How important is financial modelling to an investor
Hey everyone,
I would like to get your opinion on how important financial modelling/ modeling skills are in order to be a successful investor.
Im asking because I don’t understand how a 5000 row model, helps you to value a business (candlestick capital thread). In which way does a complex model that forecasts every possible line item help you to understand and value a business compared to a simple model. I feel like you will just tend to overcomplicate the model and increase the likelihood of making false assumptions.
Are funds that are so model heavy outliers or is it common practice and necessary to be a good investor. Asking mainly because from my understanding, a some investors rather shy away from over complex model or theoretical concepts to value a company (e.g. warren buffet).
It’s very sector / company / fund dependent. Some things can be modeled incredibly accurate in seemingly mind numbing granularity (often infrastructure). Some things don’t really make sense to model in as much detail, but you can predict certain line items for sure so you might as well include them.
At the end of the day your drivers aren’t going to be your only thing you use to invest, but can definitely provide a good sanity check/force you to think about all components of the business that you might have otherwise missed (if this drives this, how does our investment change? If this event happens, what happens to our IRR?)
I’ve seen this happen a few times where an investment looks great at first by IRR alone but as you dig into what really drives revenue / costs you start to realize how shit it was all along.
But would you say that this works best if you are in a transaction and have insider information (PE buyout), because I feel like a lot of the Information you would want to forecast for businesses are not disclosed to the public. Would you just make assumptions based on industry averages or how would you take starting points for forecasts, where the 10-K, 10-Q etc. don’t give sufficient information?
Of course your model assumptions will be better if you have insider information lmao. The whole point in learning an industry/business is that you hope to understand its underlying drivers and gain an edge over the rest of the market.
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