Bottom Fisher and Tactics

What is a Bottom Fisher?

A bottom fisher is an investor who looks for bargains among stocks whose prices have recently dropped dramatically. A bottom fisher is optimistic about buying these low-priced stocks because they believe that a price drop is temporary or is an overreaction to recent bad news and a recovery is soon to follow.

Understanding the Bottom Fisher

A bottom fishers may attempt to find stocks that the market has undervalued through fundamental analysis. Or an investor may simply view a recent price decline in the stock as too aggressive and therefore they buy the stock thinking it will recover (higher) soon.

Bottom fishers tend to be more active during a prolonged bear market where there may be stocks getting hammered lower through panic selling. When the market is dropping, or even plunging in a major way, many stockholders get nervous and impulsively rush to sell, wanting to unload their stocks so quickly that they are willing to accept virtually any price.

For the bargain-hunting investor, this is the chance they have been awaiting. They are eager to pounce on this opportunity, and swoop in to buy at low prices.

While a bottom fisher may pick up some good deals and make money, they are also trying to catch a falling knife. While an asset may have fallen a long way, or look good fundamentally, if other investors don't buy it, and instead keep selling it, the price will continue to drop. Sometimes others know something the bottom fisher does not.

Bottom fishers need to do a lot of research, or follow sound technical or statistical patterns, in order to profit from buying declining assets.

Bottom Fishers Profit From Other Investors’ Panic

Bottom fishers are hungry for good deals. If in fact it is a good deal, it comes at the seller's expense. The sellers unload at low prices, and the bottom fisher buys up the potential deal.

Unfortunately for the bottom fisher, it's difficult to tell the difference between a bargain and a stock that has fallen for a fundamental reason. It is smart for these deal-seeking investors to do research and try to determine the factors that led to the price drop. They can then decide if the stock is likely to rebound in the near future or not.

For those bottom fishers who are not knowledgeable enough about the market or savvy enough to research the particular companies whose stocks they are considering, this type of investing strategy can be like rolling the dice. There is the potential for big returns, but there is also a good chance that the stock may continue to do poorly.

Bottom Fishing Tactics

There are many unsuccessful bottom fishers. The successful ones use a strategy. The strategy they use varies, yet put the odds in their favor. It could be fundamental, statistical, cyclical, or technically based.

Fundamental bottom fishers may look for stocks that are trading at low price-to-earnings (P/E) ratios compared to prior readings. They may also look for favorable price/earnings-to-growth (PEG) readings which may show whether a stock is priced favorably based on the company's future earnings potential.

Technical traders may look for patterns that price is bottoming and starting to turn higher, such as an inverse head and shoulders, a rounding bottom, double bottom, or cup and handle reversal.

Example of Bottom Fishing in the Real World

Macy's Inc. (M) commenced a long-term price decline in 2015. There were several times bottom fishers may have been lured in. They may have been able to capture short-term profits on rallies, but ultimately the price kept dropping.

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The first inverse head and shoulders was quickly followed by lower prices.

The second inverse head and shoulders saw the price rally for about 6 months before succumbing to selling pressure once again. There were also a triangle pattern than broke to the upside, but then fell shortly after.

Some stocks do turn around and head higher, but others do not. Bottom fishers require stop losses to help control their risk in the event the stock they buy — hoping its a good deal — keeps falling.

What is the Difference Between Bottom Fishers and Momentum Investors?

These two strategies lie on opposite ends of the spectrum. Bottom fishers attempts to buy near the bottom after the price has fallen. Momentum investors buy as the price of the asset is rising, assuming that the rise will continue.

Limitations of Bottom Fishing

Bottom fishing can be done successfully, but it is often referred to as catching a falling knife. People who attempt bottom fishing must have discipline to cut losses when the price doesn't reverse as expected. They also must have a sound method for determining when an asset could stop falling and start heading higher.