InvestorQ : What is the difference between top-down and bottom-up approach to investing in stock markets?
ramya Bhaskaran made post

What is the difference between top-down and bottom-up approach to investing in stock markets?

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Mahima Roy answered.
3 years ago
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The only difference is that in this case you do not take a macro call. Only the approach begins from a macro standpoint. For example before zeroing in on a stock, the top-down approach dictates that you ensure that the economy is in good shape and growing. Then the fund manager has to satisfy himself that the industry in which the company is operating has good prospects and can deliver profit growth. Finally, the fund manager zeroes in on the specific company that is expected to outperform the other stocks in the sector.

The bottom-up approach, as the name suggests, focuses on the specific company first and foremost. Once the company is identified, the focus shifts to the industry and macro level factors. But in this case, the macro and industry factors are not used as decision points. They are merely used as ratification points. Take the case of Eicher Motors. While most auto companies may have underperformed post 2009, Eicher outperformed them by a huge margin. Effectively, when the theme is macro, adopt a top-down approach and when the theme is micro, you adopt a bottom-up approach.

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