10/9/16

So I have been asked twice in the past week by ambitious young monkeys "What are the best sources to learn to build a financial model". The problem is these guys are only freshman and sophomores in college. A FINANCIAL MODEL IS USELESS UNLESS YOU HAVE A STRONG UNDERSTANDING OF ACCOUNTING, and corporate finance. Until you have been at least through intermediate accounting and taken at least corporate finance, I highly suggest you spend your time on other things that are better value added to your development.

You young guys think a financial model is this magical thing and knowing how to do it will all of a sudden make you a great investor/financier. What you don't know is that a financial model is simply a tool for us to use to back up our qualitative assumptions of the company. A model is only as good as the assumptions that are made, and these assumptions are developed by knowledge of the business, how it generates revenue, and how market and economic factors will impact the business.

What should you do instead?

READ!! READ!!! READ!!!

1. Before you learn the technical skills of finance, you should develop your qualitative finance skills.

Every freshman and sophomore on this board that wants to go into investments should get a subscription to the Wall Street Journal. Read it for 20 minutes a day so you can learn how the markets work, what drives the market, how do different businesses operate, what drives the economy. Building a knowledge background about the markets and how it operates will make you twenty times more qualified to a potential employer because you actually sound smart. Read articles on other sources like Seeking Alpha, this forum, Fortune, Forbes etc...

2. Read books about the industry you want to go into.

If you want to go into Investment Banking, I highly suggest you read books about the industry so you know what you are getting yourself into. You can start with Monkey Business and Liar's Poker are a good start.

What if I don't like to read?

Well what you don't know is that reading is crucial to this industry. Constantly everyday a real investment professional is constantly reading about the markets, the companies they are following, and the industry they are doing work on. If you don't have a natural curiosity then it will be tough for you. However, you can develop that curiosity by reading.

So when do I start to learn modeling?

You can begin to learn modeling after you have completed at least three accounting classes and taken at least two finance classes. For most people this is sometime in Junior year. Then you will have the basic background to build and understand a financial model. The knowledge base you will have built from reading will supplement this greatly and you will be a rock-star candidate for IB/ER internships Junior Year. Good luck monkeys.

Comments (25)

10/4/16

this is great

Financial Modeling
10/4/16

I agree, but the people you are talking about sound like they have already fallen behind ... I would suggest studying for the GMAT and placing into a bulge bracket business school

10/4/16

How have Freshman and Sophomores in undergrad that haven't even started taking courses within their major fallen behind?

We were all clueless as Freshmen.

10/7/16
Rags to Hermes:

How have Freshman and Sophomores in undergrad that haven't even started taking courses within their major fallen behind?

We were all clueless as Freshmen.

I was going to say the same thing...I didn't even know what IB/Management consulting was until summer entering Junior year...

10/4/16

Great post. I always get frustrated at the extreme value jr people place on modeling. It's important but not really.

Qualitative analysis (using data of course) is far more important. A model is merely a check in the box of diligence. Masterly of the underlying concepts and a strong business acumen are far more important - hell modeling isn't even hard, so don't try to build a career/reputation at being good at excel as that is replaceable.

10/4/16

"What you don't know is that a financial model is simply a tool for us to use to back up our qualitative assumptions of the company." - YES.

Why else do you think the k & q are so wordy lol

10/4/16

Join a firm that uses them and have them teach you the basics so you can UNDERSTAND THE MODEL

Financial Modeling
10/5/16

So funny because I'm a Frosh and was just thinking that I should try and get ahead of the game and start learning how to model. LOL little did I know. Any ways I'm learning how to do basic shit on excel instead, and reading Bloomberg and the wall st. Journal daily.

10/5/16

Your investment thesis won't hinge on a model, it'll be down to 1 or 2 key drivers in the business which are usually assessed qualitatively, with some basic maths (and sensitivities) to back it up.

10/5/16

This is so true. I wasted so much time beating my head against the wall with modeling. After a few accounting classes its clear as glass. The way more valuable stuff for me to land that all important IB SA is what I learned about the industry I covered, the market, and macroeconomics.

10/5/16

This is so helpful. Young people like me should be more down to the earth. Just feel a bit hard for self learners.

10/5/16

I would say to take those accounting classes as early as possible. The more time you give yourself to understand the basics, the better you will be in the long run. I know I wish I had spent more time reviewing financial accounting, would have helped in some of my interviews.

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Best Response
10/6/16

In addition to reading, this is roughly the trajectory of learning how to model:

  1. Learn the 3 statements and their intricacies
  2. Read up on time value of money and net present value, CAPM, capital structures, WACC, and FCFF vs. FCFE
  3. Important: learn Excel functions and shortcuts
  4. Read up on DCF and Comps analysis. Practice building out historicals and simple projections. And eventually scale up to a full model.

The basic tools of finance is pretty straightforward. You need to make sure you understand valuation theory cold

11/5/16

Great advice for any monkey trying to break into IB, myself included

10/7/16

What the fuck does strong fundamental accounting knowledge have to do with it? I'm going back and forth with a portfolio company over modeling revenues on a cash basis vs. accrual accounting but that has nothing to do with my ability to mechanically build a clean model for something. If you want to be good at modeling, take a computer science class and learn to code, those classes teach the exact kind of problem solving you need to understand the tools you have in excel to solve problems.

I wear smoking slippers to work

10/7/16

Same experience here. When interns or even first years come in they want to be all over the models. It takes some hard explaining sometimes that any semi-intelligent person can technically build a model. Assuming that we all are more or less smart, the focus should always be what conclusions you can draw from your model and how various factors influence your business.
But then ppl get so caught up in crazy wizarding formulas that they forget about the view from 30k ft. up

10/8/16

As far as self teaching, on youtube Martin Shkreli has a series he put together on basic spreading and modeling. Simple stuff but he goes into investment theories and is also pretty hilarious.

Would have been a good intro when I was a freshman/soph in college

10/10/16

Can't wait to watch those videos about price gouging and money laundering.

10/10/16

I can appreciate his dark humor, I get it not everyone can.

Another good free resource is Macubus .com

4/21/17

bump.

10/11/16

Good for your mental health? Really kid.

Since you signed up for it already, it wouldn't hurt to do it. You definitely won't get near as much out of it as the Junior who is much further along in the curriculum.

10/10/16

This is really helpful. Thank you very much.

10/11/16

@Rags to Hermes -
Great post.
Only thing to expand on - don't only read books on finance. Stimulate your mind by reading a lot of non-fiction and biographies. Learn how others view the world, how they overcome challenges, how they have learn from failure.

For all the young ones out there -
Modeling is something every bank can train you to do. They can't train you to think critically and be intellectually curious. The guys we promote from Associate and VP aren't the best modelers - they're the guys that can read a CIM and get to the heart of the business they're evaluating in a single day. If they encounter a business they're not familiar with, they jump on the internet and gorge themselves on information so that they understand the landscape. If you're not somebody that has a naturally curious mind, you're unlikely to make it on the buy-side.

10/15/16

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11/14/16

Don't say this in a banking interview:

Which superhero would you be and why? I want to be like Robin Hood, stealing from the rich and giving to the poor - me.

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