The Motley Fool

What Is: Bottom-Up Investing

The top-down investor focuses 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 an individual company can be good investment 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 believes that what matters is demand for the company’s products and services.

Think about the businesses that you know 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 individual companies using their financial reports to gauge their respective strengths and weakness. The bottom-up investor looks for evidence of the companies’ competitive advantage, 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 investors, might focus on companies with low valuations and strong cash flow. On the other hand, income seekers would look for companies that have demonstrated a good record of dividend payments.