Mod Note (Andy) - as the year comes to an end we're reposting the top discussions from 2015, this one ranks #23 and was originally posted 8/28/2015.
Inspired by the "Why YOU Aren't Getting Offers" repost for #TBT.
I just participated in a series of interviews and I was sincerely disappointed. I was asked to cover the technical portion and no one could walk me through a DCF well. While I am going to talk to the people who referred these candidates (and also make note of the quality of their referrals), it occurred to me that often candidates don't realize or get clear feedback on why they didn't move on in the process (interviewer has no upside, potential legal nightmare, against policy etc.). Yes, there are always "better candidates", but there are some very common (and highly fixable) problems I see way too frequently. Perhaps that's the frustrating part, because I feel like these are things that are very easy to prepare for.
It's not just about getting it right, but presenting it well.
Let's use an example of DCF because it is standard / plain vanilla / middle of the fairway. You will get this question for sure at some point. You should know this cold. It should be polished. There is no "but what if I sound too canned" debate. I have never heard anyone sound "too canned" on something like this (or anything for that matter). I HAVE dinged people for just regurgitating when it is clear they don't really understand what's happening.
I think the worst part is that people think they know it really well and when you ask them to walk through it, they fall apart completely. And often it's not necessarily because they don't understand the concept, but they are weak at presenting it.
General Guidelines for Interviewing
1. IBD is very much about having the right answer. You have to be crisp in your terminology. You can't "get the idea" you need to tell me exactly.
2. If you are doing a memory dump to prove you know the material, stop. The whole interview should be a back-and-forth conversation. I may or may not want to probe deeper. Let the interviewer lead. I don't want to hear CAPM in your first go (more on this and pacing later). If you just keep going, I’ll let you dig your own grave. I’m not incentivized to save you. I’m looking for reasons to disqualify you and reduce the list of names I need to weed through. We will always have more candidates / interviewees than spaces.
3. If you throw a number out there (terminal growth should be between 2 to 4%, "I would forecast out seven years") you better be ready to defend why you do it.
DCF Example
Q: “Walk me through a DCF”
A: There are three steps to a DCF
1. Forecast free cash flows in the near-term, until the business becomes "stable" / predictable
2. Determine terminal value to capture value of the business as an ongoing concern beyond forecast period
3. Discount these cash flows to present value
That's it. 15 to 20 seconds. Let the interviewer probe for more.
In the first pass, I don't want to hear:
- The formula for FCF
- Multiples / perpetuity growth method for terminal value
- WACC
- CAPM
These are things that the interviewer can take the lead and dig deeper if they ask. I want to see some professional maturity in that you can structure your thoughts and answer my question succinctly in a manner that shows me you are confident and have a strong command for the materials.
The worst is when the candidate takes the lead and gets something wrong. Then I have to interrupt and get them to clarify. It's usually downhill from there.
I want you to make my job as an interviewer harder. I want to have an energetic debate about the top 10 candidates we interviewed rather than immediately disqualify 5 because they were terrible at the outset.
Nice post. I wish I had thought of this while I was interviewing. From an applicants standpoint, though, this is pretty tough. If an applicant answers the question exactly like you wanted, they run the risk (at least in their mind) that you may think that they are not too familiar with the DCF. This is why most applicants give these lengthy answers.
That's fair. It's not an easy thing to do, but I'm trying to provide the rationale to why this way is better. It's not obvious which is why "memory dump" is so frustratingly common.
Some things people might not realize when "memory dumping": The interviewer needs to standardize questions across candidates (I want to ask everyone the same question so I can level set as time is limited) so that when we have round tables about candidates I can give apples to apples comparisons of candidates. Rambling dominates the conversation and doesn't let them do that. It also opens yourself up to messing up because you are nervous and say the wrong thing for something the interviewer wasn't even looking for.
Also, I would say that this whole "philosophy" is portable to any level. Example: MD who asks for you to put together a carpet bomb deck for a client. The clients aren't stupid. This is the candidate equivalent of rambling in an interview. It shows a lack of confidence. They know it. The MD knows it.
I'm sure your approach to interviewing works for you and your group but it just feels lazy to me. It seems more effective to gear technical questions towards someone's background and evaluate what they were able to get out of prior internships, than to see how well they can memorize an interview guide.
They'll learn how to build a dcf on the job.
No offense, I don't buy the "they will learn the DCF on the job" argument. I want my hires to know the basics so we can move on to more sophisticated topics because everyone knows there is more to IBD than cranking DCFs. But it's table stakes, a platform skill to build on. In a competitive job environment, all things equal, I will take the candidate that has stand out technicals.
I agree with the no value to memorizing interview guides, but that's not my point. I feel like memorizing is a "base minimum". Like jesus, at the very least you could memorize the answers. Any interviewer can spot pure memorization from a mile away. I'm saying structure your answers to pace your interview.
Also, this structure is not the end of the interview. It's the start (the FIRST 15 to 20 seconds, not the last). I will ask the majority of the other questions and I want to know that candidates have the capacity to understand this at the start. I've seen too many people set up for failure because they were hired because people thought they "had the capacity to learn" but never really pushed them to see if that was true early on.
Why should I invest (and potentially waste) my time teaching an analyst if they haven't spent the basic requisite time to at least try to do it themselves first? This stuff is not hard. If you've ever had to do it for a class, you should have a basic understanding. If you've ever had to do it for a case comp, you should have a basic understanding. If you haven't had the opportunity, but you want this job, then go find the time to try it so you can get your own understanding.
You're rambling...
You get a monkey shit from me because you assume that what's right for you is objectively right for everyone.
I've had interviews where I've given the sort of responses you're looking for to general "walk me through a DCF" or "walk me through CAPM" type of questions and got hammered for doing so.
One interviewer asked me,
"if you had to explain CAPM to an economic illiterate. A 70 year old grandmother that never went to high school, and if you only had 15 seconds, how would you do it?"
My response,
"CAPM is an economic model which says that investors are paid for accepting risk, but not for all forms of risk. Specifically, they are rewarded for bearing risks of the general economy and the model attempts to price that risk."
The interviewer then slammed me for not going into more detail. Not explaining how risk is defined (systematic volatility), not explaining that there's a risk-free component and a risk premium component, not introducing the concept of beta and its relationship to the general market, etc. He even said, "don't you have a masters in finance?!"
So to get back to the point, there is no "right" way to answer an interview question, though there are definitely plenty of wrong ways (wouldn't be appropriate to get into risk-neutral pricing when trying to explain CAPM). It all depends on the interviewer. Interviews are generally crap-shoots. The person interviewing you most likely has an inflated image of his/her self and are biased.
I appreciate the honesty. As for the interviewer that's shitty. If I'm looking for you to explain a specific concept I'll normally guide to it. While I'm not motivated to save shitty candidates I am actively not trying to shit can good ones either.
One thing to consider: if your interviewer is an asshole, do you want to work with this guy? Will he mentor you to be a good banker? I understand we can't always choose where we get offers, but I think beating up candidates is poor form. Of course the interviewer will have a stronger command of the material.
I'll give you a +1 for sticking your neck out.