Chapter 7
THE TOP-DOWN METHOD
So if you’re bullish on Utilities, how much of your portfolio should you put in Utilities stocks? Twenty-five percent? Fifty? One hundred percent? This question concerns portfolio management. Most investors concern themselves only with individual companies (“I like my local electric utility, so I’ll buy some shares”), without considering how they fit into their overall portfolio. But we believe this is no way to manage your money.
In Part III of this book, we show you how to analyze Utilities companies like a top-down portfolio manager. This includes a full description of the top-down method, how to use benchmarks, and how the top-down method applies to the Utilities sector. We then delve into security analysis, where we provide a framework for analyzing any company, and then discuss many of the important questions to ask when analyzing Utilities companies. In the final chapter, we give a few examples of specific investing strategies for the Utilities sector.
INVESTING IS A SCIENCE
Too many investors today think investing has “rules”—that all one must do to succeed in investing for the long run is finding the right set of investing rules. But that simply doesn’t work. Why? All well-known and widely discussed information is already reflected in stock prices. This is a basic tenet of market theory and commonly referred to as “market efficiency.” So if you see a headline about a stock you follow, there’s no use trading on that information—it’s already ...
