Publications
Partners
One of the key points of investing is to focus on specific sectors, such as mining, banking, food retail and so on.
A broad investment psychology would guide one towards the sectors that are more likely to return great profits.
Then you would find the best company within that sector.
This is called a top-down approach.
Bottom-up investing starts with the theory that a great investment can offer great returns – even if it is within a less-than-ideal sector.
Personally, I always use the top-down approach, rather than the bottom-up approach.
There are two key reasons for this.
The first reason is that my ideal holding period is forever.
Therefore, I need to be in great growing sectors so that I can stay invested.
If you’re buying bottom-up, the sector may be sub-par and eventually the company you’ve invested in will weaken with the sector.
This weakening will mean you’ll need to exit and will leave you having to make the decision about when to sell.
Furthermore, you’ll then need to find another investment for the freed-up money.
My second reason for initially focusing on the sector, before drilling down to the individual stock, is that a strong growing sector adds further momentum to potential earnings for the company.
Now, the easy way (or perhaps the lazy way) of following the top-down approach is to broadly buy the sector.
In other words, rather than deciding between Pick n Pay or Shoprite* you buy both, essentially hedging your bets.
As a rule, I do not go this route unless there really is a stark difference between the two.
I also always limit it to two stocks within any sector.
If I can’t decide which two, I take the approach that I simply don’t know the space well enough.
What is also very important is to truly understand not only the strengths of the various investment options within the sector, but also to fully understand the differences between the two companies.
As an example, let’s use the recently listed Lyft and Uber.
Both operate in the digital ride-hailing space, but they have some stark differences that determine which would make a better investment – at the right price.
Lyft really only operates in the US market while Uber is very much a global business, operating in some 65 countries (although the US market is its key one).
The issue here is that in US cities there usually are already well-established metered taxi operators.
Furthermore, not only is there a pushback against these two companies, but also capped prices.
Both businesses have been operating as convivence, but also on price and the existence of metered taxis caps in terms of what they can charge.
In other markets, such as South Africa, the existing metered taxis were never really used to that extent, especially not by locals.
That means there is less direct competition and Uber therefore also has more pricing power outside the major US market.
My household is now a single-car one.
I therefore use Uber a lot, especially when traveling, as Uber is often easier than renting a car.
If Uber upped its fares, I would continue to use the service.
Now sure, there is a level at which too high a fare will see the number of rides falling – but they certainly do have some pricing power.
The second major difference is Uber Eats.
Lyft is really just a one-trick pony: digital ride-hailing in the US.
Food delivery is a far easier and more profitable business, and gives Uber an extra leg of profit that Lyft lacks.
So, two very similar businesses – but when we dig deeper there are key differences that make Uber a much more attractive investment proposition than Lyft.
*The writer owns shares in Shoprite.
This article originally appeared in the 6 June edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.
