Qualitative Analysis: The Lesson Benjamin Graham Didn't Teach

When Patrick McVeigh arrived for his first day of work at Franklin Research & Development (later called Trillium Asset Management) 40+ years ago, he was handed a copy of Security Analysis by Benjamin Graham, David Dodd, and Sidney Cottle. He was told it was the “Bible” of Wall Street and contained everything he needed to learn about investing.

Buried deep in the book was a line that would set the course for his career: “An investment operation is one that can be justified on both qualitative and quantitative grounds.” The authors acknowledged that qualitative factors are “exceedingly important” but also “exceedingly difficult to deal with” and therefore largely left them out of the book.

For Patrick, that was a revelation. The most respected investors in history had admitted that qualitative factors matter as much as quantitative ones, yet because they are hard to measure, they were essentially ignored. “Wall Street followed their lead for the next nine decades,” he later reflected.

Then and now, Patrick has anchored his investment decisions in qualitative issues: environmental policies, human rights and labor practices, employee engagement and diversity, shareholder rights, and many others. If these truly are “exceedingly important,” why wouldn’t they be part of every investment decision? And what might happen — financially and in the real world — if they were included in analysis?

That question became the compass for Patrick’s life’s work.

Turning the “Exceedingly Difficult” Into a Research Advantage

His search for answers led him to what he considered true thought leaders: people weighing qualitative issues in business long before ESG became a widely used term. One of them was Milton Moskowitz, a San Francisco Chronicle columnist whose work Patrick had followed for years.

“I grew up reading Moskowitz’s weekly column,” Patrick explains. “Later, I discovered his book Everybody’s Business: The Irreverent Guide to Corporate America, which analyzed major corporations not only by traditional metrics like sales and profits but also by less-tangible factors like employee and community engagement.”

Moskowitz summarized his philosophy in a 1973 New York Times editorial: “The theory, which I subscribe to, is that companies blessed with socially sensitive managements will over the long term outperform their competitors. They will do so because they are more attuned to the needs of society.”

Inspired by conversations with Moskowitz, Patrick built a database of rankings on 500 companies as a starting point, then began researching and writing detailed reports on them. The work required persistence. At the time (1982), public disclosures of qualitative data were limited, so he sent questionnaires to companies, followed up with phone calls, and spoke with third-party sources to fill in the gaps. “Fortunately, companies that cared about their employees, community, and environment were interested in sharing their efforts,” he says.

Convincing the broader investment industry was harder. Many analysts simply didn’t see how social and environmental factors could be material to investment outcomes.

Using Qualitative Research to Identify Sustainable Earnings Growth

Today, Patrick and his team enhance traditional valuation models with qualitative inputs. “Incorporating the qualitative data we’ve tracked down through our research can either increase or decrease our confidence in a company’s future earnings projections, influencing the valuation we place on its earnings,” he explains. “Our objective is to find companies with sustainable earnings growth.”

Believing that qualitative data gives better insight into the sustainability of earnings, Patrick and his team draw on a blend of public disclosures, direct company engagement, and independent research to assess factors like climate impact, labor rights, diversity and inclusion, community relationships, board independence, and shareholder alignment.

ESG Insights That Shaped Investment Decisions

For nearly four decades, qualitative analysis has played a central role in Patrick’s investment decisions—sometimes leading to early exits, sometimes to conviction in overlooked opportunities.

Examples:

• Avoiding hidden liabilities – Concerned about the growing incidence of “forever chemicals” in the environment, Patrick identified potential liabilities for 3M. Despite the company’s and analysts’ insistence that it was not an issue, Patrick recommended his firm sell the stock. It later became a major problem for 3M.
• Challenging popular opinion – When Business Ethics magazine named Fannie Mae its “Most Ethical Company” in 2004, Patrick wrote to the magazine and shared his view that the company was possibly “the most unethical company,” citing its role in enabling unsound mortgage practices. Fannie Mae eventually went bankrupt.
• Spotting transformational leadership – Wall Street scoffed at the CEO of carpet manufacturer Interface when he had an environmental awakening that led the company to shift all its manufacturing practices to become environmentally neutral or positive. Patrick believed the shift would result in Interface growing more quickly and taking market share from less environmentally conscious competitors, and invested accordingly.

In each case, qualitative insights revealed risks or opportunities undetectable in the financial statements.

Where Sustainable Investing Stands Now and What’s Next

So where does the investment industry stand today when it comes to valuing qualitative factors tied to sustainable business practices?

“There is some acceptance of qualitative or ESG factors,” Patrick says. “But political pressure is causing many analysts to keep quiet on these topics. The biggest misconception about sustainable or ESG investing is that it’s just political in nature and not about better investing. The current administration has framed it this way, and many have accepted that point of view.”

As for Benjamin Graham, Patrick believes the legendary investor would be a proponent of qualitative factors if he were alive today. “Graham was known for his curious mind,” he explains. “Like other great innovators, he was constantly retesting his assumptions and seeking out new approaches that worked.”

While Security Analysis didn’t expand on qualitative analysis, Graham’s acknowledgment of its importance was enough to light the path. If he had gone further, Wall Street might have spent the past 90 years honing methods for ESG analysis alongside traditional financial metrics.

Instead, that work fell to investors willing to take on the challenge — like Patrick.

DISCLOSURE: This material is for informational purposes only and should not be construed as investment advice or a recommendation regarding any security. Past performance is not indicative of future results, and investing involves risk, including possible loss of principal. Certain statements herein may be considered forward-looking; actual results may differ materially. Clients should consult their adviser regarding their individual circumstances.