I'd like to inject something fresh into this blog today and talk about my tiny knowledge of a hot financial profession - investment banking.
My limited understanding of this financial service has been the mere accumulation of countless Google searches and Hollywood portrayals. It was not until sitting through an actual I-banker's class tonight that I came to a realization that I am far from being familiar with what this much sought-after title is all about.
I'll share some of the concepts/skills that I thought were quite interesting. These are apparently commonly applied in i-banking.
No. 1: one of the most important tasks in assessing the value of a company is to know its business model and to know it well! This includes learning about how the company makes money, what is the limitation of input, how much product can be made, how the prices of the input and output materials fluctuate in relation to supply and demand, government regulation, types of product, general economy... etc. The speaker used an example of a cheese manufacturing company that he worked with to illustrate the value of building an accurate business model, which revealed that installing a $16 million equipment (a plan initially rejected by the management) was the only way to maintain a positive revenue stream for the company in the long run and prevent the company from going bankrupt. What was impressive was that the i-banker was able to build the complex model in ~2 weeks, the amount of time he said was usually granted for the job. When asked how it was possible to complete the assignment in such a short period of time, he just laughed and said anyone could do it if he works 18 hours/day, 6 days/week, highlighting the hallmark of long work hours in i-banking.
No. 2: choosing the relevant proxy for assessing returns on assets. I must be honest and say that I was confused by many of the terms and jargons he introduced while explaining the concept. However, I did try very hard to at least learn as much as I could. Basically, different companies have different ways of generating revenues, which is heavily dependent on the types of business and industry they belong to. As a result, one cannot simply rely on the same indicator when evaluating the worth of a company. This also relates to the timeline of interest. For example, planning to own a company for 5 years is different from planning to own it for 10 years. One needs to take this into account when making a decision to purchase a company. Some of the indicators used (and I need to do more research on these) were EBIT, EBITA, EBIDAR, capital-funded assets...etc.
No. 3: risk assessment. He didn't really go into this too much due to time constraints, but he brought up the Porter's Five Forces Model and foreshadowed an example of how his friend lost his old company $450 million on a deal that he would share next class.
Lastly (this is slightly tangential but funny), he mentioned quite a few times how a lot of times, i-bankers would capitalize on their deep knowledge about asset manipulation and made up phony records that accounts would never be able to detect due to the lack of financial understanding. He also joked about how his predictions and forecastings were wrong most of the time and casually stated that millions of dollars were lost here and there. Did someone mention that the US economy is currently in ruin thanks to the financial industry??
All in all, however, the financial skills shared in class were truly practical and the fascinating stories were the icing on the cake! I can't wait to hear what this guy has to say in the next class.
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