If fund managers have heard about the way in which to invest, you know a large number to take a top-down approach. First, decide how much of their portfolio allocated to stocks and how much to allocate to bonds. At this point, you can even decide on its mix of domestic and foreign. Next, decide on which industries to invest in. It is not until all these decisions were made that actually fall for analyzing any particular securities. If you think logically about this approach, but for a moment, recognize how silly it really is.

A set ’s earnings yield is the inverse of its P / E ratio. Thus, a stock with a P / E ratio of 25 has an earnings yield of 4%, while a stock with a P / E ratio of 8 has an earnings yield of 12.5%. In this way, a low P / E stock is comparable to a high? Bond yields.

Now, if these low P / E stocks had very unstable earnings or carried a large amount of debt, the spread between bond yields in the long and the gain performance of these stocks may be justified. However, many low P / E stocks actually have more stable earnings higher than their relatives. Some take a lot of debt. However, within recent memory, one could find a stock with an earnings yield of 8? 12%, a dividend yield of 3-5%, and literally no debt, despite some of the lowest bond yields in half a century. This situation could happen only if investors shopped for their bonds without also considering stocks. This makes as much sense on shopping, as in a van without also considering a car or truck.

All investments are ultimately cash to cash operations. As such, they should be judged by one measure: the value of their future cash flows. For this reason, a top-down approach to investing is nonsensical. Starting your search from the start to decide the form of security or the industry as a chief executive to decide on a left or right hand pitcher before evaluating each individual player. In both cases, the choice is not merely hurried, but ’s false. Even if pitching left is inherently more effective, the general manager is not comparing apples and oranges; he ’s comparing pitchers. Whatever inherent advantage or disadvantage exists in a pitcher ’s handedness can be reduced to a final value (eg, run value). For this reason, a pitcher ’s handedness is only one factor (among many) to be considered not binding on the choice be made. The same applies to the security module. It is neither more nor need more logical for an investor to prefer bonds over all stocks (or all retailers over all banks) than it is for a general manager to prefer all lefties over all righties. You needn ’t whether stock or bonds are attractive, you need only to determine whether a particular stock or bond is attractive. Similarly, you needn ’t determine whether he “t market? It is undervalued or overvalued, you need only determine that a security is undervalued. ’r and if it is convinced, buy it? Market be damned!

Clearly, the most prudent approach to investing is to evaluate the safety of every individual in relation to all others, and only to consider the form of security with respect to each evaluation. A top-down approach to investing is an unnecessary obstacle. Some very smart investors have imposed on them and overcome, but there is no need to do the same.

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