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In: Finance

2.While stock selection is best approached from the bottom-up, ignoring the top-down can be extraordinarily expensive....

2.While stock selection is best approached from the bottom-up, ignoring the top-down can be extraordinarily expensive. The bottom-up can also inform the top-down. As Ben Graham pointed out “True bargain issues have repeatedly become scarce in bull markets (James Montier) 2.1. Differentiate between the bottom-up and top-down approach to fundamental analysis.(3) 2.2. Do you think investors should choose between the two approaches, or do you believe that they are complimentary? (3)

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Expert Solution

A. Bottom up investment is incline towards buying up stocks from the stock specific point of view and it will be determining the firm specific factor rather than macro factors and it will be trying to value the company according to the performance of the company and it will be taking into perspective the financial reports and the demand growth and the future performance of the company so it is related to determination of the value of the company from the firm specific factors.

Top down investment approach is related to making investment after analysing the Macro picture which will be determination of the overall economy and understanding the demand and supply in the bigger picture through analysis of the overall economy which will consider the macrotrends like changing economic cycles and changing monetary policies and the growth rate of the economy while making decisions regarding investment into a company so it is a macro analysis approach.

B. I believe they are complementary in nature and investors should be accounting for both the approach while making valuation of a company and investment decision because they should be trying to incorporate bottoms up investing which will be incorporation of the firm specific factors and it will also consider the overall macrotrends because company will always be a part of the economy and its performance will be relative to that of economy and it will be complementary in nature so they would be trying to always incorporate and synchronise the the macro and micro Trends before making a investment decision by incorporation of both the fundamentals of top-down and bottoms-up approach.

jeff jeffy answered 1 year ago
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