It blows my mind sometimes how my MDs are able to spot angles for certain calculations.
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For example, we were doing an accretion analysis for a stock repurchase (while holding net income constant).
The complexity is that EPS calculation uses a weighted average share count, so modeling out the impact of a repurchase isn't as simple as subtracting estimated repurchased shares from the weighted average share count.
Of course, I could build a detailed and precise model, but my MD hates that type of complexity, so I went to discuss with him.
He immediately said you don't need to do that complex model because you can just model out repurchase impact on weighted average shares for the year by breaking it into quarters, with Q1 repurchases x 1, Q2 repurchases x 0.75, Q3 repurchases x 0.5, Q4 repurchases x 0.25.
This works because, for example, Q2 repurchases only impact the weighted average share count of the full year for that quarter and the two remaining quarters after (3/4).
It seems obvious in hindsight, but it kinda blew my mind how quickly he figured that out.
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As another example, we were trying to backsolve a weird 10-year DCF we received from a co-advisor where the WACC decreases each year, and our entire team spent an entire day completely stumped as to how they got their PV of FCFs because UFCF/(1+WACC0)^t each year just wasn't calculating to their figures.
It took our MD 5 minutes to figure out that rather than doing UFCF/(1+WACC)^t with the different WACC each year, they were doing UFCF/(1+WACC)/(1+WACC of previous year)/(1+WACC of 2 years prior)/etc...like wtf???
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I've never been great at mental math, hedge-fund-style brainteasers, etc., so maybe I'm just too dumb...but does anyone feel the same way? I went to business undergrad, so I never really touched non-finance-related math besides introductory calculus (and always using excel).
Any tips on what math areas / techniques I can learn to get better at this type of thing?
He’s just Him
He is for sure. Never respected an MD more than this dude tbh.
I would guess that they've seen the same thing before/had it explained to them. For example, the fractions approach for the weighted average shares outstanding is taught in the CFA curriculum (took a course in uni where a prof followed it). I'm sure they've seen their fair share of DCFs as well and have seen the same calculation being used, or just knew the theory well enough to spot where you were going wrong.
I think that's the cool part tho. You are already learning these tricks and angles from your MD - next time you're in a similar spot you'll know how to approach it, or you'll be able to explain how to do it to someone coming to you for help.
Otherwise could chalk it up to them just being super sharp. Once heard of an MD who would know the outcome of the math and have the juniors build a model just to show that he's right.
This. It's really just experience, hedge fund technicals aren't going to help you all that much here. The MD probably has 30+ years of experience in the field. It adds up - especially if you're inherently a math guy like this dude is.
Write down all of these small things in a dedicated notebook... revisit it once a year or so. If an MD is helpful enough to teach this stuff, don't forget it. Maybe ask him to grab coffee and ask his tips on how he stays so sharp with the math / how he learned to model, people tend to be very flattered when you notice a niche skill like that
Thanks man. Solid advice. Definitely would love to try and grab a coffee with him to just talk about this stuff. I feel like a dumbass whenever he’s explaining this stuff to me and it takes me like 3 explanations to get it lmao.
Yeah my MD is exactly like that. He can predict the outcome of our analysis like 90% of the time it’s nuts. I feel so outclassed working with him tbh, but I absolutely respect the man for sure. Built different.
Edit: and yeah appreciate the insight. For sure learning a lot from the guy.
Both of these anecdotes strike me as the kind of thing that you could pick up with experience without being some kind of savant.
The EPS calcs on the share buyback is the same concept as why people use half-year conventions on LBO debt. It's basically a quarter-year convention.
On the WACC story, there was probably some obvious pattern in the WACCs that indicated that they were using multiple years' WACCs. For example, if the WACC trends down from 20% -> 15%, and the blend is 17.5%, then you can probably work out that it's using a different WACC for each year.
Yeah, I guess I just struggle with keeping track of numbers in my head. For some reason I have a lot of trouble with “visualizing” (For lack of a better word).
For example, EPS accretion of repurchases being estimated as 1/(1-% reduction in shares) for example makes sense when I look at it, but I need a minute to think about it whereas my MD sees these and immediately recognizes the reason for the calc.
Maybe I have a learning disability I never knew about, but I struggle a lot with mental math in that way.
For the exact calculation you mentioned, I remember that as just being "grossing up the EPS." There's fewer shares, so you gross it up by that amount. If you have 40% fewer shares, you gross up the EPS by dividing by 60%. If 90% of shares are eliminated, EPS is grossed up by dividing by 10%, so 10x.
Now I get why there's emphasis on target schools – why is mental maths rocket science?
I mean I am from a target school, but we relied on excel. I’ve never been good at mental math.
It's just muscle memory from experience. It's the equivalent as knowing your multiplication tables as a kid.
Thanks. That’s actually reassuring to hear.
Weighted avg of shares outstanding was taught in my undergrad accounting class...
Yes, and I can model it out in precise detail. The problem is trying to come up with a simple quantitative “back of the envelope” method that’s easily digestible for a client. That’s where I struggle.
Like modeling it out without specifying which fiscal year, source of financials, etc. On a highly and purely illustrative level, the simplification is harder to me than just modeling out with the details.
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