InvestorQ : I am told that one has to consider soft factors also while investing. What is that?
Ira Shah made post

I am told that one has to consider soft factors also while investing. What is that?

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3 years ago
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These are normally not distinguishable from one another as fund manager use both these criteria to take a call on stocks. Hard factors are those that can be expressed in numbers. Sales, growth, profits, margins, inventory turnover, efficiency etc are hard factors that can be measured in tangible terms. They form an integral part of valuing and investing in a company.

Then we have the softer aspects! There is brand, reputation, entry barriers that cannot be valued or understood in terms of hard numbers. There is an element of discretion and judgement involved here. Why is this distinction important? There are certain sectors where one takes precedence over the other. For example, in industries like steel, capital goods, automobiles and banking, hard factors matter a lot. But in case of sectors like pharmaceuticals, FMCG and many emerging mid-cap companies, the intellectual property and the brand value can make a huge difference. For a fund manager this poses a huge challenge. What metrics to use in which circumstances is the big challenge for the fund manager. It is only when fund managers are able to take an objective decision on these factors that you get mutual funds that turn out to be long term outperformers.

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