Top-Down vs. Bottom-Up: Which Approach in Stock Investing is Right for You ?
Let's understand this friends. What exactly is top-down approach to investing? A top-down approach is also known as an EIC (Economy, Industry, Company) approach. The process flow of top-down investing goes like this. Is the macroeconomic situation strong in terms of high growth, low inflation, low interest rates, robust economic reforms, among others? Is the industry situation conducive to help the stock outperform? What is the demand situation, scope for innovation, pricing, creating brand value etc? Is the company having intrinsic strengths in terms of profits and solvency? What are the operating margins, efficiency ratios and the valuation of the stock? When does top-down work and when does bottom-up work? Normally, we find that large institutions and investors have their own unique preferences. But broadly, one can draw some demarcation lines. Top-down approach works when the basic approach to investing is focused on large cap. In any market, the large cap stocks tend to be mo