I have been reading a lot of posts on people asking each other if they know how to work models and / or if they can build a model from scratch. Though knowing how to build a model (be it LBO or Equity) is a good skill to have, it is not going to stop you from getting into a IB advisory or Equity Research job. Most firms have a library of models and don’t waste their analysts’ time in building one from scratch. As a 1st year or junior analyst, you have much more important things to do than build a model from scratch i.e. copy and past industry reports, print pitch books and deliver to the MD’s house and pull comps from capital iq. Trust me when I tell you this, it is more important to know how to a write a concise and comprehensive memo describing the results from a modeling scenario and your recommendation based on that than the model itself. More important than knowing how to build a model from scratch are to know the excel shortcut keys. When it is 10pm on a Friday and you still have few more hours of ‘modeling’ (glorified spreading of financials) those excel shortcuts will come help out more. Just my two cents.
I agree, unless you are doing for your personal interest/investments, then I can see the benefit of knowing how to build one yourself (especially as this will help you to adjust/improve it moving forward).
This is only true if you are doing generic BB IBD modeling. At boutiques they often do build models from scratch for each client, both to really make sure the analysts know the model well and because each case is always somewhat different. Also, if you’re in a more “creative” position (like on a trading desk), we need to know how to model because we create brand new models (or at least add to existing templates) all the time.
i think u’re talking about LBO models and accetion/dilution analysis models. you would most likely have to build everything from scratch for very detailed ops models - or refine an existing template quite significantly - which makes u better off building one from scratch…
BlueCollarHero Wrote: ------------------------------------------------------- > Most firms have a library of models and don’t > waste their analysts’ time in building one from > scratch. As a 1st year or junior analyst, you have > much more important things to do than build a > model from scratch i.e. copy and past industry > reports, print pitch books and deliver to the MD’s > house and pull comps from capital iq. I disagree. I’m not sure what line of work you are in, but if you are an analyst in banking or in research, then financial modeling will be a huge component of the job. It’s true that there are templates for certain things, but oftentimes in banking or PE, you’re tasked with putting together a quick-and-dirty model which can be easier to throw together from scratch, especially when you’re under a time crunch. Also, there are special situations and circumstances that require you to “break” your firm’s template, and in order to know how to do that, you have to understand how the model works and how things link together. I don’t know how you can say that financial modeling isn’t an essential part of a junior banker’s job – it’s more than essential. It’s critical. > Trust me > when I tell you this, it is more important to know > how to a write a concise and comprehensive memo > describing the results from a modeling scenario > and your recommendation based on that than the > model itself. “Trust you”? As a junior employee in either research, banking, or PE, your foremost role may not be to describe the results of a scenario or write the “recommendation” (you don’t do any "recommending in banking, by the way) – even though your role may evolve towards entailing these responsibilities as you gain experience. But going back to the main point, how do you go about interpreting the model if you don’t understand how a model works? The answer is simple – you can’t. The assumptions are what drive the model (except in the case where the model is used for confirmatory purposes, where the converse is true). This means that deriving the results from your inputs and assumptions requires you to understand what’s going on in the model. Secondly, the role of a junior employee in research, banking, or PE is often more tactical than anything else, at least when you start out. As a newcomer, it will not be your responsibility to come up with your own “recommendations” in research, and as a banking analyst, you certainly don’t make any material recommendations of your own, contrary to what you have stated. On the contrary, your job is to build models, put together memos or notes, analyze data, and so forth – and you must do all of these things correctly. One of the most important things to do as a junior analyst or an associate is to not mess up, and to double-check and triple-check all your work. This is why knowing how to model and having attention to detail are so important. If you cannot build or run a model without making mistakes, then you are a liability to your team, not an asset. > I have been reading a lot of posts on people > asking each other if they know how to work models > and / or if they can build a model from scratch. > Though knowing how to build a model (be it LBO or > Equity) is a good skill to have, it is not going > to stop you from getting into a IB advisory or > Equity Research job. This is somewhat true. I got my banking and research offers straight out of college and had very modest exposure to modeling during my junior year internship, and also had no on-the-job exposure to LBO models prior to moving into private equity. However, this certainly doesn’t imply that these skills are not important to learn prior to the job. If you are interviewing for a job, it is to your advantage to know as many of the core skills as possible. The last thing people want to do when they hire you is to train you. Modeling may not necessarily be a pre-requisite to these jobs – after all, it’s not exactly nuclear physics – but it is an important part of the job and you should really learn it if you plan to differentiate yourself from the unprepared masses. Phrased differently, you will decimate your chances of getting an offer if you show no initiative to learn the skills required for the job.
