An In-depth Analysis Of Qualitative Analysis As A Practical Strategy For Stock-Picking

An In-depth Analysis Of Qualitative Analysis As A Practical Strategy For Stock-Picking

In matters of personal finance, few subjects have a direct relation with building wealth as much as stocks. We can easily understand why: the tribulations of the stock market are captivating. But carried away on these roller coasters, most investors wish to rise in the air, without ever going down again.

In this article, we will examine one of the most common strategies used to find promising picks (or, at least, to avoid the worst). We will look at the art of stock-picking – how to pick stocks based on a series of criteria, with the aim of achieving above-market returns. The method in consideration is qualitative analysis, which for years, has been a successful strategy among investors.

Before exploring the vast world of qualitative analysis as a stock-picking method, we want to clear up a few misconceptions. Many novice investors in this field believe that there is a fool-proof strategy whose application will ensure their success, which is, at best, a myth.

However, that does not mean that it is impossible to build wealth from investing in the stock market. Simply put, it is better to consider stock-picking as an art than a science, for the following reasons:

  1. Stocks are influenced by so many factors that it is practically impossible to devise a formula for predicting their success. The compilation of useful data is one thing; the selection of the relevant figures is another.
  2. Many intangible factors are not measurable. The quantifiable elements of a stock, like profit, are relatively easy to find. But how do you measure qualitative factors: business information, personnel profile, competitive advantage, or market reputation? The combination of tangible and intangible aspects makes picking a stock a highly subjective, even intuitive process.
  3. Given the human element (often irrational) inherent in the driving forces of the stock market, stocks do not always move as expected. Investors’ moods can change suddenly and unpredictably. And, unfortunately, when confidence gives way to fear, the stock market can be a dangerous place.

Each investment strategy is nothing more than the application of a theory, which its supporters consider to be the most convincing. Sometimes two seemingly contradictory theories produce good results at the same time.

Theories themselves are essential, but you also need to consider how well-related investment strategies are suited to your personal circumstances, considering your outlook, your investment horizon, your risk tolerance, and the time you want to spend on your investments and stock-picking.

We will examine here how the analysis of qualitative factors contributes to stock picking.

  1. The direction

The foundation of any successful business is the skill of its management. It is the managers who ultimately make the strategic decisions and who therefore exert a crucial influence on the future of the company. To assess the strength of management, investors can simply ask themselves the five usual questions: who, where, what, when, and why.

Who?

Do a little research and find out who runs the company. Among other things, you should know the identity of the CEO, CFO, COO, and CIO.

Where?

Find out where these people come from, the education they have acquired, and past work experience. Assess if their background makes them suitable for running the business in their industry.

What and when?

What is the management philosophy? In other words, what style do these professionals intend to adopt to run the business? Some managers have a more attractive style: they prefer to manage the business in an open, transparent, and flexible manner.

Others favor a more rigid and less adaptable management philosophy; they consider that rules and logical organization are more important than the decision-making process.

Ask yourself if you personally agree with either and if it is suitable for the company, given its size and the nature of its activities.

Once you know the style of the managers, find out when this team took over the management of the company. Jack Welch, for example, has been CEO of General Electric for over 20 years. The length of his mandate gives a good idea of his success and the profitability of his decisions.

Otherwise, the shareholders and the board of directors would not have retained his services. When a business is going in the wrong direction, one of the first measures taken is the restructuring of management, to put it mildly, “change of management because of the poor results obtained.”

If you find that a company continually changes its leaders, it may be wise to invest elsewhere.

However, although restructuring is often caused by mismanagement, it does not automatically mean that the company is doomed. For example, Chrysler was on the verge of bankruptcy when Lee Iacocca was appointed CEO. The latter recruited a new management team that relaunched Chrysler as a giant in the automotive sector.

Why?

A final factor in analyzing is the reason why these people became managers. Examine their previous jobs by trying to find out if their reasons are clear. Does anyone have the qualities that you think are necessary to make a good manager of this business? Was she hired because of her past successes and accomplishments, or did she get her job by questionable means, for example, by naming herself after inheriting the business?

