Financial Modelling: Assumptions Built on Assumptions

Wouldn’t it be great to know the future? Sure it might take the spontaneity out of life. But you could become the best investor ever.

There is no such thing as a perfect investment record. Everyone picks up some losers along the way. But if you had an idea of what might happen, you could avoid the ‘bad eggs’ as they say.

This is what financial models try to do. They predict what might happen in the future. Not just profits, but revenues, debt, cash flows and a bunch of other business fundamentals. Judging by the calibre of investors that use financial models, from investment bankers to private equity firms, you’d think they’re the best way to value businesses.

And maybe they are…for the short-term. But I’d argue financial models are a lot less useful than most investors believe.

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The Best Edge All Individual Investors Have

If you’re an NBA fan, you’ll notice teams are getting smaller. Long gone are the days of the 7-foot center and the 6’9 power forwards. In today’s game, the big man isn’t just required to rebound, protect the rim and score. They also need to help with switches, shoot the mid-range and keep up with the guards.

If I’m honest, I miss the days of big men playing with their backs to the basket. But many teams have now craved out an edge with smaller, quicker teams that shoot three pointers at will. And just like NBA general manager, you also have to define your edge as an investor.

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Three Stocks to Compound Your Investment

There are usually two camps among value investors – value and quality. Those in the value camp are Ben Graham followers. They’re always looking for cheap opportunities and buying business far below their intrinsic value.

Those in the quality camp prefer Warren Buffett style investments. These are businesses with durable economic moats and can continue to compound your investment for years into the future.

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