Bottom Up Investing - For Investing in the Stock Market
Bottom up investing is the belief that stocks are best bought when they are falling price because many times they are undervalued.
The value of the general market is not important to this type of investor because most investors that use this philosophy are buy and hold investors who believe goods stocks will show their true value in the long run.
This is a great philosophy and the belief is true i.
e.
Warren Buffet has used similar tactics in the past for investing in companies.
When you use this philosophy however, you must be aware that buying a company just because it's going down isn't always a good idea.
If a company is falling down it may be because something is fundamentally wrong with it, and it actually is being valued fairly but not always.
Many times in the market companies are valued lower than they should be for no apparent reason except that people are scared; the best times to buy stocks are when people are scared for no fundamental reason.
Never catch a falling company that is falling because it's making less money or because it is fundamentally flawed.
Buying a company because it is cheap has been the downfall of many people who feel they are getting a good deal; don't let this happen to you as an investor.
There are things to think about before you buy a falling company to make sure you are getting a good deal.
Number one has the companies earnings changed since it has gone down? If the earnings have gone up but the company has gone down this is great, if they have stayed about the same then it's probably an OK value, however if they have gone down you had better really think about what you are doing before you put your money into them.
The next thing to look at which is really important is a company quick ratio which is how much immediate cash equivalent assets it has vs.
its cash equivalent immediate debts.
Think about if you don't have enough cash at the end of each month to pay off immediate cash assets what happens? You of course start running into debt problems, which is the same thing that happens to companies who don't have a lot of cash.
The quick ratio should be at least 1.
5 or more to make sure that you are investing in a cash rich company, and it's debt to equity ratio should also be bellow 0.
9 to make sure long term debt is kept at bay as well.
Bottom up investing if used wisely is basically the same as value investing and can yield great returns investing in the stock market for the long run.
The value of the general market is not important to this type of investor because most investors that use this philosophy are buy and hold investors who believe goods stocks will show their true value in the long run.
This is a great philosophy and the belief is true i.
e.
Warren Buffet has used similar tactics in the past for investing in companies.
When you use this philosophy however, you must be aware that buying a company just because it's going down isn't always a good idea.
If a company is falling down it may be because something is fundamentally wrong with it, and it actually is being valued fairly but not always.
Many times in the market companies are valued lower than they should be for no apparent reason except that people are scared; the best times to buy stocks are when people are scared for no fundamental reason.
Never catch a falling company that is falling because it's making less money or because it is fundamentally flawed.
Buying a company because it is cheap has been the downfall of many people who feel they are getting a good deal; don't let this happen to you as an investor.
There are things to think about before you buy a falling company to make sure you are getting a good deal.
Number one has the companies earnings changed since it has gone down? If the earnings have gone up but the company has gone down this is great, if they have stayed about the same then it's probably an OK value, however if they have gone down you had better really think about what you are doing before you put your money into them.
The next thing to look at which is really important is a company quick ratio which is how much immediate cash equivalent assets it has vs.
its cash equivalent immediate debts.
Think about if you don't have enough cash at the end of each month to pay off immediate cash assets what happens? You of course start running into debt problems, which is the same thing that happens to companies who don't have a lot of cash.
The quick ratio should be at least 1.
5 or more to make sure that you are investing in a cash rich company, and it's debt to equity ratio should also be bellow 0.
9 to make sure long term debt is kept at bay as well.
Bottom up investing if used wisely is basically the same as value investing and can yield great returns investing in the stock market for the long run.
