Imagine you are a fisherman. To catch the most fish, you need three things to go right:

  1. You need a calm, fish-rich ocean (The Economy).
  2. You need to find the specific school of fish (The Industry).
  3. You need the right bait to catch the biggest fish in that school (The Company).

This analogy describes the Top-Down Approach to investing, formally known as the EIC Framework (Economy - Industry - Company). Most retail investors skip straight to the "Company" part. They buy a stock because they like the product, ignoring the fact that the industry is dying or the economy is entering a recession. This module teaches you how to analyze the big picture before narrowing down to specific stocks.

Step 1: Economic Analysis (The Ocean)

A stock does not exist in a vacuum. It floats in an ocean of macroeconomic forces. If the economy is crashing, 90% of stocks will fall, regardless of how good their balance sheets are. This is why "a rising tide lifts all boats."

As an investor, you must monitor three key dashboard indicators:

GDP Growth
Is the economy expanding? High growth leads to higher corporate profits. Recession leads to defaults.
Interest Rates
The "Gravity" of finance. High rates make borrowing expensive, hurting profits and lowering stock valuations.
Inflation
The silent thief. High inflation increases raw material costs for companies, squeezing margins.

Example: In 2022, global interest rates rose sharply to fight inflation. Even great companies like Google and Amazon saw their stock prices crash by 30-40%. Why? Because the "Economy" layer turned negative. If you had ignored the E-factor, you would have lost money holding great companies.

Step 2: Industry Analysis (The School of Fish)

Once you determine the economy is stable, you must pick the right sector. Not all industries perform well at the same time.
• Cyclical Industries: Steel, Auto, Realty. They boom when the economy booms and crash when it slows.
• Defensive Industries: Pharma, FMCG (Food/Soap). People buy medicine and soap even in a recession.
• Sunrise Industries: New, high-growth sectors (e.g., Green Energy, AI).
• Sunset Industries: Dying sectors (e.g., Coal, Landline Phones).

The Industry Life Cycle (S-Curve)

Every industry goes through four phases. Your strategy must change depending on where the industry sits on this curve.

The Industry Life Cycle

Pioneering Rapid Growth Maturity

Pioneering: High risk, no profits (e.g., Flying Taxis).
Growth: Sales exploding, players fighting for share (e.g., EVs).
Maturity: Stable profits, dividends, consolidation (e.g., FMCG).

Porter's Five Forces

To judge if an industry is attractive, use Michael Porter's model. An attractive industry has high barriers to entry and low competition.

Threat of New Entrants

Is it easy to start a rival business? (e.g., Airline = Hard; Website = Easy).

Supplier Power

Can suppliers dictate price? (e.g., Intel has power over PC makers).

Rivalry

How fierce is the competition among existing players?

Buyer Power

Can customers negotiate? (e.g., Walmart dictates terms to suppliers).

Threat of Substitutes

Can another product replace it? (e.g., Zoom replacing Airlines).

Step 3: Company Analysis (The Bait)

Only after you have identified a growing economy and a strong industry should you pick the specific company. This is where you look at:

  • Financial Statements: Is the company making money? (Covered in Modules 5-7).
  • Ratios: Is it efficient? (Covered in Modules 8-10).
  • Qualitative Factors: Who runs the company? (Covered in Module 3).
The Top-Down Advantage: By filtering for the Economy and Industry first, you avoid "swimming upstream." Even a mediocre company in a booming industry (like Internet in 1999 or AI in 2023) can give 10x returns. A great company in a dying industry (like the best Typewriter maker) will likely give zero returns.

Summary of Module 2

Successful investing requires context. The EIC framework forces you to look at the forest before you look at the tree.
1. Check the Economy (GDP, Rates, Inflation).
2. Check the Industry (Life Cycle, Porter's Forces).
3. Check the Company (Financials, Management).

In the next module, we will start the Company analysis by looking at the things you cannot calculate on a calculator: Qualitative Factors & Management Quality.