Important when choosing a stock!
I would argue that obtaining qualitative information about stocks is just as important as quantitative (numeric) information when choosing the best stock to invest in.
Evaluating the Managers
Qualitative information includes the ability of the company management to run and grow the company, as well as their integrity and their ability to focus on maximizing shareholder wealth.
Warren Buffett takes the view that company directors need to have three qualities - honesty, intelligence and ability. But without the first (honesty), you may have a problem!
Perusing annual reports gives some indication as to how shareholder friendly their approach is. I look to see how often shareholders get a mention.
Understanding the Operation
It is also important to have some understanding of the area in which the company operates. This refers to your circle of competence.
Information can be ascertained to some extent by reading company reports, being a customer of the company and shopping in its stores, or being able to view the company in action in some other way.
For example, when I hire a taxi, I start a conversation about the electronic payment system the driver uses, as I have shares in a company that provides a system for taxis.
Gleaning information from others (scuttlebutt) who may have a closer association with the company can reveal insights into employee, investor or shareholder relations.
Ethical investing involves taking account of the social responsibility of a company. So it is also referred to as socially responsible investing.
Products or operations that may affect your decision to support a particular company could include ...
- manufacture of cigarettes
- involvement in gambling operations
- involvement in wood pulping
- production or marketing of liquor products
- involvement in uranium mining,
... to suggest a few.
Some companies are involved in a mix of operations or products. Being able to determine their level of social responsibility may become somewhat problematic.
People involved in Christian stock market investing and green investing may have a similar problem in deciding which stocks fit with their values when companies are involved in a range of activities.
I also find it useful to get some information as to what the company wants to do in the future when choosing a stock. This can be obtained from perusal of the latest annual report.
Reading previous annual reports to determine if past announcements of future plans have materialized may also help to inspire (or reduce) confidence as to the ability of the company to enhance shareholders equity.
Checking the Competition
Knowing who the competitors of the company are and how they are progressing their business is also information that is relevant to choosing stock.
The number and size of competitors provides some indication as to the competitiveness of the company and its ability to promote shareholder interests.
This competitiveness factor has been variously referred to as its economic moat – its protection from competition. Examples of some economic moats include ...
Companies protected by licenses or patents: Some people can’t survive or operate without the product.
Large supermarkets and hardware stores: These stores swamp the competition in a wide geographical radius.
Companies with specialized equipment:Other companies have difficulty in replicating the gear.
Expertise of the management and employees: Other companies have difficulty in attracting the brightest people.
Companies with a strong brand: These companies are recognized and/or trusted by the public.
- Companies that ‘clip the ticket': Planes have to land somewhere; taxis are essential for transport; toll roads get you there faster.
Generally, these types of companies have the ability to adjust their prices with or above inflation without affecting their level of sales.
Their ability to optimize shareholder value is consequently enhanced.
Being aware of the importance of management quality, the potential for future growth, the degree of competitiveness and the nature of the company's operations helps to get a handle on the more subtle aspects of a company's profile.
Qualitative information is not always easy to find, but can be crucial in obtaining a complete picture of the quality of the company's operations when value investing.
I always include qualitative considerations as best I can when trying to choose the best stocks.
Return from Qualitative Information to Financial Ratios
Return to Value Investing Home Page