Whenever a topic on investment is brought up, many people automatically assume that it involves a lot of numbers. This is a natural instinct as accounting is the language of business, and financial statements basically tell investors everything they need to know about the state of the company and its financial health. Investors who may not be numerically-inclined may be put off by this assumption as they may feel that investing is tough to grasp.
However, I would argue that investing is more than just numbers; in fact, it involves a study of facts, people and also one’s own psychology.
The Quantitative Aspect Of Investing
Investing involves several key aspects, and the quantitative aspect is the most prominent of all.
As mentioned, investors rely on financial numbers, ratios and metrics for their analysis and due diligence of a company. On the surface, it would seem that investing relies purely on the analysis of these numbers in order to arrive at a conclusion.
But logically, if investing was only about numbers, the best investors in this world would be mathematicians and accountants. Since we know this is not true, we have to explore other facets of investing which are still relevant to the decision-making process but are not quantitative in nature.
The Qualitative Aspect Of Investing
The qualitative aspect involves the use of models such as SWOT and PEST analyses (to name a few) and also includes the people aspect. Investors sometimes neglect this component of investing as they believe that all the information can be divined solely from the numbers alone. However, remember that financial statements are historical and paint a picture of the past – investors need to put together pertinent facts to build a case for the future performance of a company.
Aside from using the models as mentioned above to assess the industry and competitive aspects surrounding a company, investors should also take the opportunity to meet up with management and to size them up in terms of their abilities, candour and capital allocation strategies.
The Psychological Aspect Of Investing
Finally, there is the all-important psychological aspect of investing. Investors mostly neglect this aspect as it cannot be properly measured and each individual reacts differently due to their unique emotional make-up.
However, it is crucial to remember that we are all affected by biases, fallacies and illusions. Gaining a better understanding of our psychology is integral to doing well in investing.
The Foolish Bottom Line
As can be seen above, investing is much more than just being about numbers. Investors need to adopt a holistic view of investing as a combination of both quantitative data and qualitative information, layered over with psychology.
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