Port Wren Capital, LLC
Finding Value InvestmentsSM
The other day I was speaking with a reader of our newsletter, The Contrarian NewsletterSM. Who asked me about what the overall market was going to be doing in the future. And I responded by saying I had no idea. Then all of a sudden there was silence. Soon after, I realized the needed to elaborate on my response. Many investors that you will encounter tend to use what is often referred to as “Top Down” or “Big Picture” approach. In contract, others, typically a smaller number of investors use what is called “Bottom Up” approach. The “Top Down” investing method involves analyzing the overall market by looking into the broad sector and economic conditions. And tends to try to predict what will happen in the future. With the “Bottom Up” method the investors looks more on finding a stock based on the individual attributes of a particular company.
Now that is not to say that they do not meet at some point to some degree. This only pertains to the starting point. What that means is the investor may start searching using the “Top Down” but then proceeds to the “Bottom” in finding a particular company to invest in. However, it is very difficult to do that in the real world. As with the “Bottom Up” approach, the investor starts searching for an individual company first, then continues to move towards the “Top” in their search. But the emphasis is placed less on tying it to the “Top”. And it is much easier to do in practice.
Investors using the “Top Down” method may look at the strength of the dollar, the strength or weakness of the economy, the GDP and the like. Thus individual investor would focus more on the larger macroeconomic trend going forward into the future. The investor would put much less emphasis on the analysis of individual stock. Whereas on the other side, with the “Bottom Up” approach much more time and study is spent looking at the analysis of individual stocks with less emphasizes on the overall economic trends of the market. This approach assumes that individual company stocks will perform in general independently of their affiliated industry or sector and to a degree to the overall market as a whole. Investors would look at the company’s financial statements that include their Balance Sheets, Income Statements or Profit & Loss Statements, Cash Flow Statements for the past few years, and the most current quarter, their existing and future products or services, the supply and demand aspects, and fundamentals like P/E, Free Cash Flow, P/S, P/B, EBIT, EBITDA, Operating Margin, Net Income Margin and others in order to become very knowledgeable of that firm.
Seth Klarman, value investor, wrote in his 1997 book, Margin of Safety, “There are three central elements to a value-investment philosophy. First, value investing is a bottom-up strategy entailing the identification of specific undervalued investment opportunities. Second, value investing is absolute-performance, not relative-performance oriented. Finally, value investing is a risk-averse approach; attention is paid as much to what can go wrong (risk) as to what can go right (return).” He goes on to say, “… a bottom-up strategy is in many ways simpler to implement than a top-down one. While the top-down investor must make several accurate predications in a row, a bottom-up investor is not in forecasting business at all. The entire strategy can be concisely described as “buy a bargain and wait.” Those are the reasons why we at Port Wren Capital use a “Bottom Up” approach to investing and had no real response to the question as to what the overall market was going to do in the future when asked by one of our newsletter readers.
In summary, “Bottom Up” approach has a much higher probability of successful implementation in the stock market in both up and down markets and is much less dependent on the trends of the overall market and is more practicable in achieving higher returns than the "Top Down" approach.
One of the many benefits of our investing services is we use the "Bottom Up" fundamental analysis value investing strategy to stock investments. We find specific investment opportunities using security analysis research to find undervalued opportunities for our subscribers in our PWC STOCK REPORTSSM membership service. And you too can reap the rewards.
At Port Wren Capital, LLC, we specialize in picking specific undervalued U.S. stocks using fundamental analysis developed by Benjamin Graham using a five step process. We have beaten the S&P500, DJIA and NASDAQ benchmarks since we started 5 years ago on our own investments. Discover the difference for yourself. To learn more contact us today.
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