Bottom Fishing – An Investment Strategy

Bottom fishing is a way some people invest their money. They look for stocks or other investments that most people think are not worth much. The bottom fishers think these investments are actually good deals. They buy them because the prices are low compared to other choices.

Contrarian Investing

People who bottom fish are often called contrarian investors. That means they do the opposite of what most investors are doing. When everyone else is selling a stock because they think the company has problems, contrarian investors often buy it. They think the stock price has gone down too much based on the company’s real value.

Value Investing

Bottom fishing is kind of like value investing. Value investors also look for stocks that are trading for less than the company is really worth. They study the company’s finances and business to figure out what the fair stock price should be. If it’s a lot higher than the current price, they buy the stock.

The idea is that other investors are wrong about the company. Maybe there was bad news that scared them, but it’s not as bad as they think. Or maybe the company’s business is just not fashionable or exciting to investors right now. The bottom fishers believe the stock price will go back up when other investors realize the company is better than they thought.

Risks of Bottom Fishing

Of course, bottom fishing and contrarian investing can be risky. Just because a stock price has gone down a lot doesn’t mean it will go back up. The company might have serious problems that the bottom fishers don’t realize or think are worse than they assumed.

A stock that keeps going down is sometimes called a falling knife. Imagine trying to catch an actual falling knife. You might grab the handle and be fine, but you also might grab the blade and get hurt. Likewise, bottom fishers might catch a stock at the bottom and make money when it goes back up, or they might get hurt financially if it keeps going down.

When Bottom Fishing Works

Bottom fishing tends to work better for investors who are patient and willing to hold a stock for a long time. The stock might stay low for a while before going up. It’s important to have done your research and be confident the company is a good one that’s just temporarily out of favor.

It also helps if the investor has a diversified portfolio. That way, if some bottom fishing stocks don’t work out, the investor doesn’t lose too much. They’ll have other investments that hopefully do better. Experienced bottom fishers often set a target price at which they’ll sell the stock, either to take profits if it goes up or cut losses if it goes down. That helps manage the risk.

Examples of Bottom Fishing

A famous example of successful bottom fishing happened during the 2008-2009 financial crisis. Most bank stocks crashed hard because investors were scared the banks would go out of business. They avoided bank stocks.

However, bottom fishers like Warren Buffett’s company Berkshire Hathaway bought lots of shares of big banks like Goldman Sachs and Bank of America when the prices were really low. They believed the banks would survive the crisis and the stock prices would eventually go way up again. They were right and made billions of dollars on those investments.

On the other hand, some bottom fishers thought certain risky mortgage bonds were good deals after the crisis because the prices had crashed. They overlooked that many of the mortgages were very likely to default. Investors who bottom fished for the riskiest mortgage bonds generally lost money in the end.

Spotting Bottom Fishing Opportunities

To be a successful bottom fisher, it helps to have good business knowledge. That can give you an edge in spotting companies that are actually better than most investors think and whose stock is a good deal. Following and studying a specific industry is one way to develop that kind of edge.

Some bottom fishers also look for stocks that have fallen steeply from their recent highs in a fairly short time, usually due to some bad news. The idea is that the drop may be an emotional overreaction and can reverse once the bad news passes. Generally the business has to be pretty healthy otherwise for this to work.

Stocks that have been falling for a long time often aren’t good bottom fishing candidates. Companies that stay out of favor for extended periods usually have real business problems depressing the stock. The low stock price could still be too high if the problems are severe enough or the business stops growing.