The Bottom Fisher’s Stock Market Strategy
A stock market “bottom fisher” is an investor who looks to find bargains in stocks whose prices have recently declined. Most bottom fishers subscribe to the theory that, while investors may typically under-react to the bad news or poor performance surrounding a company, over time they tend to over-react, leading to significant opportunities to acquire stocks at deep discounts. Bottom fishers operate in much the same way that value investors.
Bottom fishers have a tendency to look at stocks that have shown strong profitability in the past but have recently experienced issues that have driven down their stock price. If the bottom fisher is right, this price set back is temporary.
The Efficient Market Hypothesis
It should be noted that many investors fall into the trap of believing that a decline in stock price automatically means greater value. However, savvy stock market investors understand the efficiency of global markets in processing information and the prevalence of fair market value- an idea known as the “efficient market hypothesis”.
Characteristics of a Stock that Can Bounce Back
That said, most analysts believe that the stock market is not perfect and that, in any market conditions, both under and over-valued stocks exist. Some of the criteria that bottom fisher investors look for in finding bargains may include strength in:
• Sales
• Free Cash Flow
• Operating Income
• Cash
Of course they are also on the lookout for strong management and brand recognition and loyalty as these elements can play very big roles in the recovery of the stock price.
It’s Not Necessarily About Finding the Bottom
Many bottom fishers will tell you that their approach is not about finding stocks that have bottomed (a very difficult thing to do). Instead, they are looking for companies with strong fundamentals and good prospects for the future whose stock is in a temporary decline.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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