BLOG – What’s wrong with a bottom fishing strategy? It works for Warren Buffett!
It’s always challenging to go against a Warren Buffett strategy. He is the most famous and successful investor of all time.
But let’s look at “Bottom Fishing” as an investment strategy for the personal investor.
First, let’s look at my definition of Bottom Feeding. Bottom Feeding is an investment strategy whereby investors search out and invest in severely undervalued stocks. The investor waits until the market wakes up and recognizes the stock’s true intrinsic value. At this point, new money flows into the stock, bidding up its price and creating a significant return for the initial investor.
Or at least, in theory, that’s what’s supposed to happen.
Well, I don’t recommend this strategy.
Here are five reasons why:
- TIME – Time is always the enemy in the market. In this case, you have no idea when the market will wake up to the undervaluation of your stock. Investing in anything without a time frame for harvesting that investment and making a profit is always dangerous.
- MARKET – Again, time is the enemy. Anything can happen in the long term to collapse a market. Wars, pandemics, political events can all undercut a good investment climate and ruin an investment opportunity.
- INDUSTRY – Fund managers must fall in love with a stock to buy and raise its price. But fund managers also must love the industry and industry prospects before buying into a stock. A promising stock in an industry that’s out of favour rarely gets the fund support needed to increase its price dramatically.
- TECHNOLOGY – Time brings with it technological change. Kodak was an excellent company until technology made its industry obsolete overnight. Blockbuster led the VCR rental market until technology made it obsolete. With enough time, technology can be the enemy of the best companies and their stock price.
- ECONOMY – Inflation, rising interest rates, unemployment, and many other economic factors can turn an investment-friendly market into a toxic climate over time.
These are only some reasons that bottom fishing is a strategy that should be left to the experts.
A wise man once told me to “never buy a stock without knowing when you’ll sell”.
Time is the enemy of investing. Keep your sell horizon short as possible and reduce your exposure to the unknown.
Island Equity Systems designs and markets equity trading systems for the personal investor