A bottom-up manager is one who looks for stocks company by company. These are the classic "stock pickers," who don't care if a stock represents an airline or a drugmaker. If the stock meets their criteria, they go for it. This approach is the opposite of that of a top-down manager. These managers take a bird's-eye view of the economy. They try to select industry groups, and then stocks, that stand to benefit from the large trends they see. Regardless of their philosophy, portfolio managers employ ratios using financial statement data and market data to screen for potential equity investments. Fundamental decisions include:
Many studies have been done to determine the most effective accounting ratios for screening equity investments.
Backtesting is the process of testing a trading strategy on prior time periods. Instead of applying a strategy for the time period forward (which could take years), an analyst can do a simulation of his or her trading strategy on relevant past data in order to gauge its effectiveness. However, as frequently heard, "past performance does not necessarily guarantee future returns"; backtesting may not provide a reliable indication of future performance because of survivorship bias, look-ahead bias, or data-snooping.