Quantitative And Qualitative Analysis In Investing

What is qualitative analysis?

Numbers don’t always tell the whole story. For instance, they can’t tell us about a company’s work environment or how happy its employees are. Also, numbers can sometimes be tweaked to cover up big problems, like what happened in the Lehman Brothers crisis.

That’s why we need something more than just numbers. We need qualitative analysis. This method helps us understand the context behind the numbers by asking questions like “why?” or “how?”. The answers to these questions are often subjective, but they can provide valuable insights that make the numerical data more trustworthy.

Say you’re considering investing in an airline that has reined in costs, beat earnings estimates in three consecutive quarters, and plans to buy back shares. When you try to actually use the airline, however, you find the website bug-ridden, the customer service representatives cranky, the extra fees petty, and your fellow passengers resentful. The negative experience tells you that the company has a lack of priority for its customers and to be careful making an investment in the airline.

So in a nutshell Qualitative analysis in investing is a method that focuses on the intangible, non-quantifiable aspects of a company to evaluate its value and potential for investment¹

Understanding the Company: Imagine you’re considering buying a restaurant. You wouldn’t just look at the restaurant’s financial statements. You’d also consider the quality of the food, the service, the location, and the restaurant’s reputation. These are all qualitative factors. Similarly, in investing, analysts look at factors like the company’s business model, the quality of its management team, its competitive advantages, and its market reputation¹1.

1. Assessing Non-Quantifiable Factors: Just like how the ambiance of a restaurant can impact its success, certain intangible factors can significantly affect a company’s performance. These can include customer satisfaction, employee morale, the company’s ethical standards, and more¹1.
2. Making Investment Decisions: Based on this qualitative analysis, investors can make more informed decisions. For instance, a company might have strong financials, but if its customer satisfaction is low, it might not be a good long-term investment¹1.

Remember, while quantitative analysis focuses on hard numbers, qualitative analysis considers the “softer” aspects of a company. Both are important for making well-rounded

What is quantitative analysis?

Imagine you’re planning a road trip. You want to make sure you choose the best route, so you start collecting data like how many routes are there? which mode is fastest and comfortable? what will be the cost in all those alternatives?. This is similar to how quantitative analysts collect financial data.

1. Data Collection: Just like how you might look at distance, traffic, modes of transportation  and weather forecasts for your trip, “quants” gather data like stock prices, company earnings, and economic indicators to make informed and profitable investment decision.
2. Data Analysis: Next in quantitative analysis , you’d analyze this data to plan your route. Maybe you use a GPS or a mapping app to find the fastest route given current traffic conditions. Similarly, quants use mathematical models and statistical techniques to analyze financial data. They’re looking for trends and patterns that can help predict which investments will perform well.Quants use various tools like regression analysis and monte carlo simulation to find desired results.
3. Decision Making: Based on your quantitative analysis, you choose your route for the road trip. In the same way, the results of quantitative analysis can help investors decide where to put their money to get the best returns.

But remember, just like how a sudden road closure or bad weather can affect your trip, unexpected market events can impact investment outcomes. That’s why investors often use a mix of quantitative and qualitative analysis to make their decisions.