Top-Down Investing – a practical example

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Top-down investing is a is an investment approach that involves looking at the overall picture of the economy and then breaking down the various components into finer details. After looking at the big-picture conditions around the world, analysts examine different industrial sectors to select those that are forecast to outperform the market. From this point, they further analyse stocks of specific companies to choose potentially successful ones as investments[1].

To many regular investors this might sound very complicated and difficult to achieve without using advanced analysis and statistical tools. In reality the analysis could be made as complex or as simple as one likes, as long as the overall results and assumptions taken make sense. Complexity does not necessarily mean that one has a better end result. This post aims to give a practical example that is easy to follow of how top-down investing works. It also goes on to mention some specific equity ideas. The end result will give some real examples of equities one can buy in order to increase exposure to the crypto-currency world which is very interesting but also very risky to buy into directly.

The US Economy

Since the focus of the exercise is to arrive at equities that a regular investor can easily get access to it made sense to focus on US equities. As the focus is on US equities then the starting point is the US economy. The US is considered to be a consumer driven economy meaning the economy is dependent mainly on consumer spending. The gross domestic product (GDP) of a country measures the market value of all final goods and services produced by an economy over a particular period of time. If we look at the GDP of the US we find that around 70% is made up of consumer spending. The other 30% or so is made up of Government Spending, Business Spending and Net Exports of the country (Export less Imports) combined.

As the economy is continuing to show signs of growth and the economy is so dependent on consumer spending one could easily arrive at the conclusion that consumer spending is expected to keep growing. Hence, the next step in the link is to find ways of investing into equities that are somehow exposed to consumer spending. That is quite a big list since many companies service regular consumers. Thus, one would need to narrow down further to find more specific entities to invest into. Moreover, two companies might be involved in the production of the same goods/services to the same type of consumers but still perform differently. If consumer spending increases the entire sector should improve, but not each company will benefit equally and not each company is in the same shape – thus other factors also need to be considered.

Refining the Selection

So, let us now add something else to the mix. There has been a fair share of hype on the crypto-currency universe, especially in the last year or two – see my previous post relating to this here. Many investors would like to invest into this world but are not comfortable with the direct instruments available due to the high volatility and high risk involved. So how can we combine the analysis we discussed above on consumer spending and the exposure to crypto-currency investing – the answer: by looking at equities that are exposed to both sectors.

A prime example are the payment service provider firms such as Visa and PayPal Holdings. Whether you buy online, buy at the supermarket, travel abroad or simply ride a taxi you could easily pay for your goods or services through one of these payment companies. Furthermore, when buying crypto-currencies people can use these same companies to convert from their hard currency (U

SD, Euro…) to the respective virtual currency such as Bitcoin, Ethereum and others. Just to get an idea of the amount of transactions that are processed by such companies, PayPal is said to handle 193 transactions per second which translates into 16.7 million transactions per day. When it comes to Visa the figures are even more great, reportedly 24,000 transactions per second which translates into over 2 billion transactions per day.

The Bottom Line

Therefore, starting from the analysis of the US economy and working our way down we have arrived at examples of equities that a regular investor could easily invest into. It goes without saying that one should not simply go and buy a bunch of shares of the two companies mentioned and one should always seek professional investment advice to ensure that the investments they are considering are suitable for them. The author held positions in the equities mentioned at the date of publication which may be sold off without notice.





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