Investing: What approach to follow? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Investing: What approach to follow?

Mar 11, 2005

The BSE-Sensex has been recording new highs day after day, although the last two trading sessions have been subdued. However, given that the index is now trading in un-chartered territory and is within striking distance of the psychological 7,000 mark, we believe that the investors need to look at the markets, more from the Bottoms-up approach as against the Top-down approach for stock investing.Let us now look at the two different approaches to investing:

Top-down approach

  1. Looks at the economic performance of the country vis--vis the global trend.

  2. Once the economic performance is known, focus on the sectors, which are likely to play the lead role in contributing towards the economic growth. Of these sectors, fundamental factors such as P/E, EPS growth, and dividend yield can be major indications in terms of investments.

  3. After narrowing down on the sector, the investors need to look at the leading companies in the sector in terms of performance.

  4. Management plays an important role in the company's prospects and therefore, it is important to factor in these factors. Data regarding the management can be availed from the company's annual reports. Management intent is of prime importance when parking your money. It is always better to invest in a market leader like Infosys rather than have your money in NIIT.

  • Read our special article: Mr. Market and You

    Bottom-up approach

    1. To start with, this approach assumes that individual companies can do well even in an industry that is not performing well. In this case, it is important that investors look at the company's overall strengths and weaknesses in terms of product performance, competition, financial status and the earnings potential.

    2. A part of bottom-up approach is value investing where the idea is to pick the cheap stocks with strong balance sheets. The strategy is to look at the stocks that trade for less than their intrinsic value.

    With regard to which approach an investor should follow varies economy to economy. Though there are 6,000 stocks listed on the Bombay Stock Exchange, the BSE-100 index would account for as much as 80% to 85% of the overall BSE market capitalisation! In such an under-researched markets, there are good investment opportunities available at the company level and therefore, it would make sense for investors to follow a bottom-up approach. Having said that, there are some pitfalls in an under-researched stock market like India:

    1. The risk profile of an auto stock cannot be vastly different from the risk profile of the auto sector, which in turn is governed by economic performance. So, a holistic view is also of significance. The difference arises primarily because of the quality of the management at the top.

    2. Under-researched companies also do not have a proven track record unlike larger companies like Infosys and HDFC. So, the ability to manage downturns and outperform peers during upturns is extremely critical. Information flow on these under-researched companies is also not smooth. So, one has to be careful to that extent.

    3. During bullish times, there can be significant trading activities in smaller stocks (like it is now). Already, the National Stock Exchange has issued a 'warning statement' to all its members. At times, it is possible that smaller stocks may be rising not because of fundamentals, but someone section of the market participants may be driving prices higher.

    Remember, a bull market or a bear market does not change the fundamentals i.e. earnings growth prospects, quality of management and valuations. Time to realize that bull markets do not guarantee easy money!

  • Equitymaster requests your view! Post a comment on "Investing: What approach to follow?". Click here!

      

    More Views on News

    6 Stocks With High Financial Leverage (Views On News)

    Aug 23, 2021

    Interestingly, two Adani group companies top the list while a Tata group company also makes the cut.

    Top 3 Agriculture Stocks to Keep Your Eye On (Views On News)

    Jun 28, 2021

    Top agriculture stocks that should have your attention now.

    5 Popular Stocks with Zero Promoter Holdings (Views On News)

    Jun 21, 2021

    List of stocks that have zero promoter holdings, where FPIs hold stake.

    How to Use P/E Ratio in Investing. podcast (Views On News)

    Sep 16, 2021

    P/E ratio is deceptively simple tool for valuations. Here's how not to read it, and make use of it for better investing decisions.

    Does the Expense Ratio Matter to Select the Best Mutual Fund Schemes? (Outside View)

    Sep 16, 2021

    PersonalFN explains how important it is to look at expense ratio when selecting a mutual fund for your portfolio.

    More Views on News

    Most Popular

    5 Small-cap Stocks with Zero Debt (Views On News)

    Sep 3, 2021

    In this article, you will get a list of 5 debt free small-cap companies that are worth tracking.

    Sansera Engineering IPO: Key Points to Consider (Views On News)

    Sep 8, 2021

    This IPO is a pure OFS and the company is looking to raise Rs 12.8 bn at the upper price band of Rs 744.

    5 Stocks that Turned Rs 1 Lakh into Rs 1 Crore (Views On News)

    Sep 7, 2021

    Patience is one of the biggest virtues you need to have if you want to become a crorepati in the stock market.

    Put the Odds in Your Favour to Find Smallcap Multibaggers (Profit Hunter)

    Sep 3, 2021

    A handy checklist to find multibagger smallcaps.

    The Top Stocks to Sell in this Bull Market (Profit Hunter)

    Sep 8, 2021

    When I saw the list of so-called 'value stocks' published by a leading brokerage, my worst fears came true.

    More

    Become A Smarter Investor
    In Just 5 Minutes

    Multibagger Stock Guide 2021
    Get our special report Multibagger Stocks Guide (2021 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Sep 16, 2021 (Close)

    MARKET STATS