Excel and Fairy Tales Part 1

The most deadly weapon in the financial world is the Excel spreadsheet.

Makes it seductively easy to make any kind of (fantasy) projections and sell stories based on that.

Some of them go right into lala land 🙃

Example: This company will grow earnings at 20% per annum for the next 25 years.

If you actually crunch the numbers, you will see that this means the profit will be up a hundred times.

Of course, you don't stop there. You now key in a fancy PE multiple on that profit and voila you can come up with any number you want for the projected share price.

No basic checks exist for these 'estimates'

  • What percentage will it be of the entire industry if its revenues grow at that rate?

  • What percentage will the revenues be of the GDP? Or the company's market capitalisation as a proportion of the total market cap of the country?

  • Most important, has there been even ONE company in history which has compounded profits 20% every year for 25 years?

  • Let alone that, ask people making these estimates to name the companies which have shown even 1% Profit growth every year for the last 25 years?

Go on...I'm waiting 😊

You will realise that it is a grand total of ONE company which has achieved that. Among listed companies in India, HDFC Bank is the only one which had shown any profit growth every year for 25 years.

But hey dragging a formula cell in excel is damn easy.

Actual execution by the company is near impossible.

Of course when the results don't keep up with the fanciful estimates, a whole bunch of factors can be blamed!

As always, success is attributed to great skill and failure to bad luck.

Unfortunately, listeners are equally happy to lap up fairy tales and following the Pied Piper into oblivion...with noone looking at data at all!

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