Investing doesn’t need to be complicated. Over the years, I’ve come to realize that some of the best investors—like Warren Buffett, Charlie Munger, and Ben Graham—embrace a straightforward, almost old-school approach to evaluating businesses. They focus on quantitative and qualitative factors that anyone can understand, without getting bogged down in intricate financial models or projections about the future.
As a psychology student, I found that this approach resonates with me. In psychology, we often combine quantitative and qualitative data to understand human behavior. It’s about looking at hard data and numbers alongside the story that data tells. When I started thinking about investing in a similar way, everything clicked.
Here’s how I’ve come to understand the process—and why it works.
Quantitative Analysis in Value Investing: What to Look For Right Now
The first step in the value investing approach is to look at the numbers. That’s where the quantitative analysis comes in. Instead of worrying about what’s going to happen in the future (which is often filled with uncertainty), we focus on what’s happening now and what’s happened in the past.
For example, Warren Buffett and Charlie Munger often say they don’t focus on industry trends. That’s important because, as I’ve learned, industries can be unpredictable. You could be looking at an industry facing tough times—like, say, Confectionery (lollipops) or American steel—and be bombarded with all sorts of negative forecasts. But the trick is not to get caught up in the doom and gloom of the industry. Instead, you look at individual companies within that industry. Is one lollipop company thriving while others struggle? Is there a steel company making steady profits despite the challenges? That’s the one you focus on.
When it comes to evaluating the quantitative side of a business, you’re looking at the assets. Specifically, you focus on the net current assets (cash, receivables, inventory, and liabilities) to understand a company’s intrinsic value. The idea is simple: if a company is trading for less than its intrinsic value, you’ve got yourself a potential edge.
You don’t need to go down a rabbit hole of intricate calculations. Just look at the numbers and see if they make sense.
Margin of Safety: The Key to Minimizing Risk in Value Investing
One of the most important concepts in value investing is the idea of a margin of safety. This term, popularized by Ben Graham, refers to the difference between a company’s intrinsic value (the true value of the company based on its assets, earnings, and competitive advantages) and its market price (the price at which the stock is currently trading).
In simple terms, you want to buy a stock for less than what it’s worth, leaving room for error or unexpected changes in the market. The larger the margin, the less risk you’re taking on. As Graham pointed out, buying stocks with a large margin of safety gives investors an edge and allows them to weather downturns without significant losses.
For example, if a company’s intrinsic value (based on its assets, earnings, and overall health) is $100 per share, but the stock is trading at $60, you have a $40 margin of safety. This cushion ensures that even if the market doesn’t value the company accurately, or if unforeseen events occur, you’re protected from significant losses.
This is an important part of Buffett and Munger’s approach too. They always look for businesses that are undervalued, which gives them a built-in margin of safety. The goal isn’t just to find a good company; it’s to find a good company at a price that gives you an edge—this is where the margin of safety comes in.
“If you could take the stock price and muliiply it by the number of shares and get something that was one third or less of the sellout of value [Ben Graham] would say that you’ve got a lot of edge going for you.” – Charle Munger, Univeristy of Southern California (USC) Business School, 1994.
Qualitative Factors in Value Investing: What Makes a Business Stand Out?
Once you’ve looked at the numbers, the next step is to evaluate the qualitative aspects of the business. This is where things start to get interesting, especially for me as a psychology student.
When you evaluate a business qualitatively, you’re looking for things that make the company stand out from the crowd. Is there something about its management that makes it unique? Do they have a strong economic moat, or a competitive advantage that protects them from other businesses in the industry? This can include things like brand loyalty, patents, or an innovative product that customers can’t easily replace.
Buffett and Munger are very big on the quality of management. A company with strong leadership will often navigate rough patches better than others. And while you don’t need to understand every little detail of how a company makes its money, you do want to understand why it’s successful. Does it have a good track record of making smart decisions, or is it riding on luck?
For example, if you’re looking at that successful lollipop business, ask yourself: What makes this company stand out? Does it have a unique product that people keep coming back for? Does it have strong leadership that knows how to handle challenges? Understanding these qualitative factors will tell you a lot about the company’s long-term potential.
The Simplicity of Value Investing: Why You Don’t Need Complicated Models
I’ve come to realize that the approach taken by Buffett, Munger, and Graham is rooted in simplicity. They don’t get distracted by fancy financial models or overcomplicated calculations. They focus on the basics: the company’s current assets and its ability to continue to grow consistently. They look at the quality of the business and its management and ask themselves: Is this a company worth investing in, based on what it’s doing now and its potential moving forward?
And that’s where my background in psychology comes into play. Just like we combine quantitative and qualitative data to understand behavior, I’m doing the same thing in my investments. I look at the numbers and then understand the story those numbers are telling me. It’s not about predicting the future with complicated formulas—it’s about understanding what’s happening now and how this business is positioned for the future.
Value Investing Strategy: The Power of Both Quantitative and Qualitative Analysis
The beauty of this approach is its simplicity. Instead of worrying about future projections, you focus on what you can see today: the company’s assets, its earnings consistency, and its ability to stand out in a tough market. Combine that with a strong understanding of its qualitative factors—like management quality and its competitive edge—and you’ve got a clear picture of whether it’s a good investment.
This approach feels more natural to me, especially as someone who spends a lot of time thinking about data and human behavior. By combining hard numbers with a deeper understanding of the business (its management, competitive edge, and industry positioning), I’m able to make better decisions without getting lost in complicated formulas. It’s the perfect blend of quantitative and qualitative factors, which is exactly how I approach studying psychology.
Conclusion: The Simplicity of Investing the Buffett and Munger Way
If you’re like me and you don’t want to get bogged down in overcomplicating things, this approach to investing is a great fit. You don’t need to worry about projecting earnings into the distant future. Instead, focus on the fundamentals and keep things simple: the company’s assets, its earnings consistency, and its ability to stand out in a tough market. When you combine that with a strong understanding of the company’s qualitative factors—its management, its moat—you’ll be well on your way to making smarter investment decisions.
In the end, investing doesn’t have to be about making it harder than it needs to be. If you focus on the fundamentals and keep things simple, you’ll be on your way to making smarter, more confident decisions without letting emotion take over or becoming bogged down with complicated models.
The Broke College Student 
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