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top-down and bottom-up investing
There are two basic approaches in making an investment decision:
A top-down investing approach is an investment philosophy where this approach involves looking at the "big picture" in the economy and financial world and then breaking those components down further details into industries, sectors and particular companies.
Having looked at the big pictures, the investors trickle down to the small pictures to make sure all the predictions have a reasonable layers step by step.
From this point, the investor first analyzes if both the global and domestic economies are on his side,
then he analyzes if the industries are in his favor, finally, he picks up the stocks of specific companies to be further analyzed. And then he makes his investment decisions that are believed to be successful for his investments.
Another approach is bottom-up investing, which is just the opposite way to the top-down investing.
In bottom-up investing, the investor focuses his or her attention on a specific company rather than on the industry in which that company operates on the economy as a whole.
The bottom-up approach assumes that individual companies can do well even though the industry is not performing very well. The investor makes a thorough analysis on the company rather on the industry and the economy as the whole. In his mind, it doesn’t matter whether the economy or the industry is sound or not, if the company is good, it will be a good investment opportunity. That mostly suits the special case for the company, e.g. a good product in the pipeline, take-over target, and /or good earning prediction. Today's aig is a good example of bottompup approch.
An investor can use different approaches to decide whether to employ the top-down or bottom-up approach. When there is a special case for the company, it is better to use bottom-up approach, on general, it’s better follow top-down approch.
When the economy is in crisis, it’s safer to use top-down approach to make an investment decision.