Top-Down Stock Investing Explained
Friday, November 30th, 2007
How do you tackle a large problem in your daily life or manage a project at work? If you’re like me, you look at the big picture and define what you need to accomplish, understand what variables exist and how they affect your progress, and create a strategy for execution. That is, you work your way from the top down to the details. This is also the essential idea behind “top-down” investing.
Top-Down Investing in a Nutshell
Top-down investors strive to understand how supply and demand is changing at a macroeconomic level and identify what sectors, industries, or geographic areas will benefit from these trends. From there, they look at what specific stocks have a competitive advantage and stand to realize the greatest gains as a result of these shifts.
The US Housing Market - A Brief Example
It’s no secret that the US housing market is (at the time of this article) severely depressed. However, while housing is in trouble today, a top-down investor will be focused on finding good companies in the industry that will benefit when the market for homes rebounds in the future. That is, he uses the overall economic trend as a guide for “where to look”, and then makes some basic assumptions about the industry moving forward. In this case, he assumes that the market for housing related goods and services (builders, etc.) will eventually improve in the long term.
In doing so, he is also acting as a “contrarian” investor. That is, he is investing against overall market trends in hopes of purchasing shares today at discounted prices (in order to profit in the future).
Tags: investing strategy, stock strategy, top down investing