You must have heard of many different strategies in the stock market. Fundamental analysis, technical analysis, intraday trading, options strategies, future trading and a lot more.
Bottom fishing is one of the strategies in the stock market that can be hugely beneficial if implemented correctly. But, if you don’t understand the principle behind it, bottom fishing can backfire badly.
Let’s understand what this strategy means and how you can implement it correctly to grow your portfolio.
What is bottom fishing in the stock market?
As the name suggests, bottom fishing is based on the principle that sometimes, good fishes hide towards the bottom of the ocean floor. If you try to peer through the murky water with enough focus and concentration, you will be able to spot the marine equivalent of a diamond in the dust.
In the stock market, the bottom means those shares whose prices have taken a tumble. They are hitting their all-time lows and are making new bottoms every day.
But you can’t just pick any stock whose price is falling!
A sound investment strategy is always designed to look for value. The bottom fishing investment strategy, in the true spirit, looks for fundamentally sound companies that are a little down on their luck.
Basically, you find companies that have strong financials. They will ideally have asset-light business models, low debt burden, efficient capital utilisation and consistent earnings growth. But, for some reason, generally due to a sectoral factor, the companies might be on a dip.
For instance, during the first COVID lockdown, many fundamentally sound companies crashed because of market circumstances. But because these companies keep creating value for their shareholders, their share prices will reflect that value sooner or later.
The bottom fishing strategy will be successful if you manage to find an undervalued company and invest at a discounted price.
Now, this may sound simple enough. But be warned — the bottom fishing investment strategy does not come without pitfalls.
Why is bottom fishing risky?
Well, the problem with trying to identify a diamond in the dust, is that it does not look like a diamond. It is perfectly disguised among the dirt.
There have been many cautionary tales of investors who have made erroneous choices in the bottom fishing strategy and have lost all their money. If you’re wrong about the company you’re choosing, your investment can dwindle down to nothing in the blink of an eye.
Think about it.
Normally, when we choose companies to invest in on a fundamental basis, we look through what experts are recommending. We use some indicators to compare its performance with its peers. We try to see if the valuation is justified.
But when you’re making a choice of a bottom fishing strategy, you’re essentially identifying a good bet before anybody else in the market gets a whiff of it. That means you’ll have to go against what experts are recommending and trust your own instinct when it comes to your analytical skills.
It’s a high-risk high-reward strategy. It is certainly worth trying out for your portfolio. But you have to be prepared to face the risk.
