Market Cycle ChartsĪll well and good, but how do you find which industry sectors perform best in each part of the business cycle? Actually, it is pretty easy with a little Internet research. Once I find the good sectors, then - and only then – is it time for me to focus in on individual companies. Specifically, a “top down” analysis, which analyzes the macro economy and business cycle, helps steers me towards those industry sectors most likely to outperform. I think I have found an “easy button” to help me along. ![]() We need every possible edge available and simply analyzing individual stocks won’t get the job done. Let’s face it, finding winning stocks that outperform the indices is a difficult process that often feels like finding a needle in a haystack. Because bottom-up insights into investment opportunity provide information important to assessing asset class attractiveness, effective investors consider both top-down and bottom-up factors when evaluating portfolio alternatives. Similarly, David Swensen, the investment guru who runs Yale University’s $27 billion endowment, wrote on page 4 of his book Pioneering Portfolio Managementthat a bottom-up approach is insufficient:Īsset allocation relies on a combination of top-down assessment of asset class characteristics and bottom-up evaluation of asset class opportunities. In other words, no matter how good one is at isolating great businesses with improving fundamentals, if its industry group is out of favor, the stock will most likely go down anyway. ![]() In William O’Neil’s investment classic How to Make Money in Stocks, his research shows that three out of every four stocks follows the trend of their respective index. Something is Missingīut, in the back of my mind, I’ve always known that something is missing in my investment process. I also like to run stock screens based on a set of fundamental and technical criteria that allows me to discover stocks that I never would have found otherwise. ![]() I keep a list of outstanding businesses in a watch list and wait for the inevitable irrational market decline to let me buy the stock at an undervalued price. I’ve always considered myself a “bottom up” investor, which means that I start my search for attractive investment opportunities by analyzing individual companies, regardless of their industry sector.
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