How to analyze from bottom to top and become an expert with a winning edge?

Viewed 1517

How to do bottom-up analysis in stock trading? We can take a look at how Bernard Oppetit does it, which has implications for us in forex trading. With this type of analysis, we can understand the underlying causes of price fluctuations in forex trading. Don't get obsessed with technical indicators. Because technical indicators always lag behind price fluctuations in forex trading. Technical indicators can also be blunt. Technical indicators will not be sensitive to future price movement trends in Forex trading.

Bernard Oppetit especially emphasizes that the main target is individual companies, he studies a company and becomes an expert on it. The opposite strategy is to analyze from top to bottom, starting with national policies and industries, and then individual companies.

Oppetit spends countless times researching trading targets, striving to master the mentality of the company's management, shareholders, employees, banks, creditors, debtors, and stock traders. He calculates the possible developments and stock price reactions. By cutting in from this angle, he directly collects information and naturally has a better chance than those analysts who rely on second-hand information.

Case study: Northwest Airlines

"In 1993, we intervened in Northwest Airlines. The company had a financing and acquisition event in 1989. Then, the entire aviation industry fell into a serious recession, with total losses of tens of billions of dollars, and Northwest Airlines' performance plummeted. From the balance sheet, Northwest Airlines had a high bank debt at that time, but the number of bonds issued was very limited (if I remember correctly, the total debt was about six or seven billion dollars, except for 500 million dollars of bonds, the rest were bank debts)."

"Due to the short-term difficulties, the company threatened to go bankrupt. The company's senior management negotiated with the bank group, employees, and suppliers, and the company's attitude was very tough as long as the negotiating opponents would suffer from Northwest Airlines' bankruptcy."

"Northwest Airlines began to win some concessions. The bank agreed to cancel the interest fee and increase the valuation of the collateral, and Boeing also agreed to delay the delivery of the aircraft payment."

"To achieve these major results, Northwest Airlines put on a posture of imminent bankruptcy. Every day, they always said through the media: 'We are going to declare bankruptcy'. This was also the reason for the continuous decline in the company's bond prices. In the end, the bond price of one dollar face value was only 10 cents."

"According to my analysis, the company could not go bankrupt. I think this was all a scare tactic. Of course, this tactic was very beneficial to the company, forcing the negotiating opponents to give in. For us, there was no point in trading bonds, because the scale was too small."

"So, we started buying Northwest Airlines' debt. Of course, the result could also be very miserable, but I believed that the odds were higher. In short, we determined that Northwest Airlines was playing a scare tactic."

"Once the negotiating opponents gave in, everything miraculously returned to normal. The company began to announce some beautiful data, the bond price rose to par, and we also made four or five times the profit. Later, the company went public and its performance was still very good."

"The whole transaction involved a lot of fundamental analysis. Modern fundamental analysis requires dynamic research, especially when encountering such special situations."

"European Disney is another very similar case, at that time, there was a kind of European Disney convertible corporate bond circulating in the market: when they encountered trouble, just like Northwest Airlines, they made all kinds of noises through the media, rendering the severity of the situation."

"They played with banks, shareholders, and everyone, but did not touch the bonds, and the development of the whole event was the same, including our profits."

"In the case of European Disney, the bonds were convertible, belonging to derivative trading tools. Perhaps it was for this reason that we had the opportunity to grasp the trading opportunities of price chaos because many derivative product traders were not familiar with the underlying securities, and the underlying securities traders were not familiar with derivative tools. If you understand both aspects at the same time, you can gain an advantage."

"Deep strategic thinking can make you see things that others can't see and profit from it. Of course, the situation may not always be the case. An event may not have information or hidden issues that everyone ignores."

"In addition, hard work may not necessarily make you have a special insight. Special insights need to be cultivated through experience. Tracking the development of companies through media reports is a good way to accumulate experience."

  • Understand all the players, and pay attention to their words and deeds. The so-called players are those who have an undeniable influence, including groups, for example, unions may be important players.
  • Understand what they should say for their interests; or, what benefits their words may bring. What is the motivation? What are the hidden issues? As long as it involves interests, any talk cannot be taken lightly.
  • Who is the biggest loser?
  • Who is the biggest beneficiary?
  • For each interest group, what are the best, second best, and third best outcomes they hope to happen?
  • Where are the focus and influence of each interest group in manipulating the development of events?
  • How will each group react to each outcome? If someone does this, how might others react and what might happen next?

Thinking about corporate events in this way is a skill that takes time to cultivate. But it can also add interest to trading.

Finally, please remember that for Oppetit, the price is driven by corporate events, and corporate events are shaped by some powerful people. Power means influence.

Therefore, in the causal relationship of the whole price change, you should first consider: "Who has influence?" Remember that for a certain company or specific situation, many people have influence. Always keep an open mind and an objective position.

As Oppetit described in the story, the market is often a game of power. The case of Northwest Airlines involved many people, including banks. Power and influence are constantly flowing, which makes it more difficult and interesting for you to track corporate events.

The above analysis gives us an understanding of the deeper causes of stock price volatility. We can use this logic to analyse the underlying causes of price volatility in forex trading. This is not an international fundamental analysis. It determines the basic dynamics of the future direction of the price of a currency pair. Technical indicators reflect prices that are only temporary.

For example, when the RSI technical indicator is overbought the price of the currency pair does not necessarily fall, but rather there is a strong consolidation, only a small decline, and then the price of the currency pair in Forex trading rises sharply again. Therefore, our understanding of the underlying causes of such price fluctuations can improve our performance in Forex trading.

0 Answers