The various methods to analyze the stocks for valuable investment insights fall under two general headings: quantitative analysis and qualitative analysis. A qualitative analyst will generally help those interested in value investing, trying to determine the true value of the stock. Meanwhile, a quantitative analyst or a quant will usually work for a quantitative hedge fund, that tends to base investing decisions on the mathematical analysis of historical data. While showing the advantages and disadvantages of both approaches is important, here we will say more about how stock quantitative analysis improves decision-making in investment.
The key features of quantitative analysis
Quantitative analysis in investing refers to the utilization of statistical analysis and mathematical models to calculate the probable outcomes of investment decisions. Thus, the most important feature of quant investing is the historical data of how the stock has tended to perform in different market conditions.
Thus, the data on the upward and downward stock trends in particular periods of time is necessary here. This information should be compared with the relevant data describing the market conditions at the same periods, to uncover the underlying patterns. Then further mathematical analysis needs to be done to determine whether these patterns describe causation or only correlation.
Along with historical data, information on the current market events is needed to supplement the analysis. Only then the hedge fund team is able to arrive at a fact-based investment decision that can make a profit for their clients.
This also means that the heavy usage of AI-based analysis tools is also characteristic of stock quantitative investing. Here everything related to computer modeling and machine learning is welcome as a helpful way to handle the large volume of numbers that provide the substance for quant analysis.
Quantitative vs. qualitative: a comparison
As mentioned, both quantitative and qualitative analyses are important and can sometimes be combined for better investment decisions. However, as compared to each other they also have their strong and weak sides.
Qualitative investing is more subjective as the value of the stock is ultimately based on the evaluator’s subjective outlook. Of course, there is objective data involved here as well. Information on management capabilities and the reputation of the employer, as well as brand recognition, is needed to make evaluations. However, such information is usually not as rigidly based on numbers but rather on previous evaluations and interpretations of characteristics. Thus, deciding on the true value of such qualities is by nature going to be subjective at least on some level.
Meanwhile, the stock quantitative analysis looks at historical data on such rigid numbers as balance sheets. Thus, objectivity is on its side, as strict mathematics does not require personal tastes to weigh in so much. Quant analysis at the very basics, simply calculates what is most likely to happen with the stock in the near future and works with that.
However, the downside of this approach is that the investment decisions that it recommends are less likely to turn in huge profits. Following the numbers will guarantee a steady income, but the return on investment will not be astonishing in most cases. Qualitative investment has an advantage here, as it aims at recognizing undervalued stocks. The numbers, in this case, might not show much beyond the current value of the stock, while the decision of a value investor might be quite different. In this case, the return of investment might be quite impressive once the market worth of the stock reaches its true value.
Yet, this comes with risks of its own, as the qualitative investors have a less certain answer on their hands. Thus, they might also be making an error and suffering considerable losses instead of getting the profit they were after. Stock quantitative analysis is less likely to lead to huge errors. This makes it a safer option, even though the short-term returns might not be all that exciting.
As the qualitative analysts are more likely to get personal with the management of various companies, they might be able to arrive at more unique insights as well. Meanwhile, quants are only going to be working with the numbers that other hedge funds have as well, thus they will only see what others see. On the one hand, that is an advantage for qualitative investors. However, less leg work and more concentration on the computer modeling also means higher efficiency of the stock quantitative analysis and might very well be saving money on the resources.
The rise and importance of quantitative analysis
The emergence of the stock quantitative analysis was given a boost by the rise of computer technology usage for business decision-making. As the technology has reached the level of development that allowed to efficiently handle large volumes of data, it has become an important tool in investment.
This development is also the key to the future importance of quant investing. The true potential of AI for the enhancement of investment intelligence and analysis is hard to guess. But it is clear that we are far from reaching the end of it. Thus, as the development of such technology proceeds, the capability of quants to arrive at the best decisions will likely grow as well.
This means that even for qualitative investors, embracing some of the tools and methods of the quants might become of necessity in the future. Thus, stock quantitative analysis strategies are here to stay and certainly worth learning more about.