Question

Fundamental versus Quantitative Investing

What makes a quant a quant? What is the difference? How are they similar? What are the pros and cons of each approach?

Answer 1

Fundamental analysis focusses on ascertaining a stock's intrinsic value by analysing the factors that could affect its price. Two approaches to this method: Top down approach wherein the analysis starts with economy, then industry, sector and then the company stock. Bottom down approach starts with assessing the fundamentals of the company and then moving to the market and economy. Pros: It includes qualitative factors in decision making like company culture; sometimes the objective views and critical jugements made by analysts are more suited than a system based analysis for some complex cases.

Quantitative Investing focusses on using a computer based model to make investment decisions. An algorithm is developed to assess and manage risk levels, ascertain the right time to buy or sell a security etc. The model is repeatedly tested under various stress markets to make it an effective investment model. Pros of this model include higher accuracy as the model is system driven, hence lower chances of human errors, very unbiased and efficient tool to make decisons. Cons include the probability of getting the wrong outputs due to keying in of wrong inputs, unable to measure qualitative factors like company culture, employee engagement etc.

Despite the above differences, these two analysis methods have few similarities like:

Both the methods try to analyse investments and make decisions based on the analysis, both help an investor know the pros and cons of investing in a stock, the right time to buy or sell.