Qualitative Versus Quantitative Investment Analysis

Coming from a background more rooted in words than numbers, I naturally tended to dissect businesses qualitatively. Yet, from the beginning it was impressed upon me—and it continues to be reinforced—that in investing, numbers often speak louder than words.

Due diligence is essential, but what exactly should an investor be looking for? Of course, factors like the business model, competitive “moats,” and corporate governance all carry weight. Both the qualitative and quantitative angles matter and contribute substance to an investment decision.

The difficulty with qualitative analysis is that try as you might, the assessment on investment potential targets tends to be subjective.  How will you decide if a business is economically dominant in its industry, or has good managers?  What is the significance of any given business model?

How do you put a price tag on such matters, when its value is all in the eye of the beholder?

Indeed, when it comes down to it, the accounts and financial statements are the most critical documents. With the right auditors, an independent audit committee, and strong internal controls in place, these reports provide the foundation of trust and analysis.

It is vital to know your facts and figures. Much of your time should be spent carefully reviewing the balance sheet, income statement and cash flow statement —probably in that order.

In the end, numbers make or break a company. And as the old saying goes, the devil is in the details.

I recommend the following Kindle book for financial statement analysis.  If you would like to read reviews about the book and may consider buying it, click here.