Some Common Approaches to Stock Selection

The job of a portfolio manager is to find the best security, the best sector and the best country to invest their clients’ money. There are different ways by which investment managers take on this task.

Here we share a few:

Bottom-Up Approach – The manager focuses on selecting individual companies they think would do well irrespective of what is happening in the sector or the economy. The problem with this is that a rising tide lifts all boats and vice versa, so sometimes a sinking sector or economy can impact even the good businesses.

Top-Down Approach – The manager starts from the global economy to see which regions of the world would do well, then moves to which economies and which industries would do well, before circling on a particular company to invest in.

A combination of top-down and bottom-up – The manager decides on which countries to favour based on a top-down analysis but builds the portfolio of stocks within each country based on a bottom-up analysis.

Technical analysis – Unlike the top-down or bottom-up approach that looks at the fundamentals of each company, sector and country, the technical approach studies past price data and graph to forecast the future direction of investment prices and thus make investment decisions.

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