  1. Learn about the company’s activities and revenue streams

Other essential factors to consider when analyzing the qualitative elements of a company are the products or services it offers. In the sophisticated terms of MBA holders, the question to ask would be, “What is the business management model?”

To determine the value of an investment, it is essential to know how the company’s activities allow it to be profitable. Often people brag about the money they are going to make with the stocks they have just acquired, but if asked about the actual activities of the business, they are clueless.

If you are unsure of how a company makes money, you can’t really be sure that the investment will give you any return.

One of the most critical lessons from the collapse of the tech bubble in the late-1990s is that ignorance of the business model can have dire consequences. Many people had no idea how dot-com companies were making money or why their stock prices were so high.

In fact, these companies were not profitable, but it was believed that their growth potential was enormous. This conviction prompted investors to buy indiscriminately by following the movement, which ultimately caused a stock market crash.

However, not everyone lost money when the bubble burst: Warren Buffett had not invested in high technology, mainly because he didn’t understand it. Although he was ostracized while the bubble was forming, it saved him billions of dollars when dot-com companies deflated.

You need to clearly understand how a company generates revenue to be able to assess whether management is making the right decisions.

  1. Business sector/competition

In addition to having a general knowledge of the company’s activities, you should analyze the characteristics of its sector, for example, its growth potential. Any company in a booming industry can offer a solid return, while a poor company in an underperforming sector may make a hole in your portfolio.

Of course, to determine at what stage of growth a company is, one must use approximations, but common sense can be instrumental: it is not difficult to see that the growth prospects of a high-tech sector are superior to those in the railway sector.

Another important factor is market share. Consider how Microsoft outrageously dominates the operating systems market. Any business trying to enter this market faces huge hurdles as Microsoft takes advantage of economies of scale.

It does not mean that a company with a virtual monopoly is guaranteed to remain dominant, but it is risky to put your money in a company that attacks the “monster.”

Obstacles to market access can also give the company a significant qualitative advantage. Compare, for example, the restaurant industry to the automotive or pharmaceutical sector. Anyone can open up a restaurant because it requires very little skill and capital. The automotive and pharmaceutical sectors, on the other hand, present considerable barriers to entry: large capital expenditures, exclusive distribution channels, government regulations, patents, etc. The more difficult it is for the competition to break into an industry, the higher the advantage of existing firms.

  1. Brand worth

To establish a brand’s reputation, it takes years of product development and marketing. Take, for example, one of the most popular brands in the world: Coca-Cola. Many specialists estimate that the Coke brand is worth billions of dollars!

Huge companies like Proctor and Gamble rely on hundreds of popular brands such as Tide, Pampers, and Head & Shoulders. By having a portfolio of brands, you spread the risk, because brands that work well compensate brands that have difficulties.

It should be noted that some people responsible for picking stocks stay away from companies whose names are based on one person. In fact, if a company is too closely linked to an individual, any bad news concerning the latter risks damaging the performance of the shares, even if it has nothing to do with the company’s activities.

A perfect example of this phenomenon is the difficult period that Martha Stewart Living Omnimedia went through because of Martha Stewart’s legal troubles in early 2004.

A promising option: Gorilla Trades Inc. a stock-picking platform

Most investors do not delve into economic theories, such as fundamental analysis, qualitative analysis, etc. A simpler and straightforward alternative is technology and reliance on automation. There are promising platforms that offer predictions on stocks and draw insightful information for investors, with Gorilla Trades being the most famous example.

Gorilla Trades is a subscription-based platform offering its subscribers daily insight on stocks. It has been the driving force behind its thousands of subscribers gaining incredible success with it stock-picking. Gorilla Trades recommends individual stocks and offers advice by taking into account a large number of factors that influence market conditions. It is very well-known for its accuracy in prediction.

The platform provides information to novice, experienced, and even professional investors, who have benefitted dramatically in the last 20 years. With a presence in over 55 countries worldwide, Gorilla Trades has become the one-stop for stock-picking.

Conclusion

It is just as essential to assess a business from a qualitative point of view and determine whether you should invest in it than to examine sales and profit. This strategy may be one of the simplest, but it is also the most effective way to judge a potential investment.

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