When doing your due diligence on any particular investment it’s best to understand the difference between Qualitative and Quantitative analysis and which makes sense for you.
The Need For Analysis in Investment
Successful investing is reliant on the collection and interpretation of data about potential investments. Without the collection and interpretation of information, investment is nothing more than gambling. With that said, collecting and interpreting data about potential investments is much easier said than done, not least because there is an overwhelming number of factors that can exert influence over the outcomes of investments.
What is Data?
Data about potential investments can be separated into the qualitative and the quantitative. Qualitative data refers to descriptions of the potential investment’s qualities. For example, information about the backgrounds and experiences of a corporation’s top leadership can be considered qualitative. In contrast, quantitative data refers to figures for the potential investment’s measurable quantities. For example, that same corporation’s revenues and expenses over the last month would count as quantitative data. The easiest method for separating the qualitative from the quantitative is remembering that the latter can be expressed using numbers.
Quantitative vs Qualitative Strategies
Investment analyses are conducted using both qualitative and quantitative data. As a result, it should come as no surprise to learn that there are strategies out there based on both qualitative and quantitative data.
One example of qualitative strategies in action is picking corporations to invest in based on whether it has a sensible plan for making a profit or not. This means examining the corporation’s products and/or services, examining whether there is interest in those products and/or services, and examining whether the corporation can provide them to the right people. Failure to consider these factors was partly to blame for the DotCom Bubble, which saw stock share prices build and build because investors were falling into a herd mentality. As a result, many of them bought shares in corporations even though they knew nothing about what those corporations produced and how those corporations planned to make a profit.
In contrast, quantitative strategies tend to be about picking investments based on a set of measurable characteristics that existing evidence suggests to lead to profitability. For example, a particular simple quantitative strategy might be based on the efficiency with which a corporation uses its resources to make a profit, which can be gauged using the Return on Equity and similar measurements. More sophisticated quantitative strategies will make use of many more measurable quantities related to just about every aspect of the investment being analyzed.
Based on this, it is clear that both qualitative and quantitative strategies have their advantages. For example, qualitative strategies can cover factors that quantitative strategies cannot express using numbers, but run into the problem of admitting human bias into the process. As a result, both have something to offer to the investor.
How Quantitative and Qualitative Strategies Can Complement Each Other
In the end, qualitative vs quantitative is something of a moot issue. Using one does not conflict with using the other. Furthermore, neither a qualitative nor a quantitative approach to investment analyses can create a complete picture of an investment’s future prospects. Instead, smart investors will take care to investigate potential investments using both qualitative and quantitative data so that the weaknesses of one can be covered using the strengths of the other. Simply put, this is the approach that is most likely to lead to investment success.