Bottom up investment analysis will involve how you look at the stock market before deciding which stocks to pick. Unlike top-down analysis techniques, this option will be looking at individual companies first before checking prevailing market trends or global economics. There are a few disadvantages to this, but overall, this method is about evenly matched with top-down analysis.
For one thing, after you’ve chosen only top performing companies to invest in, any of your later choices will be a good pick. (As far as analysis can tell – there is always the chance that your analysis could be wrong, or that new situations could ruin your assumptions.) In top-down, you end up with a lot of companies of varying quality at the end, and have to choose between them.
With bottom-up investment analysis, you’ll end up choosing between many high quality companies in the end by deciding which ones are in better industries for short or long-term gains.
In the long run, you will probably find through using this bottom-up investment analysis that the overall market situation does not always have an effect on individual companies. Even through some of the worst market days, really good companies will continue to buck trends and show increasing stock prices.
Bottom-up investment analysis is also a bit easier to do as it is taking less into account. Instead of needing to guess at what different global economic situations may mean to a particular stock, you can just worry about whether or not the company itself is doing what you consider to be good business. If one company is doing well financially, you should be able to feel safe investing in it.
One thing that you should keep in mind while doing bottom-up investing is that even though the market situation is not always as important to this strategy, it does not have to be left out entirely.
In fact, many people have found it easier to pick stocks by using a combination of both top-down and bottom-up investing analyses. This way, you’ll be choosing both companies that stand to remain strong after you invest, and you’ll be choosing industries that are doing well overall.