Bottom fishing is an investment strategy in which investors seek out securities whose prices have recently dropped and are considered undervalued.
How It Works/Example:
Investors that engage in bottom fishing, called “bottom fishers,” hunt for securities that they believe are undervalued in the market or that recently have experienced a significant price drop. If these securities are bought at what is effectively a discounted price, they will gain value and make a profit once the price recovers.
To illustrate, suppose a bottom fisher spots a stock whose price fell from $100 per share to $60 per share over two days. The investor researches the issuing company and finds no fundamental change for the drop in price, so he determines it was due to market forces. He buys ten shares for $600. Over the following week, the price steadily returns to $100 per share. The investor then sells the ten shares at this price, realizing a profit of $40 per share, or $400 total.
Why It Matters:
It is clear that bottom fishing is an attractive short-term strategy for boosting portfolio value or for making a quick profit during periods of volatility in the market.
However, bottom fishing can be risky since even the most experienced investors find it impossible to account for all factors that affect market prices. Also, it is not always possible to determine if a price decline results from investor behavior or from some fundamental change in the issuing company.
The presentation will explain you how buying fundamentally good stocks at right price and exiting in right time is the key to keep a portfolio healthy. Market volatility gives nth number of such opportunities. Getting 15% absolute return in 3-6 months is far more rewarding than getting 40% return in 2 years. We believe a good stock is one which gives you at least 15% return in 1 year, else its not worth keeping in your portfolio.