can you tell me the differences between the top down and bottom up approaches. what is the major assumption that causes the differences in these two approaches?
In the top-down approach, an investor focuses on an industry that s/he feels will do well -- and then chooses one or more companies within that industry. The assumption is that many companies in a booming industry, such as tech stocks in the late 1990s, will increase their values. In the bottom-up approach, an investor studies one stock at a time, regardless of the industry its in. This approach assumes that a good company will make money even when its industry as a whole isn't very profitable.
Check these sites for a lot more information.
http://www.fool.co.uk/news/investing/investing-strategy/2007/01/19/top-down-or-bottom-up.aspx
http://stocks.about.com/od/researchtools/a/030506screen.htm
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http://www.tiaa-cref.org/about/press/publications/market_monitor/2006_11_20.pdf
The top-down and bottom-up approaches are two different methods of analyzing investments in the stock market. In the top-down approach, an investor starts by analyzing the broader economic and market factors and then narrows down to specific industries and companies. On the other hand, the bottom-up approach focuses on analyzing individual companies without considering the broader market conditions.
The major assumption that causes the differences between these two approaches is the belief in the importance of either macroeconomic factors or company-specific factors. In the top-down approach, the assumption is that the performance of a company is heavily influenced by the industry it belongs to and the overall economic environment. Therefore, if an investor identifies a thriving industry, they believe that most companies within that industry will increase in value.
In contrast, the bottom-up approach assumes that the success of a company depends primarily on its own merits, regardless of the industry it operates in. Investors who use this approach believe that even in a weak industry, a well-managed and profitable company can still generate positive returns.
To learn more about the differences between top-down and bottom-up approaches and their implications for investing, you can visit the provided websites.