numi, I am not sure what do you mean by there is no ‘recommending’ in banking, right you do not recommends stocks and bonds, but for the majority of the time you are ‘recommending’ any variety of things to your clients, i.e. appropriate capital structure…pricing of transactions…pricing of instruments and what not…and the other times you are putting your balance sheet at risk at which time you are recommending to the bank’s internal committee’s if the transaction is good for the bank or not. Thus basically all you are doing in banking is recommending, or I supposing the better word to use is ‘advising’ or to ‘opine’ as people in banking love to call it. While I agree with you that as a junior resource on a deal you won’t do any recommendation by yourself and will run the model exclusively, after your model and output are finished and your deal team has a recommendation for the client, you will be the one responsible for drafting the pitch books. And in my experience, the analyst who excel quickly are the ones who can clearly and concisely explain the recommendation and output of the model. Same goes for explaining the recommendations for the internal committee memo’s when putting the balance sheet at risk. Granted you are not wrong and it is a good idea to learn as much about modeling as possible. But I just wanted to bring the point to light that is it not absolute necessity to be a modeling god to get a banking or research job. Plus in an interview no one can distinguish if you have good modeling skills are not, unless of course they ask you to conduct one, which I suppose they could. However, at the BB’s and other major shops, Training the Street or the other major modeling companies are having training session every month and they will most likely have you participate in those if don’t join as part of a analyst class and join the firm anytime outside of June / July. It is much more important to have good excel skills in my opinion. I will caveat this with one thing, I have never had a research job and I am not sure what there models look like. I have friends in research who have said my banking models were much more complex than what they put together. However, this could be just be the firms they work at and I am not about to make a generalization. Feel free to agree or disagree.
One think I’ve learnt - models don’t give recommendations… Recommendations should be made independent of the model and the model used to confirm the hypothesis… And just because the model spits out a 25% IRR, doesn’t mean the deal is good and vice versa… As they say - the people who give too much attention/weight to the model are associates straight out of business school and analysts… Anyway modelling is not hard at all… the only think you need to know to model properly is how the 3 statements interact with each other… everything above that are just bells and whistles…
There’s a mechanical part of fundamental modeling which us about how the statements all connect with each other, and there’s a more abstract, conceptual part of modeling that has to do with knowing what factors are most influential on a particular business, and making sensible projections of revenue growth, operating margins, etc… The first type can be learned by studying a book and spreadsheet; the second requires more insight and experience.
You need models to reveal market assumptions.
myzegna Wrote: ------------------------------------------------------- > Anyway modelling is not hard at all… the only > think you need to know to model properly is how > the 3 statements interact with each other… > everything above that are just bells and > whistles… If modeling is not hard at all, then that just reaffirms that people really have no excuse not to learn how to model in advance of a job interview.
Modeling is not necessary if you are smart enough and enter finance through non-traditional routes. I know this because my boss, who moved to banking from academia, uses a mouse to navigate through excel. For the rest of us who went through the traditional path (undergrad/MBA), modeling is essential. If you are a junior, modeling IS your job (together with making concise, beautiful ppt).
well said Zuran… some MD’s who have been through the traditional route are pretty hands on with the model Some don’t really care - all they’re worried about is the key outputs… Also, everything can be sensed checked/calculator with a pen and calculator and that is what a lot of the senior bankers I see do… numi, good point…I wouldn’t expect though a jnr to be able to model if they’re coming in for an entry-level position in banking. What i would like to see if an understanding of how the three statements interlink and what flows where and where
Young people today are so ambitious. When I was younger, I would have been perfectly happy to just date a model. Now everyone wants to build their own. A foolish and narcissistic generation…
I blame Weird Science.
JoeyDVivre Wrote: ------------------------------------------------------- > Young people today are so ambitious. When I was > younger, I would have been perfectly happy to just > date a model. Now everyone wants to build their > own. A foolish and narcissistic generation… JDV, I consider myself young and would be happy to just date a model. But when those hundreds of fields medal winners next to me start spitting out models by the dozen and then get paid the $$$s to go and get some from the bar across the road, thats when I have no choice but start fumbling with the keyboard.
JoeyDVivre Wrote: ------------------------------------------------------- > Young people today are so ambitious. When I was > younger, I would have been perfectly happy to just > date a model. Now everyone wants to build their > own. A foolish and narcissistic generation… LOL +1
Anybody have any pointers on how to learn modeling?
start with an oil & gas company, you’ll be surprised how easily you can translate Price, Cost, and Quantity into an income statement.
bchadwick Wrote: ------------------------------------------------------- > There’s a mechanical part of fundamental modeling > which us about how the statements all connect with > each other, and there’s a more abstract, > conceptual part of modeling that has to do with > knowing what factors are most influential on a > particular business, and making sensible > projections of revenue growth, operating margins, > etc… The first type can be learned by studying a > book and spreadsheet; the second requires more > insight and experience. Knowing how the three statements all connect together will lead you to the fundamental challenge in modeling, the abhorrent circular reference.
I think knowing how to build models is a very useful skill, but it probably varies from job to job.