Beware The Bad Habit of the Spreadsheet


As the title suggests, beware of how you use the spreadsheets. Like a pen, a finance spreadsheet can be used to create wonderful ideas and opportunities or it could just as easily ruin you and leave your mouth gaping open with a crap taste in your mouth. I’ve noticed a lot of people downloading the files and although I have a disclaimer tab in there, I would like to expand on some things.


As the title suggests, beware of how you use the spreadsheets. Like a pen, a finance spreadsheet can be used to create wonderful ideas and opportunities or it could just as easily ruin you and leave your mouth gaping open with a crap taste in your mouth. I’ve noticed a lot of people downloading the files and although I have a disclaimer tab in there, I would like to expand on some things.

Learn From Experience

When I first downloaded the FWallStreet spreadsheet, I thought it was the coolest thing. I read the post on JNJ on FWallStreet and I thought to myself

I’ve got it made. Just find companies with a nice linear FCF history which are cheap according to this spreadsheet and I will make money – Jae Jun

(p.s. please don’t quote me =P )

So I kept searching for companies that I knew and their competitors, companies that hit 52 week lows, companies that were recommended, abused, and the works. Each day, I would go through so many companies just to find something that showed “YES” on the spreadsheet.

Note that I did not mention researching any of those companies. Of those screens, the ones that the spreadsheet claimed to have a large margin of safety, I admit that I did “invest” my money.

The result, the price went up for a few weeks but slowly started to lose 20-30% of its value. I felt uneasy, unconfident, worried and found myself questioning myself. All signs that I didn’t know a thing about the company, except that I thought it was cheap.

Luckily I knew I had made a mistake and only realised a 10% loss. At least I learnt my lesson and I remember what I learnt, unlike the sentiment I have for Wall Street.

Wall Street people learn nothing and forget everything – Benjamin Graham

It is Just the Beginning

The spreadsheets are just the beginning. If your research starts and ends with the price, then I must say that the spreadsheets will probably cause you more harm then good.

Combine the spreadsheet information with a little deeper research and not only will your circle of competence increase, your judgement and analysis skills will surely improve as well.

Just because a stock is considered extremely underpriced, without doing any research we cannot tell the difference between market panic freefall and company fundamental breakdown.

Detachment with Investments

Ever that get feeling in your stomach when you have a “tip” or a “hunch” that a stock is the next Microsoft or Google?
That, my friend, is just a signal for you to find a toilet to sit on.

Along with that gut feeling, another dangerous investor pitfall is not selling when you should. One of the causes is due to an investors attachment to a particular investment. When the price starts to climb, we start to believe the company is invincible and limitless. Exactly what happened with Google and AAPL. When reality and common sense stating that a billion dollar giant can’t maintain its scary 30%+ growth, the price of both companies plunged. Ultimately, we miss the opportunity to sell when the price goes beyond its intrinsic value because of our greed.

Be fearful when others are greedy, and greedy when others are fearful. – Warren Buffett

Preparation Will Always Yield Fruition

What goes up must come down – Isaac Newton

There is no way around common sense. No company can produce consistent growth year after year forever. That is just impossible. Management gets shuffled around, founders pass away, the world changes and companies can not always adapt and capitalism creates ever increasing opportunities and competition. With so many variables to consider, a company, no matter how good it is, can not be constantly perfect.

By being patient, and preparing and researching companies, time spent trying to understand the company may cause you to miss an opportunity. But a time WILL come when the company you were researching will hit your radar again. This time, you already know most of the things you need to know. Now you can act quickly on the knowledge you’ve gained over that time.

I say this because this is something I (still consider myself a beginner investor) learnt the hard way like most people. I still find it hard. There is just a psychological tendency for us to act hastily when it comes to making a decision on an opportunity. Ever been in a situation where you saw something on sale for “a limited time” or “today only” and ended up buying it without going through your options? Yup, thats the issue I’m talking about.

Price is Just an Number

Price is just a number. It is important to uncover what the price is relative to. Read that sentence slowly again. It is important to uncover what the price is relative to. The spreadsheet can only do so much as to point you in a certain direction.
Don’t fall victim to the laziness a spreadsheet can bring.

  • Rocky

    Jae,

    Great post. I think that this applies alot to what I am doing right now. I often find myself getting excited about a stock and I want to jump in without really understanding what the company is about.

    I think that this is a key in trying to make sure that I don’t hose myself and lose a bunch of money.

    On the two stocks that I have purchased right now I am up about 11% in a little over three months, but I researched them and understood there businesses before I bought in. But now I have a bunch that I want to buy, but I have to keep telling myself, that I need to understand the company before I jump in head first.

    Keep the articles coming. I find them absolutely amazing.

    Rocky

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