Businessman Investor

Touching base with the rational business psyche of stock market investors

Tuesday, October 28, 2014

Quantitative versus Qualitative Approach in Stock Market Investing

Quantitative comes first. What's the point anyhow in
exhaustively delving into the qualitative aspect of the
company only to learn it's not even fundamentally earning
money consistently as a business?
Quantitative always comes first. Why? Because I don't want to waste my time going through the qualitatives of a company only to learn eventually, when I'm doing the quantitative part already, that its math doesn't add up, i.e. it's not a profitable business at all, not making any money consistently. What's the point, right?

First and foremost, why one is investing in the first place is to garner rates of return, and as a rational investor, it's only right to be conscious and aim for this. Only when do the numbers add up that one should start delving into the qualitatives of the company. Don't get me wrong. Looking at the qualitative side is important. I would say it's an important factor in mitigating risk. Because, personally, for me, while financial institutions would equate risk to volatility in order to quantify/measure it, i.e. the more volatile an investment is, the riskier it is--I am still a firm believer that volatility doesn't define risk (although I would agree that put into the more appropriate context, volatility indeed can be a risk factor).

Risk in general is the factor of uncertainty. Risk exists because of the fact one doesn't know what he's doing. Or put into the context of investing: if you're investing or trading on something you don't know, then that indeed is risky. Thus, going back to qualitative approach, if you do indeed know that a company is good because it has been consistently profitable throughout the years, starting to ask the question "why is it profitable?", and finding the answers to that will indeed further mitigate risk. Why has the company been profitable? What makes it competitive in its industry? What has it been doing right? Who is the management? How is management running the company? How has its culture helped it succeed? There's many questions you can definitely ask indeed. The qualitatives simply validate the quantitatives, and that holistically mitigates risk. To further demonstrate why doing some "qualitative homework" also helps, let me ask you: let's say you discovered two equally competent/profitable companies: Company A is in a heavily regulated industry that is about to be negatively impacted by an upcoming new government regulation. Company B, on the other hand, is a very popular beer company, almost akin to how Coke is to pop/softdrinks. Which between the two do you think you'll be investing your money into, and which one is riskier?

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The information presented here is for educational purposes only. Under no circumstances should it be construed as a recommendation to buy, sell, or hold any stocks. If you choose to use this information, you do so at your own risk.

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