In today’s session, we are going to talk about quantitative versus qualitative analysis of stocks, this should be an interesting go around. I know how I feel about this, but I am not sure how Andrew feels about this, but I have an idea, but I think this could be interesting. Phil Fisher was the creator of the term scuttlebutt investing, it was a method he used to gather qualitative information to help him in his investment process. He used it to great effect and it was integral to his success. This process is a little more difficult for the individual investor but some of the aspects of scuttlebutt investing can be added to anyone’s arsenal.
- Definition of quantitative versus qualitative
- What it means to be strongly quantitative
- The pros of quantitative analysis
- The advantage of utilizing both quantitative and qualitative analysis
- How biases can affect your thinking and investing
Andrew: Yeah, the guy who formulated the Value Trap Indicator, a quant-based system, obviously I might lean one way or the other. The way that I kind of look at and I think it is a little bit contrarian to what a lot of value investor that there is a lot of belief that you have to have a balance of quantitative and qualitative.
If we define that real quickly, for the beginners. Qualitative is talking about the aspects of the business that are more intuitive things like how skilled is management, where you perceive a trend as far as supply and demand. It is things that you can’t put a hard number on, but it still can have an effect on the business. So that’s qualitative and quantitative is everything that is strictly about the numbers, tangible data like assets, earnings, cash flow stuff like that.
So, I kind of want to hear your take on it, Dave, because I am all about the quant, I know there are guys like Phil Fisher, who wrote “Common Stocks and Uncommon Profits”, which was one of the first books I read about the stock market. He talks about a thing called “scuttlebutt” which is his way of using and doing qualitative analysis. He would go and talk to different executives at different companies that he was interested in, and try to get some information based on those kinds of conversations.
I think that Buffett tries to do the same as well. And I know guys like Jae Jun at Old School Value, I’ve interviewed him before and he talks about how there’s an art to value investing and you need to balance qualitative and quantitative. I don’t think there is a right or wrong answer and that is why we are having this discussion and having this episode, it is going to be interesting to see what the positives and negatives are of both methods and which one is better. Or should you try to merge the two?
Dave: That is a very good point. My thoughts on the battle of quantitative versus qualitative. I am going to say that I am a little more like Jae Jun, where I think I don’t know that I could necessarily put hard and fast rule number wise, 75 to 25 or 50/50 anything in nature. I know that Ben Graham, who we both admire quite a bit was definitely a quant, he was definitely all about the numbers. Warren Buffett who is one of our idols, he started off as a quant and he has merged through his life into a little bit more of both. And I think I probably fall a little bit more into that as well. [click to continue…]