Qualitative vs Quantitative

“Warren Buffett: ‘I don’t know exactly how I would manage money if I was just trying to do it by the numbers.” Charlie Munger: ‘You’d do it poorly.’ Warren Buffett: ‘Yeah. That takes care of that..' - Berkshire Meeting 2013

“Though we absolutely need numbers to understand the world, we should be highly skeptical about conclusions derived purely from number crunching.” Hans Rosling

"Quantitative data is efficiently priced, qualitative insight is not." Pat Dorsey

“It is easier for Wall Street analysts to understand a numbers-based model than one that depends on tenets of behavioral science.” Rajendra Sisodia

"Numbers alone won’t tell you the answer; instead you must think critically about the qualitative characteristics of your business.” Peter Thiel

“Although financial data surely is important in analyzing a company's strength and future prospects, qualitative indicators are no less important. In fact, we would go so far as to say that in many instances, qualitative factors may be more revealing than quantitative factors in drawing a picture of a company's future performance. Companies whose prospects look great based on financial indices in one year may present a sadder picture a couple of years later. Qualitative indicators, in contrast, tend to be more stable.” Rajendra Sisodia

“Although poring over financial data is important in evaluating a company's prospects, a full picture cannot be obtained without also considering such contextual influences as relationships with stakeholders, corporate culture, and organisational architecture. In fact, such qualitative attributes have greater influence on future performance than quantitative attributes of the past.” Rajendra Sisodia

“An investment operation is one that can be justified on both qualitative and quantitative grounds.” Benjamin Graham

“The single most important thing as an investor - it's not the quantitative information - it's the qualitative information. It's having an arsenal of qualitative information that helps you reverse engineer the business model - What's actually happening in the company.” Reece Duca

"If you read Phil Fisher's book Common Stocks and Uncommon Profits, I think he has a 25 point checklist on how to analyse a company and interestingly of the 25, probably 15 are qualitative elements. Which is just the reverse of what most people on Wall Street do." Paul Black

“If this business was susceptible to a purely quantitative approach, they wouldn’t need me and you would just punch a button and it would solve for all your problems. That hasn’t happened.” Chuck Akre

“Interesting enough, although I consider myself to be primarily in the quantitative school, the really sensational ideas I have had over the years have been heavily weighted toward the qualitative side where I have had a 'high probability insight.' This is what causes the cash register to really sing. So the really big money tends to be made by investors who are right on qualitative decisions, at least in my opinion.” Warren Buffett

"The quantitative side of what we do is easy, to be honest with you. You don't have to have much more than a sixth-grade mathematics education to spot a potentially interesting investment proposition.... I would say the qualitative side of what we do consumes 95% of our time because that's the hard part." John Harris

"[My] only evolution .. in my own framework of looking at businesses, is that I pay more attention to the qualitative factors around a business than the quantitative. In the past I used to be much more focused on the quantitative." Mohnish Pabrai

"While we can run spreadsheets with the best of them, we really emphasise understanding the qualitative factors that drive the numbers; market shares; competitive advantages; the secular and cyclical impacts on the industry; management’s skill in allocating capital. The goal is to identify companies in which we have a great deal of confidence that their values are going to continue to compound as we own them." C.T Fitzpatrick

"It's tempting when you start out to think your knowledge about finance and valuation will lead you to all the answers, but I now put more emphasis on qualitative than quantitative analysis" Jake Rosser

“We are qualitative. We’re qualitative because the determinants of value over time are qualitative.” Brian Bares

“Our process is very qualitative. What we’re trying to think about are what are the drivers? Where will the revenues of this company be 5 or 10 years from now? What are the competitive advantages which is really getting into questions about profitability and margins? But what is the corporate culture? What is it that makes this business special? Why can’t somebody else do it? And we think if we can answer some of these more causative questions, I think it gets you to broadly correct answers. The left of the decimal point, if you will. And I see much more value in this.” Tom Slater

“It’s not about the numbers. For most investments the factors that will drive long term success don’t have much to do with spreadsheets. They have to do with something other, either understanding human nature or understanding nuances about how certain aspects of how things work rather than running spreadsheet.” Mohnish Pabrai

“You cannot make a quantitative deduction to allow for an unscrupulous management; the only way to deal with such situations is to avoid them.” Ben Graham

