Top-down approach vs. Bottom up approach

Top-down approach to valuation:
· Valuation process
· macroeconomic analysis - Fiscal, monetary policy, political changes
· industry analysis - cyclical, counter-cyclical, non-cyclical)
· stock analysis - identity company with most upside potential, not only examine past performance but future prospect).

This method is supported by AMIR.

Rationale for top-down approach:
Performance of individual firms is largely explained by economic and industry trends. Studies show that asset allocation is far more important than election of individual securities.

Bottom up, stock picking approach
Select underpriced stocks without considering the direction of economy and state of the industry

Valuation process:
1. Forecast expected cash flows
2. Determine required rate of return
3. Discount the cash flows
4. Make investment decision