Definition of bottom fishing’
Bottom fishing is the process of investing in assets that have experienced a decline due to internal or external problems. And fishing on the Donk trader or investor presumes that the depressed price of the asset is temporary and the price will recover to become a good investment over time, based on technical or fundamental analysis.
Penetration bottom Fishing’
Bottom fishing can be a risky strategy when asset prices are reasonably depressed or cunning strategy when asset prices are traded with absurdly low estimates. Many famous investors such as Warren Buffett and Benjamin Graham, had made their fortunes on the acquisition of assets that are traded at low valuations relative to their internal evaluation and is waiting for assessments to restore to normal levels.
Examples of bottom fishing include:
- Investing in the shares of the aluminum company when aluminum prices are depressed.
- Buying shares of container shipping companies during economic depression.
- Investments in the print media of the company, when placing of such companies.
- The purchase of shares of the Bank during the financial crisis.
In each of these cases, it is not clear when or if the share price will recover, although arguments can be made in any direction. Investors who bought Bank stocks during the financial crisis of 2008 generated significant profits, while investment in the print media, the company can receive a loss because the industry has not yet managed to fully recover from increasing competitive pressure.
Fishing On The Donk Strategy
Fishing on the Donk attractive because of the greater profit potential in relation to fairly valued or overvalued assets.
Most popular fishing on the Donk strategy is called investing. Looking at the coefficients, valuation and forecasting of future cash flows, value investors are focused on identifying opportunities where the market may be MIS-pricing of assets. A great example of a company that went through a bad quarter due to supply problems and have experienced a significant decline. Value investors can determine that this incident was an isolated one and to buy shares in the hope that it eventually recovers to trade estimates, which are more in comparison with their peers.
Many traders use technical analysis to identify oversold stocks that may be attractive for bottom fishing. For example, a company may report lower-than-expected quarterly financial results and experience a significant decline in prices. Traders may notice that the pressure starts to subside and decided to take a long position to cash in on short-term rebound. Often times, these traders can use technical indicators that will be useful in determining if the security is oversold or look at candle patterns or schedule to make such conclusions.