Whenever I approached the close of my financial modelling course, I always did a simple roll-call to call for feedback from everyone in the class. This time, instead of recycling this common practice, I decided to try out a different approach by using Mentimeter and getting everyone to input three keywords on how they felt about the last two days, and this was the result:
A million followers can't be wrong.
One of the key aspects of financial modelling is being able to accurately project cash flows. This has consistently been a perennial question that comes up - "how do we do it?", "How do we know that the numbers are reliable?", and of course the occasional remark from the seasoned industry veteran: "the assumptions are too conservative, I think it should be much higher!"
Subject matter experts and experienced professionals who have been in the game for a long time play an influential role in terms of how we rely on an estimation of the future. In today's context - given the speed and digital pervasiveness of information - the loudest person in the room can also sometimes be easily misconstrued an industry thought leader.
“Facts can be so misleading, but rumors, true or false, are often revealing."
- Colonel Hans Landa [Inglorious Basterds]
Before we had the TV, email and newspaper, people relied on word-of-mouth as their primary source of information. Casual banter amongst households within proximity was how we passed the word around.
There was usually nothing lost in translation and no one usually questioned its legitimacy. That playground of information is so different today. Part of how we receive information today has evolved to include social media channels, such as Twitter and LinkedIn. We no longer need to hear information directly from the proverbial horse’s mouth. It is incredibly easy to be swayed by the opinions of the majority, albeit online or offline. After all a thought leader with a million followers can't be wrong right?
“Be wary of self-proclaimed and crowd-proclaimed experts. It’s less likely that experts will be mimetically chosen in the hard sciences (physics, math, chemistry) because people have to show their work. But it’s easy for someone to become an overnight expert on “productivity” merely because they got published in the right place. Scientism fools people because it is a mimetic game dressed up as science."
"The key is carefully curating our sources of knowledge so that we are able to get down to what is true regardless of how many other people want to believe it. And that means doing the work.”
Projecting cash flows is a work of art.
You would be almost be certainly wrong if you think that the ability to project cash flows requires hard core quantitative and technical skills. Valuation and financial modelling is really part art part science. In fact I would even go further to say that a large part of it is art, since the desired outcome is almost always based on creatively imagining what the future beholds.
The narrative, so to speak, is as important as the numbers. As Yuval Harari puts it in his book:
"A person who wishes to influence the decisions of governments, organizations, and companies must learn to speak in numbers. Experts do their best to translate every idea into numbers."
And so, the process of constructing a financial model tries to achieve this.
I often get asked if I could provide excel templates for a variety of sectors that people could use to just work off, punching in the inputs to generate the valuation output. Unfortunately, I don’t think it works that way.
The real value in any financial modelling exercise is not the result it produces, but the mental exercise that you have to go through in order to produce a functional three-statement spreadsheet of intricately connected moving parts.
This is probably the same parallel why people run marathons - not to get from point A to point B but more so the journey, the process of having gone through first hand and pain of completing 42.195km and that personal feeling of having achieved something at the finish line. That sensation means something different to everyone.
The financial model is a representation of what you think of the business and possibly how you see it evolving over time. In the hands of another person, the model assumptions and outputs might look very different.
As Warren Buffet once famously said:
"The forecasts may tell you a great deal about the forecaster but they tell you nothing about the future."
Whatever someone wants has value.
Going back to the narrative, the valuation exercise is always all about that magic number and the story behind that number.
It is easy to play around with numbers, crunch the numbers and as a lot of bankers say - massage the numbers. Numbers are freely available nowadays with the Internet and relatively cheap access to that information.
Stories on the other hand are a reflection of the CEO’s ambition and the company’s vision of the future. In the modern and evolving digital world, social media has increasingly found its role as a facilitator of information (both true and fake), and does an incredibly good job of amplifying stories.
Just look at GME.
The boring brick and mortar retailer was reportedly shuttering stores in 2019 and went into a semi-crisis when revenues plunged in 2020. Yet, its share price defied everything the numbers were saying, becoming a cultural sensation on social media.
If you looked at Lehman Brothers' balance sheet back in 2008 they actually had "one of the strongest capital and liquidity positions the Firm has ever had". But the story unfortunately went sideways, souring sentiments very quickly, resulting in its shocking collapse, disregarding whatever the fundamentals and numbers were showing.
Cryptocurrencies and NFTs are also classic examples of how story-telling has manifested in valuation.
There is almost no means of proving why a digital image of a monkey could be worth thousands of dollars. There is also no real use for a digital monkey, and therefore, no way of doing a meaningful DCF valuation.
NFTs are simply worth what they are because people say so and because people want it.
You can’t model sentiment and emotion in a spreadsheet. You also can't do an analysis of the cost-benefits on waging war for national security. Neither can you put a price tag on human relationships. The numbers simply won’t stack up.
"The concept of economic value is easy: whatever someone wants has value, regardless of the reason (if any), and its value is higher the more it is wanted and the less there is of it."
