Bottom Fishing
What is bottom fishing?
Bottom fishing is the practice of buying an asset when it has suffered a significant drop in its market value due to factors that have affected the world market or factors that have affected the specific asset, in order to profit from extraordinary asset when other market participants realize the value of the asset under normal market conditions.
Explanation
Asset prices are volatile and fluctuate greatly from time to time. This happens for both positive and negative purposes. When sentiment for an asset becomes extremely negative, due to any factor, asset prices fall to unsustainable levels. This is when investors see high value in it and rush to buy these assets. This purchase by value investors is called bottom fishing.
Helps investors generate significant returns while minimizing risk. There is a good margin of safety in buying undervalued assets, which makes it a very successful strategy for investors.
Bottom Fishing Objectives
Focuses primarily on purchasing assets when they are of low value. Buying them while they are undervalued creates the required margin of safety. Investors achieve one of their most important goals, which is risk reduction.
Excess returns are higher risk-adjusted returns. This is another important objective of bottom fishing. Buying low and selling high generates quick and disproportionate profits for invest
Investors can also use a mix of technical and fundamental analysis, also known as the tech-foundational approach, to invest in defeated assets. In this technique, investors will typically examine their investment universe using technical criteria and then review the results using fundamental parameters to further narrow the list before choosing their investment candidates.
This technique is very effective and efficient because it can create some interesting opportunities which can be missed by only using technical or fundamental filters.
Risks Associated with Bottom Fishing
Although bottom fishing can be extremely rewarding, it carries its share of risks as damaged resources do not always regain their perceived intrinsic value. Assets can also fall further, hurting investor capital.
When the deterioration in the price of the asset is irreparable, it continues to decline and never returns to the investor’s purchase price. In some asset classes such as stocks and bonds, investments can lose all of their value, leaving the investor with damaged property.
To pursue their risk management objective, they adequately diversify their investment portfolio to ensure that certain bad decisions do not affect the overall returns of the portfolio. A wise investor understands that some things are valued the way they are for the right reasons and knows them very well.
Conclusion
Bottom fishing can make investors quick and important if done right. However, investors should be aware of the risks inherent in such investments.
Investors should know at all times what they are getting into, because not only can such investments prove to be unnecessary, there can also be no easy exit from such investments.
The use of filters can be extremely useful in filtering out candidates for bottom fishing for beginners. Seasoned investors, however, may have spent a lot of time identifying unfiltered stocks.
