numi Wrote: ------------------------------------------------------- > Here are my two cents. > > The more time I have spent working in finance, the > more faith I have put in the fundamental qualities > of a business, i.e. doing an assessment of market > opportunity and size, competitive dynamics, > barriers to entry, supplier and customer > concentration, leadership position, quality of > management team, and so forth. The financials > (margins, growth rates, balance sheet ratios, and > cash flow values) should essentially reflect all > the fundamental elements of a company or industry, > if you have done your due diligence correctly. > Valuation ratios are just a numerical > representation of how much you should be willing > to pay for a company or asset, but your > determination as to whether a business is > fundamentally good should come primarily through a > qualitative assessment. > > At the end of the day, good investments are > defined by their underlying leadership > characteristics and growth drivers, and the model > is simply a quantitative representation of those > factors; it’s not the model or the ratios that > drive the business. I used to think naively that > having a good model would tell you most of what > you needed to know, but after spending more time > on the sell-side, I started to realize that a > model is only as good as its assumptions, I can > say this with total confidence because our private > equity models can be thousands of rows long, > especially when you take into account all the > different sensitivities, scenarios, and financing > considerations; however, as investors, our > diligence and a review of financial results tells > us whether a stock or company is a good one well > before we even build the model or look at > valuation trends (and most of the time, since > we’re in the business of buying private companies, > we don’t even trading comp history for such > companies). > > Any thoughts? that it is exactly my view. for example, i believe the cfa exam give you the tools necessary to value an investment but it is the qualitative characteristics as well as your own experience that really determines wether you are a good analyst or not. this game is an art, not a science, if there was a formula would could all follow then everyone would be generating alpha.
Ah, this is for an interview. Should have mentioned that up front! Good answers on the part of numi, jdv, et. al.