Almost all genuine value investors use bottom-up approach, which neglects the broad macroeconomic analysis and focuses merely on selecting a specific security of a company based on the fundamentals of the business. This is in sharp contrast to the top-down approach, which places more emphasis on broader economy and predicting the trend in factors such as GDP, interest rates, inflation, commodity prices and exchange rates.
I’m confident that the vast majority of the readers on this forum utilizes the bottom-up approach by focusing on the fundamentals of the business. I don’t have much to add on the concept of the bottom up approach itself but I’d like to discuss layers in the bottom-up approach, or bottom-up from bottom-up if you will. In a nutshell, this involves drilling down one layer after another layer until you get to the fundamental drivers of the business. You start by identifying the very bottom layer of the fundamentals of the business, then you work all the way up to segment key metrics, then segment revenues and profits, then you roll the segments up to get to the consolidated results of the whole company. However, in order for you to identify the very bottom layer of the drivers of the business, you will have to start top-down and keep asking what drives that and why? Continue Reading »