Qualitative v/s Quantitative

Quantitative Value talks about how you can use numbers directly and run them through a sieve to separate good and bad companies. The authors have gone to great lengths to prove how a purely Buffett style of value investing can be combined with an Ed Thorp inspired quantitative model to gain advantage in stock picking. In the American context, they've used Enron and WorldCom as examples to show the power of their models. What is likable about the book is that they've not laid claim to these methods and only tried to enhance them by bringing various tools together. But the question really is whether it's so simple. Surely algorithm based accounting methodologies cannot give the best answers always. Even if the book tries to argue its case for US market, I am not aware of any case studies in the Indian context.

Then again you have Mr. Greenblatt who professes that Magic Formula beats the market and that his methodology has worked year on year without market timing. The authors of Quantitative Value have also used it for their case study in their book. At the heart of it, Magic Formula boils down to very simple value investing principles - i.e. buying companies with good returns on capital at cheap prices. In that sense there is much merit in keeping things simple and boiling it down to a few simple ideas in the end.

Einstein said, "Make things as simple as possible but not simpler". So losing out essential details by focusing far too much on simplicity can be harmful. With respect to Indian markets especially corporate governance is probably one key variable which cannot be measured through numbers directly. Rahul Saraogi makes this point very clearly in the video below (for a general sense of how professional investment managers invest with a value investing perspective in India, this is a wonderful interview). With this perspective in mind, qualitative assessment is probably as crucial as quantitative valuation.

To boil it down, I think there's merit in both qualitative and quantitative methods. In the Indian context, I'm unaware of any methodological study of Magic formula investing or the other quantitative methods extolled by foreign investors. Without access to a database of past financial accounting information on Indian firms, testing would be not be possible for the layman investor. Nonetheless, I would definitely suggest the book Quantitative Value to fellow investors. Even without being able to test methods, the ideas behind financial metrics explained in the book have merit and can be key to making sound investment decisions.

P.S. For Indian investors who would like to use quantitative filters to search for stocks, I recommend screener.in. We'll be ever grateful to Ayush Mittal for this. :)