How hard is modelling after all?
How difficult is it really to build DCF and/or LBO models? How long does it take an intelligent person to learn to build complex models?
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Building good bottom-up/top-down forecasting models is challenging. Especially when you need to do it quickly.
Given forecasts, building a DCF or lbo model is very simple.
Modeling is not as hard as I thought it was going to be.
Things easier than modeling 1)Anything you do in a finance class in the avg undergrad business school. 2)Your sister 3)Comps and pitchbooks
Things harder than modeling 1)Advanced calculus 2)What would be considered a moderately difficult program by a second year comp-sci student 3)My dick
Yeah, I know its a shit answer unless you're intimately familiar with your sister, my dick, or comp sci. Deal with it.
Thanks, dazedmonk, for sharing these details :)
is pretty straightforward once you learn the formulas. there is nothing complex about it whatsoever, just addition/substraction/multiplation/division. sure "accretion/dilution" and "analysis of various prices" sounds intimidating at first but when it comes down to it its just addition and division.
the difficult time and the shit that takes the longest is coming up with the assumptions that go into the model. how do you choose the multiple that you use in that LBO or SOTP? i duno, hey lets spread or benchmark the entire fucking industry. and thats why banking sucks and takes and the hours are as long as they are.
Not really that hard, but it can be time consuming. I mean, once you know how to handle modeling debt and interest and aren't intimidated by circular references, it's not hard at all.
To farva's point, the thing that can cause a model to turn into a bear of a project is getting the assumptions right. For instance, when building a model for a sell-side M&A engagement, you could spend hours/days/weeks with the client working to get an accurate revenue & cost build up to drive the model. The actual three statement model isn't what's complicated.
As for DCFs? Fucking joke. LBOs? They get more complex as you get wilder with the debt instruments you incorporate, but they are still not going to crush your brain.
As with anything, the more experience you get modeling, the better and more comfortable you will get. Nothing to freak out over or get overly excited about, people stress waaaaaaayyyyyy too much over modeling...I hear people talk about modeling like its as much fun as fucking a chick...it's not.
you, sir, have obviously not been building your models the right way.
half true. the actual excel modelling is OK. not bad. its like a game, quite fun when u get faster and faster.
hanging around clients offices for 10 hours waiting for them to argue about/sign off on the assumptions is totally gay.
or having someone decide "OH YEAH LETS MAKE THIS MODEL MONTHLY", now tell me u'd rather do that than tap some ass.
Also keep in mind that for the more complex math, you have quant teams that make modeling much easier by building in functions. This may apply more to S&T than IBD, but let's say you need to price out some options on something. Quants at banks usually build in the more complex equations, so instead of inputing the Black-Scholes formula directly, you'll have an internal add-in to Excel that lets you type in a very basic formula, and then just reference the 5 or 6 cells that contain your variables and, the output will be your option price and your Greeks.
Same thing with DCF. On the S&T side you don't assume a discount rate, but instead pull in an entire discount curve, like LIBOR, for pricing out swaps and such. Your bank should have something set up where curves are stored internally and you just reference a curve in one cell then put down a list of dates. Then everytime you F9 the LIBOR curve, month by month (or any time period you want), will automatically update in your spreadsheet so you can update cash flows as often as you want.
Plus quants can help you out when you need it. I once built a model where I needed to create a new forward curve and didn't know the best method. Our quants suggested cubic spline interpolation, so they built a spreadsheet that did that and I just integrated it into the model I had already built.
MODELLING IS THE WORST!! good thing i dont do it anymore
--------------------------------------------------------------------------------------------------\ http://modernyuppie.blogspot.com/ Musings and antics of a young hedgie in the Rotten Apple
ill take brazilian models over excel models
The only thing worse than having to break down the model on a monthly basis is building an entire store by store or property by property roll-up for companies that have 100's/1000's of assets/locations.
I too, prefer brazilian models...my favorite being Adriana Lima
It amuses me that so many people think modeling is the most important part of the job, when in reality no one in finance actually decides to do a deal or not do a deal based solely on a model. Sure, they might use it to confirm assumptions and look at different scenarios, but deals come together because of qualitative factors and both sides agreeing, not because of the IRR an lbo model outputs.
I think the 80/20 rule applies just as well for modeling as it does for anything else: getting the basics right and getting everything to flow correctly gets you 80% of the way there and represents 20% of your effort.
If you want to go more in-depth and do property-by-property roll-ups or monthly breakouts or unit-by-unit builds, sure, you can do that but in reality it's all guesswork anyway so I view it as the 80% part of your effort that goes toward the 20% of your results.
Generally the most difficult/time-consuming part of modeling is getting the assumptions right and having the client actually agree to whatever you've stated for the financial projections and such.
The first time (or first few times) you do a model, you learn a lot but after awhile it becomes pretty routine.
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