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One of the most popular styles of investing is top down investing. It is a logical and systematic approach to investment and it can produce great result if done properly. Here are the basics.

Start with an idea!

You can start with an investment thesis or a general economic idea that you believe in. For this example, we can assume that we believed in the growing wealth of the Chinese population. This might be because we believe that the Chinese as a nation would continue to grow and prosper for many more years to come. With the growing wealth, we can then narrow our search further. We might be interested in the growing affluence of the Chinese people and the need for them to spend more on luxury items. This will narrow our search again to focusing only on luxury related companies.

Maybe we want to just focus in one segment of the luxury sector; we can choose to look only into the watch industry. We will only end up with a handful of companies to look at after this short exercise. In the watch industry that is traded on the Hong Kong Exchange that focus in the Chinese market in particular are

1)      Hengdeli Holdings (3389: HK)

2)      Emperor Watch and Jewellery (887: HK)

3)      Stelux Holdings (84:HK)

4)      Oriental Watch Holdings (398: HK)

5)      Sincere Watch (444: HK)

6)      Time Watch Investments (2033:HK)

A top down approach can help us narrow down our search for investment very rapidly. Imagine having to look through thousands of companies to look for one you are interested in buying compared to looking only at 6.

Risks Beware!                         

However, this method is not without risks. The main and most obvious is you might be wrong on your “Big Idea”. For our example, maybe in the next 20 years, the Chinese population will not enjoy a growth in wealth. Maybe the country faced some crisis such as war or revolution and the country fall back in its economic cycle. It seems unthinkable now, but such situations have happened again and again in history, in China, in Germany, in Russia and many more countries.

Secondly, there is also a risk that knowing the overall trend might not help us in picking the right company. For example, since the discovery of the automobile, the growth of the industry has been tremendous. However, it will be extremely hard for any investors to pick the winning automotive company at the beginning. The auto industry in the USA consolidated from hundreds of companies down to three and all three are not extremely competitive in the global arena currently.

So as an investors, we must always know what we know, but more important, always know what we do not know.

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All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim owns shares in Hengdeli Holdings.

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