For instance, if a CEO has a history of corruption or bankrupting companies, you would likely want to know that before investing. Likewise, if a company’s primary product or service isn’t patented and easily replicated, you’d want to consider that because it will likely damage their competitive advantage.
The downside to bottom-up investing
While understanding how a company operates, its product and service offerings, and its financial health is important, it’s not always wise to make investment decisions based entirely on those factors that. Completely ignoring broader macroeconomic factors may cause an investor to miss something that, while maybe not currently, could negatively impact a company’s growth potential in the future. For example, if a company is in a heavily regulated industry, like healthcare or finance, changes in government policy can affect how a company operates.
Identifying and researching individual companies can also be harder for newer investors who may not be well-versed in financial statements and what to look for in a company. Unlike index funds, which allow you to invest in multiple companies at once, investing in an individual company doesn’t provide instant diversification — which is one of the cornerstones of a good investing strategy.