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What is bottom-up investing?

28/06/2024

Fundamental investing – or fundamental analysis – is one method used by fund managers and investors when trying to decide whether to invest in a stock. It’s a way to understand the intrinsic value of a stock and has two primary methods: top-down and bottom-up. 

A top-down approach sees investors first looking at macroeconomic factors during the decision-making process: things like trends in interest rates, inflation, currency movements and economic growth. A bottom-up approach, however, minimises the significant of market cycles and macroeconomics, with the focus elsewhere. 

Here’s how it works. 

 

How does bottom-up investing work? 

Rather than beginning with wider macroeconomic trends, bottom-up investing starts with analysing the company itself. 

That’s not to say that economic factors aren’t considered – they are simply secondary to company information. This company information may include the firm’s financial reports, its management and organisational structure, its price per share and its marketing efforts. It requires a strong understanding of the company itself – its history, its present and its future – to be able to spot any issues that could potentially compromise share prices down the line. 

This is why many who take a bottom-up approach invest in businesses that they personally use and know. 

After this, an investor will compare the company’s credentials with those of its competitors, before looking at the wider sector and greater macroeconomic factors before making a decision. 

 

The pros and cons of bottom-up investing

Bottom-up investing allows an investor to choose a company based on their specific risk appetite and other investment criteria. It can be a good way to identify robust companies that may currently be undervalued, and can also increase an investor’s understanding of individual companies. 

However, it’s an approach that can be very time-consuming, so may not be suitable for those who are time-poor. Bottom-up investing can also run the risk of missing major opportunities that come with wider market trends. 

Which approach do you tend to take? 

 

“Stable Rise Limited is not authorised or registered by the Financial Conduct Authority. The marketing materials are not intended to provide financial advice nor promote any individual financial products.”

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