Investing strategy solely focuses on the company’s performance.
Even though the economy is poor or the industry isn’t going well, an investor using this strategy feels confident that the company will win even in the volatile market condition.
In a nutshell, the Bottom Up strategy entails a full review of the company. Through a basic analysis of the company, investor following the Bottom Up strategy strives to enter and exit in the market.
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Example of Bottom Up Investing
Suppose a trader is looking forward to purchasing the stocks of Nestle. Hence, before moving ahead, the trader would like first to take a glimpse of the company’s financial statement.
He’ll try to grasp more data about the company. What’s new the company is likely to bring in the market? What are its future projects, its current revenues, and expenses?
An investor would like to get an in-depth analysis of these entire things. All these things boost a sense of belief in a trader’s mind.
For instance, he starts feeling confident upon his decision since he has talked about the company’s performance in detail by contacting the management of Nestle, Franchise Managers, and suppliers.
The investors have got a positive review from every person. Hence, the investor would start finding interest in the Nestle stock as he tries to take a competitive benefit over the market.
He thinks that the company’s market value tends to rise in the future as its plans are great.
Advantages of Bottom Up Strategy
A Bottom Up strategy comes with plenty of benefits to the investors. It is mainly helpful if you are an active investor who doesn’t care for what’s happening around in the economy.
This is because it often remains a matter of uncertainty, so you must go with this strategy.
Still, only an experienced investor should move ahead with this strategy who knows the company’s profile.
The Bottom Up strategy is quite popular among short-term investors, as they actively check out how the company is doing.
Market conditions are volatile; it’s not easy to define how the company will do by solely relying on economic and industrial factors.
That’s why; Bottom Up strategy is a better way to make the best decision in the market.
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Disadvantages of Bottom Up Strategy
For less experienced investors, a Bottom Up investing strategy can be a little tricky if they aren’t aware of what to notice in a company’s profile.
Most investors pick this strategy and only consider the past performance of the company.
Though, it doesn’t make smart sense because the future plans and the competitors of a company can later crop up as a big issue.
If the competitors of that company have launched some amazing products in the market, it may result in the decline of the company’s stock value.
Also, the debt, liabilities, assets, and access to modern technology should be taken into account.
Only those investors who are investing in a particular company for a very long time pick this strategy. As they know how the company is going to perform.
They are aware of how the company’s product can be dominant over other products available in the market.
The complicated analysis and unfamiliarity with the company’s performance make the outcomes slightly unpredictable for the new traders.
Also, one can incur a loss by solely relying on incomplete information.
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Bottom Up Investing Strategy – Conclusion
In the end, it doesn’t remain that tricky to decide whether you should choose a Bottom Up strategy or not.
Suppose you think that your research is strong over a company’s performance and its next plans. Of course, this strategy will derive great results for you.
While, if you’re a new trader, you’ll have to put in some extra efforts than if the company is offering good returns, and its past performance is also good.
But, it doesn’t mean that in the future, your hope for this company’s stock will help you in winning a big jackpot. You’ll have to weigh up its current and future plans.
If the company follows the trend and stays updated with the technology, you can think about diving in. A Bottom Up strategy can help you in catching a big chunk of profits if followed properly.
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