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The Most Dangerous Software for Investors

A consultant died and went to heaven. There were thousands of people ahead of him in line to see God.

To his surprise, God left his desk at the gate and came down the long line to where the consultant was, and greeted him warmly. God took the consultant up to the front of the line, and into a comfortable chair by his desk.

The consultant said, “I like all this attention, but what makes me so special?”

God replied, “Well, I’ve added up all the hours for which you billed your clients, and by my calculation you’re 193 years old!” 🙂

Laughing at God’s response?

Well, that’s the way consultants really bill their clients.

The easy calculation is – “I worked 16 hours per day for 30 days, so at Rs 5,000 per hour, my fees will be Rs 24 lac!”

“Oh wait, I need to beat my last month’s target that was Rs 30 lac. How could I get this much money without the client knowing?

Okay, let me tweak the number of hours worked per day to 20. Yesss, now it’s Rs 30 lac! Target met!”

Laughing at how consultants play the tweaking game to make their moolah?

Well, that’s exactly how most investors also make their investment decisions.

And the software that helps the consultant tweak numbers, and that also helps investors make their decisions is…our lovely, old Microsoft Excel!

No doubt the Excel is a very handy tool to make big calculations, but then I have seen the dependence on this software not just destroy consultants’ relationships with their clients, but also investors and businesses.


Excel is dangerous!
Ever since I shared my investment analysis Excel sheet, I have received a lot of emails from readers who have found “amazing businesses” that were trading cheap and thus ready to be bought.

I asked a few – “What makes you think these are amazing businesses.”

“See the numbers and ratios,” pat came the reply. “Plus the DCF is also showing that it’s a super-buy!”

Now, it’s sad to hear investors using the excel as a map to find great investment opportunities. This is despite that I had posted some warnings in that post…

  • This excel is just a compass, and not a map. So take your next step carefully.
  • Don’t look for perfection. It is overrated.
  • Focus on decisions, not outcomes.
  • Look for disconfirming evidence. Avoid falling in love with the numbers.
  • Remember Charlie Munger who said, “All I want to know is where I’m going to die, so I won’t go there.” Depending just on this excel for decision-making can really kill you (financially)!
  • Pray! Pray! Pray!

It’s easy to ignore all these warnings when you are seeing perfect numbers on your screen.

It’s even more difficult to avoid taking the decision when the numbers show that not just the company is “great” but even the valuations are “attractive”.

Focus on decisions, not outcomes
During rising markets, when valuations get expensive, people are not buying, and thus commissions dry up for brokers, all they do is ask their analysts to “tweak” numbers on their excel sheets to come up with ‘Buy’ recommendations!

It’s an easy way out, this tweaking of numbers to create numbers out of thin air.

And not just brokers and their analysts, even a lot of companies “tweak” their future growth targets so as to always present a rosy picture to investors.

I am not belittling the importance of financial analysis in investment decision making. All I am saying is that a tool like Excel, if not used carefully and if depended upon, can cause much anguish in this imperfect world.

Even if it does not lead to error in decision making, loving the Excel analysis can lead to wasted hours that could otherwise be used in understanding businesses.

Warren Buffett says…

Avoiding the dumb things is the most important. Learn more, know limitations, avoid the dumb things.

I won’t categorize Excel as dumb, but the bigger task in your hand is to understand businesses and numbers and know the limits of Excel in decision making.

Charlie Munger says…

Some of the worst business decisions I’ve seen came with detailed analysis. The higher math was false precision. They do that in business schools, because they’ve got to do something.

Are you addicted to Excel?
Well, here are a few danger signs that will tell you that your life revolves around the dangerous Excel…

  • You want to Ctrl+Alt+Del your boss.
  • A stock fell just after you bought and you want to Ctrl+Z the decision.
  • You search for Alt+F4 keys when you need to close your car windows.
  • You get in a lift and double-click the button for the floor you want.
  • When you see your portfolio down in the dumps and you want to save it, all you think of is Ctrl+S.

Well, the simplest way to get off this Excel mania is to think of Alt+F4 to close the Excel down! 🙂

You will make better investment decisions. Believe me!

Now my question to you is – Has Excel helped you identify great investments in the past?

