The Motley Fool

What is Bottom-Up Investing?

The top-down investor would focus on how the global environment might either benefit or disadvantage particular companies, industries or countries. Today we go to the other end of spectrum to look at bottom-up investing. Proponents of the bottom-up approach could not be more different from top-down investors. They reckon that economic factors and market cycles are irrelevant when picking stocks. Instead, they would focus on the merits of individual stocks.

The bottom-up investor believes that individual companies can perform well even if the industry that it is a part of or the country that it operates in may be suffering economically. The bottom-up investor reckons that what matters is demand for the company’s products and services.

I am sure we can think of, or have seen, businesses that seem to have recession-defying qualities. The bottom-up investors would say these companies are examples of the merits of bottom-up investing.

So, bottom-up investors would, instead of building a “big picture” of the economic world, try to build a picture of companies using their financial reports to gauge their respective strengths and weakness. The bottom-up investor would, for instance, look for evidence of the companies’ financial stability and prospects for growth.

Each bottom-up stock picker would have different criteria for gauging the investing merits of companies. Some investors, such as value hunters might focus on companies with low valuations and minimal debt. On the other hand, income seekers would look for companies that have demonstrated a good record of dividend payments.