X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Investing: The top down approach - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jan 23, 2007

    Investing: The top down approach

    Amidst the bull run that the stock markets are witnessing and the euphoria that it has created, investing in the right kind of stocks with a disciplined approach has assumed significant importance. In this write-up, we shall focus on the top-down approach that is one of the most popular methods of identifying the right kind of stock.

    Economy: In fundamental analysis of stocks, the macro-environment is an important factor that determines the outlook of the economy and the industries to be impacted by the same. For instance, excess liquidity will lead to firming of interest rates, which in turn would affect the profitability of companies with a high level of debt (in the form of high interest costs). In today's times, concentrating only on the domestic economy is not sufficient. Given India's efforts to integrate with the global economy, global factors such as the US interest rates, crude prices and currency movements and the impact of the same on India also needs to be monitored.

    Regulation and politics: Politics play an important role in determining the direction of the economy, industries and consequently companies. This is because for any economy to grow and prosper, it needs to implement policies and reform measures that may yield benefits over the long term. Thus, an unstable political environment not only hampers economic growth but also tends to adversely impact the stockmarket. This was amply proven in the elections in May 2004, when the UPA government came into power. The government's focus on infrastructure development, steps to curb fiscal deficit and simplifying tax structures are some of the important factors to keep an eye on.

    Industry: The next step is to understand the industry in which a company operates. For instance, the impact of macro-economic factors and government policies for different industries tend to be different. Also, understanding the dynamics of the sector assumes importance. For instance, given the fact that the oil and gas industry is highly regulated, the government's stand on kerosene and petrol prices becomes critical. For the pharma industry, considering that exports have been gaining momentum, investors need to understand the generics environment in the regulated markets vis-a-vis that in the unregulated markets and so on. For the auto industry, which is facing pressure on the input side (read steel), the movement of steel prices plays an important role in determining the fortunes of this industry.

    Company: Once an investor has decided upon the industry, the next step is to determine which is the best company in that particular sector. The first and foremost parameter in this regard is the quality of the management. The management's vision in anticipating changes in the sector, strong financials and proven track record play an important role in steering the growth of a company. Besides this, the position of the company in a particular sector (for instance whether it is the market leader or the second best player), its scale (in terms of bargaining power with the distribution chain) and so on are some of the factors that need to be considered.

    To sum up...
    At the end of the day, it becomes important to invest in a fundamentally sound company with a strong management, the ability to deliver results even during adverse conditions and reasonable valuations. This means that investors will need to research the companies well, read the annual reports and keep track of whether the company is on course to achieving its objectives. Ultimately, this is what will reward shareholders with steady returns in the long-term.

     

     

    Equitymaster requests your view! Post a comment on "Investing: The top down approach". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 18, 2017 (Close)

    MARKET STATS