Top down investing and bottom up investing

Top down investing and bottom up investing describe the two directions research can start from. Top down starts with a broad view, a macro trend, an economic cycle, or a sector expected to do well, and narrows down from there to find specific companies that benefit from it. Bottom up starts with a single company, its numbers, its business, its management, and builds a view of the wider industry or economy outward from that one case.

Neither direction is inherently better, and most investors end up using both depending on the situation. A top down starting point is useful for noticing an opportunity before spending time on individual companies, but it risks buying into a trend without fully understanding the business behind it. A bottom up starting point forces a deep understanding of one company at a time, but can miss a broader shift that would have flagged the company's risk earlier.

In practice the two approaches usually meet in the middle. A top down idea still needs bottom up work on the individual company before buying it, and a promising company found bottom up still benefits from checking whether the sector or macro backdrop it sits in is a help or a hindrance.