Storytelling for what it is, is a persuasion exercise to galvanise interest and to sell something - an idea, a product, a call to action. But it remains effective only to the extent others believe and identify with it. Any story becomes instantly more believable if there is sufficient information and that the anecdotal evidence provided is relatable by the other party - which explains also why investor targeting strategies are different for retail punters and large institutional buyers.
Without connecting the numbers to a story, projecting cash flows simply becomes an emotionless exercise of numbers.
For the want of money.
The world was a very different place in 2006. We were about 2 years out from the SARS crisis, and it wasn't even considered a pandemic. I had completed my final exam papers, presented my engineering thesis and was comfortably placed in a French IT consulting firm, which at that point of time, was being subcontracted by Philips TV to develop a software prototype. The product was meant to be used for all of Philips' clients in the hospitality and healthcare sectors.
But I left within 6 months into my role. My motivation for making that leap was driven by
The fear of being stuck in an engineering job, working from 9am to 5pm everyday for the rest of my life, and:
Perhaps more importantly: The want of earning more money by being in banking.
That was primarily how the world of corporate finance appealed to me - fresh graduates bringing home $8,000 a month. No other career could offer that kind of salary, certainly not in the engineering world.
But I was not lucky.
My grades were less than mediocre and I had been in the 'wrong' field of study. I didn't even know what a Bloomberg terminal was, how to calculate a series of discounted cash flows, or the definition of enterprise value. I wasn't cut out for an investment banking ("IB") role. I didn’t get my $8,000 per month dream job but I eventually managed to join the valuations team of an accounting firm.
Trial by fire
I distinctly remembered my first day of work at KPMG. All eyes were on me as I walked to my desk. It was only much later in my career that one of my colleagues told me with a giggle: "We were all wondering why you - trained as an engineer - came here to steal our jobs."
So, it was with a bit of dumb luck, a vacant analyst position created by the timely departures of a few junior staff, and sheer persistence that landed me into a corporate finance role.
I had graduated a year later than all my engineering classmates, which made me two years older than the guys who graduated from accountancy and four years older than their female peers. In short, I was the uncle of all analysts in the team. For the longest time, no one could understand why I had taken a 33% pay cut from my job in Philips to venture into the unknown from a zone of comfort and familiarity.
Many times, I even found myself having to clarify where I worked at previously:
"Not Phillip Capital the securities house - Philips, the TV company..."
I was incredibly scared during my first 6 months in my IB role. I came from a working culture that involved going to a techno-park five days a week and sitting in front of my desk coding for long hours. Banking was nearly entirely different - the closest I would ever get to writing code was the Bloomberg functions on excel and perhaps some Visual Basic. Other than that, I was a fish out of water. I was so afraid that my line managers would deem me unsuitable for the job and ask me to leave. However, what they did do was make a bet that I would voluntarily leave within those six months.
This incident was later unwittingly and awkwardly revealed by a stranger who crashed one of our team drinks. I remembered him saying:
"Hey! You lost your bet. He's still here!!"
It is just one of those things people in IB like to do. It might have sounded condescending and insensitive, but you pretty much got to have thick skin in order to survive. IB isn't just about getting through the gruelling late nights and delivering on the number crunching. It was also about the harsh and toxic environment that one has to be prepared to put up with for many years to come.
"Compendiaria res improbitas, virtusque tarda"
(Evil takes the shorter road, virtue the longer.)
Today, I get a lot of questions on how to break into a corporate finance career whenever I teach at the Singapore Management University.
"I don't have any accounting or finance background, how do I get in?"
Ironically, most of the people asking me these questions have better credentials and working knowledge about the field of investment banking than I had during my time. I had tried learning about financial markets and their workings by punting in stocks during the bull market, which peaked shortly in 2007 and went bust later towards the end of 2008.
I'd watched the markets not to make money, but to experience first-hand how it was like to invest (or trade). It sounds unusual given younger people today are more investment savvy and have even more access to investment and trading platforms.
All in all, I don't have a straight answer for how to get into an IB role. The willingness to work hard beyond the stipulated 8 or 9 hours a day was definitely a plus, but beyond that it was challenging to also prove how you could get the job done eventually or what value you brought to the team. For most of my peers it was mostly due to the fact that they knew the culture, having done internships before. In my case, it was probably my positioning as the go-to-coffee-boy for all the work that no one wanted to do.
All in all, I attribute most of this to being at the right place, right time and meeting with the right people (天时地利人和). That said, everyone has a different trajectory.
Back in 2006, I had found myself then in a somewhat employees' market whereby banks were poaching talents from the accounting firms often enough to create a vortex of hiring, and I was lucky to get dragged into the process.
Revisiting "for the want of money"
Bankers during those hey-days were also raking in deals (most notably from the many S-chip listings) and taking home multi-year bonuses. I remembered hearing someone from one of the local banks earning thirty six months of bonuses. Even if his base pay was mediocre, the absolute quantum still sounded crazy. There was even word that bankers who got less than a year's pay in bonuses would jump ship just because they weren't compensated enough.
