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Bottom Up Investments
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I am a research analyst that specializes in identifying mispriced securities (long or short) based upon a combination of fundamental and financial statement analysis.
  • Book Review: Building Financial Models 2 comments
    Oct 21, 2010 11:05 AM
    John S. Tjia’s Building Financial Models (2009, McGraw-Hill) is a comprehensive guide for designing, building, and implementing valuation projection models. It provides an overview of projection models, an in-depth explanation of the accounting and financial concepts that underpin financial models, step-by-step directions for using excel to create financial models, and a section on the principles of good forecasting. The book does not provide any information on how to model different industries; rather, it provides a detailed overview of a general financial model.
     
    The book starts off by walking the reader through an overview of financial modeling best practices, accounting concepts, and necessary excel functions. It then provides readers with directions for building a fully functional integrated financial model that links the balance sheet, income statement, and cash flow statement. In addition, the book addresses iterative calculations, balancing plugs (setting the model to increase funding requirements via debt or equity and/or using the cash sweep to repay debt, pay dividends, or repurchase shares), and other areas that can challenge analysts. New additions to the 2nd edition include an overview of discounted cash flow modeling and financial model templates available on the author’s website. For the analyst looking to develop their Visual Basic skills, the book even includes a primer chapter towards the end of the book.
     
    The two keys to building an effective projection model are to (1) building a model with an intuitive, easy to use layout, and (2) applying reasonable assumptions to your forecasts. With the help of John Tjia’s Building Financial Models, at least one of these two keys is taken care of. While I found some of the detail provided a little unnecessary, I believe the book was geared towards a reader with less financial modeling experience. In sum, I would recommend this book for beginners looking to develop financial modeling skills and for intermediate-level analysts looking to hone their craft.  For an analyst looking to learn how to model a specific industry, I would consider looking elsewhere.
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  • dimes
    , contributor
    Comments (43) | Send Message
     
    I agree something so simple coudnt possibly work. Suggest readings on martin armstrong what forecaster and a sad story.
    21 Oct 2010, 11:16 AM Reply Like
  • NYC Rider
    , contributor
    Comments (151) | Send Message
     
    Whether building financial forecasting models is a good idea for you depends on whether you like to do bottoms-up analysis and how much time you have. They are VERY time consuming in order to do well. On the other hand, a well built model with quarterly statements, etc., will tell you a lot about what is possible and what is not possible given a specific company's outlook. Analyst estimates available on Google Finance etc. are often way off the mark for smaller companies. For larger companies, the ability of an amateur to add value beyond what the professionals do is almost zero ... so probably not worth modeling companies like Apple, GE, etc. Those companies are so complicated in any case.

     

    So modeling for smaller simple companies for people that have the time and desire to do bottoms-up analysis makes sense, and can lead to some pretty interesting discoveries, I think.
    7 Aug 2011, 07:45 PM Reply Like
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