Bottom-up investing
Bottom-up investing is a stock-picking strategy that looks for great companies regardless of the industry they are in and without getting hung up on macroeconomic forces, market cycles, and the like.
Expanded Definition
A "great" company with solid management, a successful business model, and a proven ability to generate cash flow could very well be a worthy investment. Such a company will excel and increase in value whether it mines for gold or manufactures blue jeans, say bottom-up investors, who acknowledge wholeheartedly that investors have limited time to review the universe of stocks.
David Herro of Harris Associates is esteemed as a bottom-up investor. Three key factors he looks for when evaluating a company are:
- High level of ownership by managers.
- Free cash flow and intelligent investment of excess cash.
- A trading price well below his estimate of the value of the underlying business.
Benjamin Graham, Warren Buffett, and Peter Lynch also use a bottom-up approach, although perhaps not as strictly as Herro. "If Fed Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn't change one thing I do," Buffett once said, indicating his preference for analyzing a business's fundamentals rather than concentrating on what might happen in the larger world.
Proponents say the bottom-up approach to investing allows investors to find bargains in industries that other investors may have abandoned.
Opponents say that macroeconomic factors such as the availability of credit and changing demographics can't be overlooked when considering how well a business will do in the future.
Related Fool Articles
- The Most Dangerous Way to Invest Today
- Better Know a Stock Picker (David Herro of Harris Associates)
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