To put this into an average working person's context, imagine:
In just 12 months, bankers would have earned the equivalent of what everyone else outside of IB makes in 3-4 years.
To extrapolate this even further out - working for 7 to 10 years in IB implies that you could easily retire for the rest of your life. It makes everyone else's job look like a joke. And some folks in IB were still complaining.
More than 10 years on, the frenzy of hiring and huge bonus payouts have significantly subsided. But the toxic work environment probably hasn't. Many graduates today continue to worship the 'altar' of corporate finance and chase the prestige of being accepted into the bulge brackets. I don't blame them.
To paraphrase the words from a scene in Mission Impossible III said by Theodore Brassel:
It is obscene that bankers are paid so much for the work they do compared to most other careers. Easy for me to say "do whatever makes you happy" or "be open to other well deserving jobs as well" when I have personally gone through and benefited from the system.
Investment banking offers no guarantees
Ultimately, everyone has to make peace with whatever career you have landed into. Many of my engineering-schooled friends are doing very well today, even having not gone into banking roles. Some are in sales, business development, entrepreneurs, etc.
Not everyone who lands an investment banking career is guaranteed to make lots of money and the promise of working on exciting deals. Most of the day-to-day work is iterative (and sometimes mundane): Research, spreading numbers and window-dressing a company's profile. As a junior or mid-level banker, you'd be lucky to get involved in and be a spectator in deal negotiations. Be realistic, you won't get to be portrayed a hero or a rockstar deal-maker. This is not the moves. However, you will be paid well and most likely be a target of envy for most of your peers earning a fraction of your salary.
More important than the prestige that comes with it, you really have to love what you do. The dots really do connect backwards. It is not so much about being "fast and furious", but whether you appreciate the dynamics of the job that you have chosen to be in and sustain yourself in that industry for a long time.
As I look back on my cover letter dated in 2006, I recall of how starry-eyed I was when I applied for a role in investment banking. I had been lucky, yet, at the same time, it also reminds me of how far along I had come: I applied for the money, saved some, spent some, invested some and lost most of it. I'd gained knowledge of the subject matter, technical skills and the experience, including the network of people, intangible resources built over the years, and spat out by the system.
But. No regrets.
There’s nothing you should regret in life - all the good things that you have today are a result of everything that has happened.
Consistency has a compounding effect. You usually don’t see the results until a very long time later.
Never look down on anyone because of what they do.
Complain less, stop victimising yourself and move on.
General knowledge, financial literacy and personal health are ultimately your own responsibilities.
When traveling, take the cheapest and happiest mode of transport available.
Never kick someone when they are down.
Learn to give and receive compliment and feedback.
Don’t ever get cocky. Ego and wealth are like items on a balance sheet. Here today and possibly gone tomorrow.
Being hands-on is the simplest and purest form of leadership.
Find the courage to disagree.
Own your mistakes.
Run your own race.
Don’t ever believe that you can second guess the stock market.
Pay it forward by learning to teach and mentor younger people.
It is not where you work that is your source of economic power - it is your health and attitude.
The media is curated by people who are biased. Everyone has a bias. Be critical and discerning, don’t believe everything you read and hear.
In this day and age, a healthy digital footprint is important. Anyone who tells you otherwise is smoking you.
When someone says ‘just trust me’, you really should think twice.
Invest in a tailored shirt, and a good suit. Don’t cheap out on ties and a good pair of shoes. Dressing well shows that you take your business seriously.
Candidates with decorated CVs and impeccable credentials do not always make the best workers.
Never believe someone who says that they are purely helping you out of goodwill and have nothing to profit or gain from doing so.
Be a jack of all trades and a master of at least one or two.
Even in the most helpless of situations, it is absolutely critical to have a healthy sense of optimism.
Treat investors’ money as your own.
A fantastic career not only enables you to pay your bills but also pushes your limits, builds character and helps you to grow as a person.
Never compromise on quality. Focus on creating a great product rather than calibrate quality to price.
Never limit yourself by the stereotypes placed on you by others. Bell curves and rankings are just part of a game played by people with their own agendas.
Just because you lack the vintage of a good school or a “bulge bracket” doesn’t give you an excuse to underperform.
Not everyone who is older than you is wiser than you. Wisdom is acquired through working on the day to day chores, not age.
Contrary to conventional wisdom, people don’t really change that much.
There is a difference between keeping still and not doing anything. Make sure you are on the right side.
You can’t see where you are going if you keep covering your eyes on the way down a rollercoaster ride.
Never allow social media to define your identity or create a false sense of security. Life is not measured in terms of likes and followers.
Everyone is entitled to their point of view, but only the people with skin in the game get to make decisions.
Most people who are looking for your opinion usually don’t want you to disagree with them.
There is no such thing as ‘I have no choice’. You always have the right to decide.
Age should never be used as an excuse for not being up to date or learning new stuff.
Usually, no one is incompetent. Everyone is good at something. Some people are just placed in the wrong places at the wrong time.
If you can’t get to keep your money, there is no point in proving that you are right.