What it is:
Bottom-up investing focuses on individual securities rather than on the overall movements in the securities market or the prospects of particular industries.
How it works (Example):
Taking a bottom-up approach to investing means becoming fully familiarized with the company you are considering investing in. There are many aspects to consider when investing in a security using the bottom-up approach.
For example, you may be interested in investing in Company XYZ. You will probably begin by researching what type of company they are, what products they offer, and their management structure. Most importantly, you will review Company XYZ's accounting statements and annual reports in addition to past performance data on their securities. You may then consider the overall market as well as the company’s customers and target customers. You should also consider what customers say about their experiences with Company XYZ's products and customer service.
The bottom up approach can be thought of as the opposite of the top down approach which relies heavily on economic and market trends. To illustrate this difference, in a top-down approach you might begin by looking at market data over time or at the performance of specific sectors of the economy. You may also look at the impact of certain events (e.g. wars, natural disasters, presidential elections) on market performance. Unlike the bottom-up approach, the investor will be more concerned with overall markets than with any particular security.
Why it Matters:
The bottom-up investing approach provides investors with the opportunity to become familiarized with the long-term potential of individual companies. Through researching and comparing individual companies, certain investors may be more confident in gains that can be made by investing substantially in a handful of solid companies rather than a smattering of funds or indices.