Are financial models even important?

As George Soros once said in his book The Alchemy of Finance, "It is better to use no model than a faulty model". Lets face it, most models are wrong and their projections are usually off. Especially in the multi manager model which is short-term and speculative, how does building financial models even help there. In the short term stocks are based off of what the market participants think the company is going to do in the future so what is even the point of building financial models in this type of role, wouldn't it be much better to use your time trying to figure out what other people in the market are going to do next?

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Comments (17)

Feb 4, 2021 - 10:31am

To feed the PM's thirst for false precision and numbers. 

Instagram: @dickthesellsider | Substack: dicktoad.substack.com

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  • Prospect in HF - EquityHedge
Feb 4, 2021 - 10:34am

But wasn't the PM an analyst once too who worked his way up to being where he is, so doesn't he understand that financial models do not help?

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Feb 4, 2021 - 10:54am

Your initial point was very good that why wouldn't they just focus on what other participants are thinking, and they do. But it's also single name stock trading, so need to put together numbers out to know what's priced in and what's not.

Also shorter-term funds hire ppl from IB/PE background so it's naturally part of their DNA to model the crap out of things as part of the thought process. 

PM's PM thinks in numbers too, so I wouldn't expect a PM to be changing the process until he/she changes dramatically to become a long-term wide-moat concentrated investor where a lot more time devoted on the business and the softer stuff. 

Instagram: @dickthesellsider | Substack: dicktoad.substack.com

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Feb 4, 2021 - 4:10pm

Building a model forces you to research the company and industry. That way you might not get accurate numbers, but you'll still find out whether or not the company is trash or if it looks good.

  • Prospect in HF - EquityHedge
Feb 4, 2021 - 4:37pm

Can't you focus your strategy around predicting what others are going to do next? After all that is what the theory of reflexivity says

  • Prospect in IB - Gen
Feb 4, 2021 - 4:49pm

So if everyone else is using financial models to predict the stock price, shouldn't you also be modeling to understand why the stock is moving? Firms seriously trading TSLA or GME I hope are not using financial models but rather flows and technicals to make their decisions. Different stocks different reasons.

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