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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