What You Should Know About Bottom-Up Investing Personal finance
For example, if a CEO has a history of corporate corruption or bankruptcy, you probably want to know that before you invest. Likewise, if a company’s main product or service is not patented and easily reproducible, you should take this into account as it will likely hurt its competitive advantage.
The disadvantages of bottom-up investing
While it is important to understand how a business works, its product and service offerings, and its financial health, it is not always wise to make investment decisions based entirely on these factors. Completely ignoring broader macroeconomic factors can cause an investor to miss out on something that, while perhaps not currently, could negatively impact a company’s growth potential in the future. For example, if a business is in a highly regulated industry, such as healthcare or finance, changes in government policy can affect how a business operates.
Identifying and finding individual businesses can also be more difficult for new investors who may not be familiar with financial statements and what to look for in a business. Unlike index funds, which allow you to invest in multiple companies at once, investing in a sole proprietorship does not offer instant diversification, which is one of the cornerstones of a good investment strategy.