The Problem With Being Qualitative

Qualitative analysis forms an important component of the analysis process however it should not be the start point. The problem with the qualitative factors is that there is no measurable way to determine just how much each factor is worth to the overall investment value. Adding to this, it needs to be asked just how much of the qualitative facts are already factored into the current price. This is impossible to accurately say.

One of the real problems with qualitative (as compared to quantitative) analysis is that an accurate appraisal can only be given after taking in all the influences on the business. In reality, this may prove to be impossible due to the unpredictability of everyday life and the lack of accurate comparators between different opinions. Quantitative analysis on the other hand takes given, measurable inputs to help evaluate any given model. By comparison, these inputs are far simpler to digest and model than what can be provided by qualitative factors alone.

Quantitative data is easier to obtain, easier to measure and compare, and there is less of it. Once the thorough quantitative analysis has been done can a qualitative analysis really only take place. In all cases of investment, an investor is looking to measure the value of an investment in way that can be compared and easily understood.

In fact, the numbers can probably tell a lot about the qualitative factors of a business. A good example of this is companies that have demonstrated a high return on capital over a number of years (long term). This is probably quite a good indication of a business that has some sort of competitive/strategic advantage over its competitors. Could a qualitative analysis show this? Most likely but it would not show the magnitude of the advantage. This is where I think many people go wrong. They attach too much to the qualitative factors without taking into consideration that these factors are already in the numbers contained within the accounts.

So where does the qualitative come on? One answer may be that they can be used to help gain understanding of how the situation could change going forward. How durable is the advantage and where will it come from in the future? What is management trying to achieve and are their ideas workable? What could destroy the advantage? Only when taken in this context does qualitative analysis begin to be useful for investment. Moreover, in many cases it is pretty difficult to put any value on the qualitative factors above and beyond what you've read in the financial statements.