Bottom fishing

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Bottom fishing is the practice of investing at a time when shares have low valuations, especially in a period when the markets are bearish. Bottom fishing is done with the speculation that when the markets improve the stocks will bounce back and become a profit-making investment.

Contents

Why should I be aware of this?

Bottom fishing can be a risky venture as markets could always move contrary to expectations. Price and timing are two crucial factors which determine the profitability of bottom fishing. We may buy stocks when the market has bottomed out, but there is no guarantee that the market will move up or dip further. It is, therefore, not something to go for if we are looking for quick profits.

Bottom fishing strategies can sometimes generate very good returns because the low valuations mean there is a lot of room for re-rating.

How does this affect me?

It's very difficult to tell the difference between a bargain and a stock that has fallen for a fundamental reason. We may attempt to find stocks that the market has undervalued through fundamental analysis. Or we may choose to be active during prolonged bear markets where there may be stocks getting hammered through panic selling.

All about bottom fishing

Bottom fishing in stock markets is like putting a net in deep waters without knowing what to expect you time you throw the net. As one is never sure of the outcome, bottom fishing requires intelligence, experience and some trial-and-error to give the expected results.

When the equity markets are on a downturn, the big question before the investors is whether it is time for bottom fishing. Does the current market provide an opportunity to accumulate great businesses at reasonable prices? One can never be sure how long it may take to catch a definite uptrend.

General trends

Under normal circumstances when markets hit bottom, they remain at the bottom for a long time. The odds of a quick recovery like in 1999 and 2003 are extremely low. And as seen by earlier trends, after hitting bottom, stock markets remain low for one year and property for two years. Hence, investors don’t have to hurry even when markets bottom as they have plenty of time to put together a portfolio at the bottom to benefit from the next upturn.

What can I do?

  • According to experts one should gradually start accumulating stocks with a medium-to-long term perspective in select sectors rather than wait to catch the bottom.
  • Investors should allocate money in a staggered fashion into quality blue chip companies. Ideally 30-40% allocation should be made to equity/ equity mutual funds, 20-25% cash should be maintained and the rest can be kept in fixed deposits and bullion.
  • When there are possibilities inflation and interest rates peaking out and commodity prices are on a downward spiral, it is safer to look at selective stocks in sectors such as banking, capital goods, construction, media and logistics sector.

CopperBytes

  • The sources of growth for tomorrow's financial companies are likely to differ from those of today. The challenge for the long-term investor is to identify the catalysts for that future growth.
  • Investors should consider how financial companies will eventually grow once the sector goes through what promises to be a considerable consolidation and balance-sheet repair process. [1]


References:

  • What is bottom fishing?
  • Is it time for bottom fishing in stock markets?
  • Too Early for Bottom Fishing

Source

  1. Reuters