The Power of Qualitative Analysis in Investing

During their recent episode, Taylor, Carlisle, and Ardal Loh-Gronager discussed The Power of Qualitative Analysis in Investing. Here’s an excerpt from the episode:

Ardal: So, taking the question slightly broader. So, on a quantitative analysis, I think we’re all looking at the same information or data set. So, that’s why I just don’t think you can have very much of a differentiated view, if you’re only doing a quantitative analysis of a business. Because one person’s analysis to another when using the same information is going to be relatively similar, depending what assumptions you make in your DCF or calculations of the like.

But I think from a quantitative– sorry, a qualitative perspective, so here, we’re trying to look at the business overall and the numbers behind it. So, here, we’re talking about industry analysis, competitor analysis, management analysis. They’re all the softer factors that are much harder to quantify. I think that’s where your insight and your own experience, as an investor, which is my journey, is what I chronicle in my book, that’s where it gives you the Insight into a business that other people might not be able to see. You’re able to perceive a destination that others cannot see with the same information.

I think that comes to qualitative judgments. That’s where every individual investor has a different internal scorecard, whether they recognize it or not. And that circles nicely back to cognitive and behavioral biases. We’re all a product of our own upbringing, whether it be nature or nurture. Those fundamental life experiences, I think, form our own investment philosophies. I think how we apply those and how we understand ourselves is what enables us to make successful determinations about whether a stock is going to be a good long-term investment or not.

That’s why I think the journey that I went on through the book, which was essentially it was a target market of one, it was just myself, because I think at its heart, you have to understand your own strengths and weaknesses, you have to understand your own past mistakes and your own successes, because you don’t want to repeat the mistakes, and obviously, you want to amplify the successes. So, to do that, you really have to understand your own nature. I think that that comes down to an understanding of your cognitive and behavioral biases, and that is what influences your answers when you do a qualitative analysis of a business to differentiate your view from others in the market.

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