by Cheng » Sun Dec 07, 2008 5:25 pm
This is my summary from Ben's book, Chapter 7: Quantitative & Qualitative Factors in Security Analysis. The Margin-Of-Safety Concept.
After the analyst has learned what information he can get and where to find it, he faces the harder question of what to make of it. Analysing a security involves an analysis of the business.
Quantitative might be called the company's statistical exhibit. Included in it would be all the useful items in the income account and balance sheet, together with such additional specific data as may be provided with respect to production and unit prices, costs, capacity, unfilled orders,etc. These various items may be subclassified under 1) capitalisation, 2) earnings & dividends, 3) assets & liabilities, and 4) operating statistics.
The qualitative factors, on the other hand, deal with such matters as the nature of the business; the relative position of the individual company in the industry; its physical, geographical, and operating characteristics; the character of the management; and, finally, the outlook for the unit, for the industry, and for business in general.
Qualitative Factors (these factors are important, but also difficult to deal with intelligently)
Nature and Prospects of the Business. Industry Analysis. It is an established canon of investment in common stocks that one should first select the most promising industry or industries and then picking out the best companies in those industries. Many statistics are compiled and studied, the trade papers are read with care, and interviews are sought with well-informed people in each industry.
The Factor of Management. Picking a company with a good management is considered by many to be even more important than picking a company in a promising industry. The most convincing proof of capable management lies in a superior comparative record over a period of time. (which brings us back to quantitative data)
The Trend of Future Earnings. Financial theory sometimes sought to estimate future earnings by projecting the past trend into the future, and it has then used this projection as a basis for valuing the business. But while a trend shown in the past is a fact, a "future trend" is only an assumption.
Security Analysis and the Future. The kind of security analysis we regard as a most rewarding principle is concerned primarily with values which are supported by the facts and not those which depend largely upon expectations. In this respect the analyst's approach is diametrically opposed to that of a speculator, meaning thereby one whose success turns upon his ability to predict or guess future developments. Needless to say, the analyst must take possible future changes into account, but his primary aim is not so much to profit from them as to guard against them. Broadly speaking, he views the business future as a hazard which his conclusion must encounter rather than as the source of his vindication.
Margin of Safety as the Basic Quantitative Factor
Offsets to the Hazards of the Future. Place prime emphasis upon the presence of a large margin of safety for the security, which should be able to absorb whatever adverse developments are reasonably likely to occur. In such cases, he will be prepared to see unsatisfactory earnings for the issue during depression periods, but he will expect that (1) the company's financial strength will carry it unharmed through such a setback, and (2) its average earnings will be enough to justify fully the bond or stock purchase he is recommending.
"The really big money tends to be made by investors who are right on qualitative decisions." Warren Buffett
"Risk no more than you can afford to lose, and also risk enough so that a win is meaningful." Ed Seykota
Scan with FA, Time with TA, Volatility is my Friend.
