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. 🙂