By the way, Excel is the “second” most dangerous software for you as an investor. The most dangerous is…your mind. 🙂

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Reni George says:

    Dear Vishal
    Good afternoon to you,
    Well may be iam forward reading your mind,was expecting something of this sort from you,you are correct..right now investors are too much into the figures that they forget to see the bigger picture that is there in the view.you said is correct.One of my friend has once said,the best part of Excel sheet is that,you can put up whatever figure you like and come up with the result you wanted.
    Frankly speaking,my excel use has been minimalist…the figures are too assumptive and when we start with a exaggerated entry,the the end result is too enormous and far away from the truth.

    When i was doing a job..My excel sheet at the start of the month contained lofty figures of sales,which my superiors like to the core and they were happy.After some time I found out that they were too glued to the sheets that they forgot the ground scenarios of sales working.So ultimately they were blindfolded by the figures that were presented in the excel sheet.And this excel sheet went through three or four hierarchical structure and the end figures were too lofty to be true.

    So like wise in Investment also excel can blindfold many things,it should be used to justify the figures and not to justify the figures that we expect.

    Thanks and Regards
    Happy Investing

    Reni George

  2. Very true, Vishal and Reni. I learnt this the hard way, and since last year, I’ve focussed more on qualitative criticism of business, finding risks hidden in the numbers and statements, and spending less time valuating the stocks – all we need to find is if we’re paying:

    1. A great price for an average business (cheap valuations, not the most preferred choice for investing)
    2. A fair price for a great business (most preferred)
    and

    if we’re looking at an expensive story…I’ll rather stick with Peter Lynch and use simple ways to find if stock is not very expensive, and that’s all…

    • Very well put Sunny. Common sense (which is probably not common) is the first signpost …. all analyses/else comes later. time to time we must apply the common sense dip stick. At a time when say for example valuations of steel firms are flying high we need to ask will people start eating steel ! similarly toothpaste ! similarly ipad ! and what not. Plus the psychology part of trying to understand oneself.

  3. Hi Vishal,
    I agree with you that over dependence on Excel and relying on it solely for decisions doesn’t make sense.
    I’m sure most people understand that its just another tool, but the results/output is believed to be sacrosanct.

    Most of the points above apply to any tool or analysis technique – be it PE ratio, DCF, income capitalization, etc. However, the reasoning used in the analysis gives it a sound base to decide if an investment is attractive or not or how attractive it could be?

    If we take the previous example of IL&FS Inv. Mgmt (IIM), the dividend yield of approx. 7% seems to be Perfect Deal. But look closer at the Dividends per share for last 4 years (including FY13) the dividend per share is only Rs.1.50 for all 4-years straight. PE ratio of 10x seems attractive. The Div Yield and PE seems like a mirage because the Price has fallen drastically for the last few years making these ratios look like Bargains.

    My take is to look at the background or the trend behind the Ratios and not get mislead by the Final Ratio itself. Moreover, looking at a trend would be better than looking at a single number. For instance Operating Margins, EPS, etc has to be seen for the last several quarters or years to get an idea of the consistency of performance and show how the company fared during varied economic cycles.

    Any tool, analysis, ratio, etc will give indicators or pointers like a dashboard on your car, but you being the Driver or Investor has to know how to read the same.

  4. Hi Vishal,

    Excellent article. I will share my short experiences. To put it mildly, excel works on a simple principal “Garbage In Garbage Out”. As an I Banking analyst, I can make most exhaustive use of excel. I can use complex functions (which hardly serve any purpose). However I am dumb in the art of investing. After 3 years stint as an I banking analyst (unfortunately) with hands on experience in buy-side and sell-side transactions, I can definitely vouch that CORPORATE VALUATIONS ARE A SUBJECTIVE CALL AND SPREADSHEETS ARE TWEAKED TO ARRIVE AT THESE NUMBERS. It is counter-productive to rely on these numbers (given by analysts in fancy words like revenue guidance).. Sorry Vishal to talk so ruthlessly of your ex-profession. But I dont consider myself anything better than Excel Jockey… 😛

    Best Regards,
    G

  5. Sridhar says:

    Some people talk about using macros and specialized hi-funda tools to automate stuff. Yes, its true that it saves you from doing repetitive tasks. However, financial valuations are highly subjective and customized – so the concept of automating this can be achieved only up to a point – one still needs to plug in the financial data or basic information correction.
    Some people also claim that using macros and regressions one can make predictions – sounds too stupid. How can you value a business and predict its future based on math…..unless that math is truly supported by strong knowledge of industry trends, understanding of business cycles, etc.

  6. I don’t know what blunder you are talking about. Excel is just a tool. We use it to decide financial parameters. Additional to that we use fundamental analysis using browser. Now you will Internet Explorer is dangerous? Foolish.

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