Both qualitative and quantitative analysis are important when we’re talking about long-term intelligent investing. But what’s the difference anyway? And which should you choose?

In this article, I will answer exactly these two questions.

More specifically, I will:

  • Explain what qualitative and quantitative analysis are about
  • Outline the main similarities and differences
  • Recommend you which you should choose based on your goals

Sounds good?

Let’s start then!

What Qualitative Analysis is About

Qualitative analysis is all about analyzing the aspects of a company that cannot be measured (qualitative factors).

Anything from customer loyalty to managerial competence falls into the category of qualitative factors. A few other examples would be:

As you can see, qualitative analysis is concerned with information that cannot be measured using metrics and calculations. There are, however, some exceptions to this rule.

For example, shareholder-friendliness which is about how much managers care for the shareholders can be assessed by also looking at how many shares the managers buy back and how many options are exercised per year.

But more often than not, qualitative analysis is about looking at information that doesn’t involve numbers, such as the customers’ opinions, the relationship between employees and managers, etc.

Generally speaking then, there’s a lot of guesswork involved. It is more of an art than science and it definitely relies much on the analyst’s experience regarding business.

What Quantitative Analysis is About

Quantitative analysis is about analyzing companies based on their financial statements and it helps you assess a security’s value based on objective information.

Quants (as the quantitative analysts are often called) like to examine the balance sheet of a company to how it is financed, what kind of debt it carries, how much cash, etc. They also go through the income statements to understand how profitable a company has been, using various metrics to interpret the information.

Based on that, you could say that quantitative analysis is more of a science than art and it’s more difficult for people to interpret the data they use differently. But many investors happen to have different interpretations of financial statements based on their experience and what they are most concerned about.

Qualitative Analysis vs Quantitative Analysis?

So, what is the difference between qualitative and quantitative analysis?

After understanding what the two kinds of analysis are about, it’s pretty easy to see the differences. But for the sake of clarity let’s outline them:

  • Qualitative analysis tries to figure out a company’s value based on fundamental elements of the business, while quantitative analysis does that by interpreting objective information like financial statements
  • Qualitative analysis may require talking to managers, customers, and vendors while quantitative analysis doesn’t require you to go much further than reading a company’s financial statements
  • Qualitative analysis relies on the analyst’s experience with a certain market and his ability to investigate a company with not much to go on sometimes, while quantitative analysis relies on the analyst’s skills to interpret financial statements using a compilation of metrics
  • Qualitative analysis is more of an art than science because it focuses on qualitative factors, while quantitative analysis is a very precise type of analysis since it deals with quantitative information

As you can see these two approaches to security analysis are like night and day. But keep in mind that they often overlap with each other when you have to use quantitative methods to assess a qualitative factor’s importance.

For example, competitive advantage is usually viewed as a qualitative factor, but one aspect which determines its strength is market share, which can be precisely measured using numbers.

Qualitative Analysis vs Quantitative Analysis: Which Should You Choose?

If you’re wondering which type of analysis you should choose, just take a look at your goals.

Are you planning to invest for the long-term? Then you definitely need to use both. You see, quantitative analysis mainly ensures that you will be getting shares of a company for cheap based on its historical profitability and growth. But qualitative analysis can provide the extra layer of assurance that this profitability and growth will continue for many years to come.

If on the other hand, you’re more interested in trading and you are more likely to sell stocks soon, then you may not have much to gain by applying qualitative analysis; quantitative analysis could be enough.

So, take a look at your situation before you choose. The only thing that’s certain is that you will be at least applying quantitative analysis; without it, you’re blind. But it’s, indeed, up for debate whether you need qualitative analysis or not.

Conclusion

To recap, qualitative and quantitative analysis deal with assessing a security’s value; one by looking at qualitative factors and the other by considering quantitative data.

Another important thing you need to take with you is that qualitative analysis may seem more easy than quantitative analysis, but in reality, it can be just as hard (or even more). It can take years for someone to turn this art into a source of information that is persuasive enough when it comes to a company’s value.

More so, it requires a lot of experience in business. You don’t have to be a businessman to apply qualitative analysis, of course. But being a voracious reader of business news and knowing some fundamental concepts helps.

Fortunately, unless you’re planning to pick stocks by yourself to invest your money for retirement, it’s unlikely you will have to go further than applying quantitative analysis.

Thanks for reading and please share this article if you found it useful!

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Talk to you the next time!

Disclaimer: This information should not be viewed as financial advice. You should consult a financial advisor or do your own due diligence before you invest. The owner of this website and author of this article are not to be held liable for any undesired result by anyone who uses this information that is provided here in any way.