Modeling at SMs
I'm thinking about moving from private to public markets and while I'm evaluating this transition along a number of criteria, I want to talk specifically about modeling on the job.
At my current firm, we build endlessly complex models. Personally, I don't think they are that valuable except for occasionally finding items that make you come down slightly on value (is that applicable to HF modeling since there's no competitive auction? How detailed are price targets, how often do you update, what info do you use outside a 10-K to build models?). For the most part, we end up in the same place as we did when starting out, and so the complexity is mostly performative; I am of the belief that just because there is information to be processed, does not mean it needs to be processed.
At SM HFs, are Analysts modeling junkies? How much of the day to day job is modeling? How detailed are models relative to PE models? Where does model building come in - ideation, just prior to execution, etc.?
Thank very much.
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Don’t know about other guys and maybe some will say I have limited attention to detail but as a generalist I usually spend most of my time on the phone discussing about any name of interest, reading/processing equity research, meeting companies. Rarely do a full blown model. Depends on the sector I’m looking at but I usually focus on revenue build / income statement to make sure the numbers/assumptions are fair and that it mechanically comes up to some differentiation.
When you do a revenue build / income statement, how do you do this? Do you do a full bottoms up build based on headcount (e.g., maybe scrape an org chart together from LinkedIn?) Or are you able to find enough about say, retention metrics (somehow? I'm not sure) that you're able to have a bottoms up projection that way? Or do you maybe take market share assumptions to project growth? Just curious how you go about the revenue build / income statement model.
I usually take whatever they did last year/quarter and multiple by 1.1 and go from there. hope that helps!
You can find all types of analysts, from obsessive modelers to guys who won't go deeper than back-in-the-envelope calculations and will primarily resort to back-of-the-envelope calculations and qualitative DD (feedback from clients/competitors mainly).
I think one could say the endlessly complex models are often a by-product of the imported banking culture from where your #1 goal is to not screw up and make the guy above you satisfied. And you have those crowded project teams where every VP/Director will add comments to get credit. Sure, in public investing, on some companies you might have to get your hands dirty and do very granular models. But that will (usually) be because you expect to get additional insight, not because someone wants to get credit for the deck/model.
Personal preference is to focus on fewer assumptions when modeling but to really challenge them
Do either of these necessarily translate into better success as an investor? It would be great to find a place where obsessive modeling isn't the culture, but, if that's going to mean I'm a shitty investor, then I'm no better off...
Can you say a little more about this as well?
Thanks for your response (past one and hopefully another reply!)
I have limited experience, but I tend to agree with what Dunder said below. Modeling nuances and getting a tax rate right won't make you money. What will is understanding the story and the underlying inflection points.
Regarding the clarification on why using fewer assumptions makes sense, see TheBuellerBanker 's take below which sums up my thinking
Depend on the fund/style. Some of the best investors/analysts I know barely do any modeling. Typically just use sell side models and then tweak numbers. Sometimes when needed you go in to details modeling a specific revenue segment/line item but never full blown three statement model for every name.
It's pretty rare/hard to consistently make money on modeling nuances. Investing is more about narratives, and the model serves to support your thinking. You could spent hours modeling the tax rate for a quarter, only to find nobody cares that the company beat or missed because of it. Or you could be modeling a restaurant during COVID and perfectly nail the quarter, only to find out nobody cares about the quarter and only the QTD matters.
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