A Kuwait-based investment firm, Watheeqa Investment Company, has a nice little newsletter from last year which was brought to my attention through the Manual of Ideas web site. It has a few quotes from several prominent investors on how investment theses ought to be simple, not full of detailed spreadsheet modeling.
Says Mohnish Pabrai:
Usually two or three variables control most of the outcome. The rest is noise. If you can handicap how those key variables are approximately likely to play out, then you have a basis to do something... If I find myself reaching for Excel, it is a very strong sign to take a pass.
There are an infinite nunber of facts that you can learn about a company, but there are usually two or three very important variables that make the company succeed or fail. A lot of Wall Street gets so bogged down in the minutae and details that it misses these two or three big things that make or break the investment. Part of what worked for me over the years is being able to distinguish what matters from what doesn't.
Investors are detail oriented and most never get to simple. Analysts have multiple spreadsheets and focus intently on miniscule details, which are irrelevant over three to five year periods. Most investors miss the big picture due to their overly analytical minds.
This is all true. Most positions for the superior value investor should be based upon just a handful of long-term trends, and should ideally be held for the medium to long term. The fact that most investors do not follow this advice contributes to the manic moods of Mr. Market.
Why do analysts trained in finance programs and big banks make these detailed spreadsheet models? I can venture a few hypotheses:
1) They need to justify their existence, as does their academic field of finance.
2) They have no intuitive heuristic for understanding the macro-economy and investing, perhaps because they are too young, or do not want to put in the time and effort to develop one.
3) They are trained in engineering or similar fields which make full use of numerical modeling.
4) They fundamentally have no intuition for social science phenomena.
5) There are always strong incentives to follow the herd, and do what the herd does, which is make spreadsheet models.
6) Everyone else at your bank/fund does this sort of modeling.
Perhaps you can think of other reasons!
This also reminds me of the following great Warren Buffett quote: "Wall Street is the only place that people ride to work in a Rolls Royce to get advice from those who take the subway."