You say potato, and I say...
The former (top-down), in essence, involves a prescriptive view that begins with geo-politics, filters down through national and local politics, economics (global and local), finance, companies, markets, sectors, groups, and stocks. The latter (bottom-up) is mostly similar, but in reverse order. The primary difference between the two, for me, is that the former makes pronouncements and attempts to fit the market's square peg into the investor's round perspective (or pronouncement), whereas bottom-up investors allow the markets to 'speak' to them, they 'listen' to the message the markets convey.
When I identify a company and its stock as possible leaders, I confirm that status via seeking similar strength in its group and sector. For example, after I identify xyz as a possible leader, I then attempt to identify whether other company's shares in the same group out-perform by a similar measure; if yes, I seek some measure of out-performance in its sector. (Please understand, the broader the group -- individual stock --> group --> sector --> market -- the less the out-performance, an argument in favor of concentrated positions: more risk = more reward.) This group and sector analysis confirms my thesis in favor of the winning investment opportunity, not vice-versa.
I never view the world and say, "Everything sucks, the world is going to hell, but it is a good time for ordnance makers. Buy their shares!" You willhear me say, and often, "He is smarter than anybody, but not smarter than everybody." This quote sums my view of investing. The consistently successful investor acknowledges the enduring power of the markets, which can and will grind him, his ego, and his portfolio to dust long before it acknowledges he was correct after all. Perhaps.
Which is why, correctly or no, I choose to view the markets from the bottom-up; my view is clear, unclouded, rarely confused. And I can allow the profound power of the market to help guide me to enduring and consistent investment success
This post concludes on Investment Poetry.
-- David M Gordon / The Deipnosophist
Labels: Market analyses