Consider the following two reviews on someone’s LinkedIn profile.
“She is a very detailed oriented person and seems to miss almost nothing while combing through financial statements. On many occasions this skill of her in finding the small one liner red flags in the notes segment of the reports have played a crucial role in saving our firm millions of dollars”
“The ability to think big is what sets him apart. Our entry into the fintech space far ahead of other asset managers was mainly because he was able to figure out how much of a disruptive force this segment could be in our everyday lives”
These are both very rare and useful qualities to have. However, the challenge one phases is that the two can be very contradictory. If I am combing through thousands of numbers and footnotes, it is very hard to be able to focus on the big picture. But to be a great analyst or a top-notch Portfolio Manager we do need to have both these skills. Yes, there are funds which rely almost exclusively on bottom up research and I have also interacted with those who give a lot of emphasis on top down (otherwise equity strategists will be out of business altogether). But, in my view we should try to be good at both.
Easier said than done. I have personally struggled with both top down and bottom up at times (this is part of learning and getting experienced). Now what I try to do is what I like to call the “Zoom out – Zoom In” strategy. The essence of the strategy is that at a given time I will only focus on the big picture or the details but will not try to do both together. The key is to figure out when to focus on the broader issues and when to go into the details. Let me explain this with a hypothetical example.
Let’s say I am flying to Vietnam for the first time to find investment opportunities. Prior to going there I will be doing my homework on the country (more big picture) as well as try to find the interesting companies to meet. Once these names are identified I need to do a bit of homework on these companies (more detailed oriented work). Once on the ground when I am meeting with company XYZ for the first time, the ZOOM OUT strategy really kicks in. Its better to focus on the big picture things like strategic focus of the company, overall business model, regulatory structures, technological changes, targets for the next 5 years etc. Going into the nitty gritties of the financial numbers really does not make sense. The ZOOM IN part will come in when I come back to my country after having shortlisted the top 5 ideas (from lets say 20 companies). This is where I will really do the grunt work of modeling out the company, understanding the nature of the expenses, changes in historical margins etc.
As a warning, know that people have many different strategies. This is one that I have decided to use personally based on the weaknesses I found in myself. Someone else could be using a completely different approach.