There was a man named Hari who was taking a stroll when he came across a bunch of ragpickers. They were scanning through piles of garbage and waste.
He realized they were searching for valuable stuff that sometimes accidently makes their way into the garbage. This practice of the ragpickers reminded him of a term in investing known as Bottom Fishing.
If we look at the stock market, the stock market’s health is largely dependent upon NEWS flow reflecting the state of the macro-economic environment. In other words, a good macro-economic environment leading to good and positive NEWS flow improves sentiments of investors.
No investor would like to invest when the economic environment is not conducive because the risks of investing in adverse conditions are rather high.
Let’s say a country which had favorable political conditions, suddenly finds itself in the throes of terrorism. Under such circumstances the stock market plummets to a level that is commonly referred to as the bottom.
At such times, the stock prices of perfectly healthy and robust companies also tend to test the bottom.
The sentiments are so discouraging that everything is viewed from the same pessimistic lens and all companies good and bad get painted by the same gloomy and gray brush.
However, such are times that present the best opportunities to astute investors. There are opportunities to identify stocks that are quoting at prices below their intrinsic values.
Such under-valued stocks can yield handsome returns when the negativity in the macro-economic environment alleviates.
Identifying such valuable stocks in what is popularly known as Bottom Fishing which translates to fishing for good companies when the markets bottom out.
It helps investors generate meaningful returns while containing the risks. Buying undervalued assets brings in a good margin of safety, making it a very successful strategy for investors.
Risks of Bottom Fishing
Though bottom fishing can be extremely rewarding, it does carry risks as not always the beaten-down assets return to their perceived intrinsic value. The assets may also decline further in price, damaging the investors capital.
When the damage to the price of the asset is irreparable, it keeps on declining in price and never comes back to the investor’s buying price. In some asset classes like stocks and bonds, investments may lose all of their value, leaving the investors with damaged merchandise. Such investment decisions might end up risking the entire returns of the portfolio.