“A good analysis of where a company is headed demands a look at the qualitative factors, those touchy-feely, squishy, from -the-gut factors that are ignored despite the fact they often determine the company’s fate. Assuming that the numbers are correct ignores critical issues in qualitative analysis of companies, issues that can influence the numbers as well as the eventual fate of those companies.” Marianne Jennings

"It is easy to drown in the ocean of available facts while underestimating the few important qualitative aspects of a business that should enable it to do well going forward." Larry Pitkowski

“Focusing on the quantitative is never enough. One must also have been able to integrate the soft sciences of individual and social psychology; the qualitative.” Frank Martin

“I think the most common tendency of young investment professionals is to rely almost entirely on quantitative skills and ignore qualitative positives or negatives of businesses and their managers. I was no exception. It is really just natural because fresh graduates have better quantitative skills than their bosses. And if you’ve got the biggest hammer, you want everything to look like a nail. But I can’t think of one investment we’ve made where we developed an advantage over other investors by ‘outmodelling’ them. With experience comes an appreciation for the qualitatives that are hard to incorporate in a model. Our most successful stocks typically include a differentiated point of view on the quality of management or the quality of the business.” Bill Nygren

“I think you need a combination of quantitative and qualitative skills. Most people now have the quantitative skills. The qualitative skills develop over time. But, as Warren used to tell me, ‘You’re better off being approximately right than exactly wrong.’ Everyone talks about modelling—and it’s probably helpful to do modelling—but if you can be approximately right, you will do well. For example, one thing you need to determine is: Are the company’s leaders honest? Do they have integrity? Do they have huge turnover? Do they treat their people poorly? Does the CEO believe in running the business for the long term, or is he or she focused on the next quarter’s consensus earnings?” Lou Simpson

“As I get older (and, I hope, wiser) as an investor, I find myself giving much greater weight to fuzzier concepts such as culture and governance and competitive positioning. The numbers ultimately have to make sense, but these qualitative factors underpin my investment decisions in a way they didn’t when I was younger. Experience (i.e., being burned when these factors were absent) have taught me to pay attention.” Chris Mayer

"I started out very influenced by Graham, so I emphasised quantitative factors. Charlie came along and said I was all wrong, and that he’d learned more in law than I’d learned in financial studies and everything, and that I should think more about qualitative factors, and he was right. And Phil Fisher said the same thing.” Warren Buffett

“Quantitative analysis should be supplemented by qualitative considerations - In studying earnings records an important principle of security analysis must be borne in mind: “Quantitative data are useful only to the extent that they are supported by a qualitative survey of the enterprise.” Ben Graham, Security Analysis

 “We are unique in that we start with qualitative analysis. Our research process begins with company-level information. We want to understand on a very detailed level exactly what a company does, who it competes against, and the forces affecting its ability to earn sustained economic profits over long periods of time. We also want to understand the motivation of the people running the company. Are there incentives in place to align management’s success with the success of passive shareholders? Is management doing what they said they would do? What is their history? Questions like these and many other qualitative factors are examined before we allow a company to be considered for the portfolio. Only after a company meets our internal qualitative criteria, and only after the idea has gone through an internal presentation and discussion, will we do valuation work. We understand that this process is the reverse of many managers, but we want to prevent ourselves from being drawn into seductively cheap subpar businesses. Our process is built specifically to guard against this.” Brian Bares

“Our performance is the result of a qualitative process that seemingly can’t easily be factorised… A strict attachment to even intricately constructed screens could, and in practice would, have caused us to miss out on some of our biggest drivers to date.” Michael Bullock

“We also believe that the quantitative approach, so persuasive in finance, downplays those qualities that cannot be measured such as a founder’s drive, ambition and vision.” Baillie Gifford

"When we analyse a business, we pay close attention to the qualitative and intangible variables –such factors are often difficult to ‘model’. We are uneasy with fancy numerical models .. which have almost ubiquitous acceptance by the high priests of modern finance. We believe one is susceptible to gaining a false sense of security, which can result in mental slothfulness and neglect. In the case of models, analysts tend to overweight what can be measured in numerical form, even when the key variable(s) cannot easily be expressed in neat, crisp numbers. The ‘model’ behind our largest investment required nothing more than sixth grade math, and a napkin – not a sophisticated spreadsheet capable of more numbers than I’m capable of counting." Allan Mecham

