Bottom-up investing basics
As pointed out in previous columns, bottom-up investing is simply fundamental analysis at work. It involves the simple process of piecing the business information of a company.
But as learned by seasoned investors, its productive use requires hard work, discipline and time. Its application also means doing the same work over and over again on a regular basis—without which, it cannot lead you to winning and making a large amount of money.
As such, bottom-up investing is a boring enterprise. This makes it an investment tool that is not for everyone. In other words, it is ineffective for investors who do not have the psychological temperament required for its successful use.
That’s the bad news. The good news is that we have the ability and capacity to develop that psychological temperament for its successful use. While we may not have been born with it, we are given the faculties to earn it through dogged resolve, patience and dedication.
This can be likened to playing golf. It requires some set of skills. Those with the natural skills will learn fast and beat you in the game. But through practice, time and diligence, you can become a good player who can actually beat most of those who were born with the skills.
Bottom line spin
This culminating article on the use of bottom-up investing certainly does not have all the space to help you form good decisions and judgments in stock investing. But walking you through some of its basics may help you learn a lot.
The first of which is to focus on the company’s fundamental financial performance. As what they say, “When companies do well in their respective business, the prices of their stocks [do well, too]. And when their business suffers, the prices of their shares suffer, as well.”
This basic principle forms part of the standards in the selection of a stock. As emphasized previously, following what dominant players are buying (or selling) is one good basis of selecting what stocks to buy (or sell).
Looking closer into the financial performance of a company will certainly lead you to informed decisions and better judgment.
Among the considerations used to generally measure and judge the financial performance and condition of a company are the following: Growth, profitability, financial health and risk conditions.
Needless to say, you must have some knowledge on the basic tools of financial statement analysis to undertake the foregoing exercise. A lot of books are available in the market. You can even have them free from the internet.
On the matter of growth, as suggested by a financial expert, you need the answers to “how fast has the company grown, what are the sources of its growth, and how sustainable is that growth likely to be?”
On profitability, you must know “what kind of a return does the company generate on the capital it invests?” There are other related subjects on profitability you may have to ask, as well. Again, consult the financial books to understand them more.
On financial health, the answer you need to discover is “how solid is its financial footing,” as the say. A general measure on a company’s financial footing can be seen on the status of its liquidity. Another is its ability to service its debts. Consult your financial books for more.
The last is knowing the risks to your investment in the company. As they say, “there are excellent reasons not to invest in even the best-looking firm.” Therefore, “make sure to look at the negatives as well as the positives” of a company.
The second aspect to bottom-up investing is making an in-depth study of the company’s management.
Based on the insights of most successful investors, profitable and rewarding stock investments are, in the end, determined by the quality of the management of the company.
True enough, the business of companies rise and fall based on the competence, reputation and performance of the people running the company. The critical matter, as pointed out again by an expert, “is to know whether they are running the company for the benefit of the shareholders or for themselves.”
The question about management or performance record is very relevant and important when it comes to successful investing. We may talk about it some more. Read about it in the next article.
