When approaching the stock market, there are two broad ways to look at investing. You can look at it from a macro standpoint or a micro standpoint. Do you care more about broad market trends and behavior? Or are you more concerned with the performance and prospects of individual companies? If you gravitate to the latter, you have a micro approach, also known as bottom-up investing.
Bottom-up investing is an approach that focuses on specific companies and their performance outside the bounds of broader market factors. Bottom-up investors find companies they like. In addition, they evaluate their fundamentals to determine whether the company itself has the means to succeed. For example, this includes financials, management, market share, etc. Moreover, bottom-up investors believe that well-equipped companies will succeed regardless of market factors.
Bottom-up investing takes a lot of work. However, it’s a proven philosophy that investors can use to build high-performing portfolios. Here’s how to approach investments from the bottom up.
The Bottom-Up Investing Philosophy
Investing in individual companies is a time-intensive practice. Firstly, investors need the patience to evaluate the company and its stock performance. Secondly, they need the knowledge to piece everything together in an investment thesis. Here’s just a sampling of some of the fundamentals for bottom-up investing:
- Products and services. What is the market demand for this company’s products? How are they different from the competition? What are their price points and margins? Who are the primary consumers? Investors get to know everything they can about the company’s core revenue mechanisms.
- Company financial health. What types of assets and liabilities does the company have on its balance sheet? How are its revenues and cash flows? What type of debts does it have? What is its credit rating? Does it pay a dividend? Investors need a clear and accurate picture of the company’s ability to manage its finances, so it can continue to grow profitably.
- Leadership and management. Who are the key figures in the c-suite? Moreover, what’s their tenure or area of expertise? What’s their leadership style? How do they present the company in the media overall? Having confidence in the company’s leadership is an important part of forming an investment thesis about the company’s ability to succeed.
- Recent stock performance. How has the stock traded over the past several years? What caused it to dip or jump in the past? Has it been stagnant for extended periods? Are …….