"In our evolution as investors, one of the things we have discovered is that it is often the things that don’t get measured that have a greater magnitude on investment returns than what is measured. That is to say, the numbers don’t provide all the clues. It is often qualitative factors such as company culture, management’s approach toward capital allocation, or customer service, that can yield critical insights into a company’s sources of competitive advantage. In fact, an advantage premised upon qualitative factors can often be more enduring." Jake Rosser

“Much of what investing is has an important qualitative element to it as well. It’s about using your judgment when evaluating leadership and managerial skills—something you can do only by synthesising information in a way that often does not lend itself to computation. It’s about the judgment needed to reconcile data points that support diametrically opposed conclusions.” Paul Hilal

"The qualitative analysis is even more important than the quantitative analysis because quantitative is always a lagging indicator. By the time you see it in the numbers, it's often too late." C.T Fitzpatrick

"Data is backward looking and it is the future that will determine our returns." Jake Rosser

"We don’t know how to buy stocks just by looking at financial figures and making judgments based on the ratios. We may be influenced a little by some of that data, but we need to know more about how the company actually functions." Charlie Munger

"Avoid over-relying on numbers and models. Investors often feel comfortable with numbers and models because they appear definitive. However, they can be misleading because they often are based on historical data that may not be repeatable or are based on assumptions that may not prove valid." Ed Wachenheim

“Company value is determined by all future free cash flows discounted to the present. Rudimentary ratios fail to capture what could, should, or would happen to a company beyond the next year or two. Historical cash flows, book value, earnings, or momentum in the growth of any of these factors may not be comparable with what happens in the future for dynamic companies undergoing change. This renders these ratios useless as indicators of value. The key determinants for predicting the future earnings power of a company are actually qualitative. Factors like competitive positioning, industry growth, and the capital allocation ability of management are not adequately captured by simple ratios.” Brian Bares

“In the world we live in today, investing on the basis of rote formulas and readily available fundamental, quantitative metrics should not be particularly profitable. (This is not necessarily true during market downturns and panics, when selling pressure can cause prices to decouple from fundamentals.) It also stands to reason that in a time when readily discernable quantitative data is unlikely to produce high-profit opportunities: if something carries a low valuation, there’s probably a good reason, and successful investing has to be more about superior judgments concerning (a) qualitative, non-computable factors and (b) how things are likely to unfold in the future.” Howard Marks

“The more I have seen, the more I’m convinced that the difference between great and merely good is qualitative.” Josh Tarasoff

“People with very high IQs who are good at math naturally look for a system where they can just look at the math and know what security to buy. It’s not that easy. You really have to understand the company and its competitive position, and the reasons why its competitive position is what it is, and that is often not disclosed by the math.” Charlie Munger

“Ultimately, for long-term investors it is crucial to look beyond quantitative metrics. While characteristic of many great companies, on their own they prove poor predictors of future investment returns. Reported financial metrics tell us how things were, rather than how they are going to be. They may help in identifying past winners, but not necessarily the long-term winners of the future and certainly not the emergent winners that defy traditional definitions of “quality.” Tom Walsh, Ballie Gifford

“Quality counts. If you are a long term investor, it’s hard to find a more important factor as to what will power your ultimate investment returns. That said, quality is impossible to measure with precision because it often embodies more subjective qualitative factors than easily quantifiable measurements. Quality is also dynamic and changes over time.” Tom Gayner

“Today, in our society, in economics, and in finance, we place far too much trust in numbers. Numbers are not reality. At best, they are a pale reflection of reality. At worst, they're a gross distortion of the truths we seek to measure.” John C Bogle

“Numbers track the narrative of our dedicated culture of service, but never fully capture the spirit that creates them. Numbers are ‘the map, not the territory.’” Tom Gayner

“The problem with quantitative or algorithmic or kind of very specific rule-of-thumb-based investing is that markets are complex adaptive systems that change over time. So, the idea that — while it’s appealing human on emotional level that there might be some secret formula that always works or works for both extended period of time, I generally think that’s a bad thought.” Dennis Lynch

“We’re set up more in the judgment business, in the qualitative assessment business. And I think that that — given the nature of markets that you have to have that as part of your DNA.” Dennis Lynch

Further Reading:
‘Investment Models - Need to Know’, Investment Masters Class, 2018.