Investment style: are you a bird or a worm?

There are two different approaches to investing - 'bottom up' and 'top down' - says Bengt Saelesnminde. Here, he explains what they are and why they matter.

"Right, that's it. No more! I'm getting the shopping online from now on. I've had enough of your interference."

Oops, this could be the end of supermarket shopping as we know it. The problem? Well, how can I put it? Let's just say that there's a difference between the way my wife and I shop.

I've seen this frustration among colleagues when it comes to investment, too. Whether it's crude oil or olive oil, you might just want to find out which type of approach you use to make sure there aren't any bust-ups.

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How to avoid a bust up over investing

Mrs S has a plan when we go to the supermarch; she's already planned her recipes and she knows exactly what she's doing. Her path is well mapped out.

If it's shepherds pie, the decision is Welsh, or New Zealand lamb; Maris Pipers, or King Edwards. Then on to the next thing.

But while she's checking off her list, I'm trawling for the bargains. Minced beef, chicken thighs, salmon; I haven't got a clue what I want to do with it all, but if it's cheap it's going in the trolley.

That's why I'm off shopping duty. Our two strategies don't fit. My selection uses a bottom up' approach (yes, that really is an investment term). I trawl all the aisles looking for the bargains - I'll consider anything, just as long as it's good value. I'll worry about the recipe later.

Mrs S uses a top down' system. She casts a bird's eye view from the top, she knows what she wants and homes in on it. All she's got to worry about is the brand, the cut, or maybe a promotion.

I could make my strategy work too. Maybe I win on price, but lose on the taste test'.

It's difficult to say who's right. The important thing is to know which type of system you use because you'll need to adapt your research accordingly.


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When Mrs S isn't about

When it comes to stocks, I tend to favour the top down approach. I'll keep a close eye on certain sectors, then pick the stocks I like. When we visit the local supermarch in France, I've got the time to trawl the whole store, and it drives her mad! But I definitely don't have that patience when it comes to the stock market.

So right now the economics tells me that 'consumer cyclical stocks' (stocks that have anything to do with discretionary spending) are a bad place to be. My bird's eye view tells me not to waste my time in that sector.

If you're a regular reader, you'll know that I'm placing my bets on the global economy. The macro-economic situation tells me to gamble on global growth. Sectors I like include commodities, oils and pharmaceuticals. And that's where I do my fishing.

I'm not saying my approach works for everyone, it just depends on your bent. I've tried my hand at bottom up too.

Never say never

Bottom up investing starts in a different place. Like my wife, I'm generally uncomfortable with it. For starters, you've got an awful lot of stocks to choose from. So if you're going to play this game, you'll need some 'filters' (or screening tools). If you haven't got access to the professional data feeds, you can find some free online stuff.

I tried out Advfn's 'Filter X', and it wasn't bad. You can start out with over 2,500 stocks and then filter them down to just a few that fit in with your criteria.

Criteria you may want to use include: price/earnings, dividend yield, dividend cover, peg factor, price to sales, gearing, etc. In fact, the 'Filter X' system reckons there's nearly 200 criteria at your disposal.

You can play around with the filters to your hearts content. In the end you'll come up with a stock selection honed to whatever criteria youchoose.

But be careful. Filtering is only the first stage of the process. Undoubtedly you can find some interesting stocks, but then you'll have to do the hard work of analysing them.

So there are benefits to both approaches. Personally I prefer taking a top down approach. I'll look to the macro-economic indicators to find mysectors.

I leave it to someone else do the long hours that come with the bottom up approach. Someone with the patience and fascination for profit and loss statements and balance sheets.

I've mentioned Simon Caufield to you before. Simon takes the deconstruction of balance sheets to the extreme. I couldn't do it myself.

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This article was first published in the free investment email The Right side. Sign up to TheRightSide here.

Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.


He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.


Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.


Bengt also writes our free email, The Right Side, an aid for free-thinkers on how to make money across financial markets.