Building Your Own Financial Investment Models

Introduction

When seeking out potential investments, the ability to make informed decisions is crucial. One of the most powerful tools at an investor's disposal is a financial model. The significance of building custom models tailored to your specific needs cannot be understated. Let's explore the benefits of creating your own financial models and how to get started.

Understanding Financial Models

Financial models facilitate investment analysis and decision-making by providing specific insights into company performance. There are a plethora of models covering financial fundamentals, valuation, technical analysis, and portfolio management.

Some of the most common models/analyses that investors utlize are:

• Stock Screeners
• Financial Performance Models
• Valuation Models
• Technical Models

They enable investors and analysts to identify investment opportunities, estimate the value of an asset or company and simulate the potential outcomes of different investment strategies under varying market conditions.

Why Build Your Own?

When starting out on the investent research journey, you'll come across many prebuilt models available on multiple stock analysis sites. The reality is that these models are only possible for all stocks by standardizing the modelling approach across all stocks. To gain a deep understanding of a model and have the ability to customize it to your needs, you'll need to build your own.

Customization

Creating your own financial models allows for an unmatched level of customization. This personalized approach ensures that the model aligns perfectly with specific investment strategies or market niches you are interested in. By building a model from the ground up, you can incorporate unique perspectives or insights that generic models may overlook. Customization is crucial in capturing the nuances of your investment philosophy or the specific market dynamics you are dealing with.

Understanding the Data

Constructing your own financial models involves a deep dive into the underlying data. This process fosters an intimate understanding of the data, its sources, and its implications. As you build and refine your model, you become more adept at questioning assumptions, interpreting data, and recognizing patterns which ultimately leads to more robust and reliable investment decisions.

Flexibility and Adaptability

Unlike off-the-shelf models, which may not account for the latest market trends or specific investment scenarios, custom models can be continuously refined and adjusted. The ability to adapt a model to a specific company or industry is something that itn't possible in generic models.

Scenario Planning

Control over the assumptions and formulas driving the model allow you to run multiple scenarios and understand how the model (and corresponding investment decisions) change in response. It is much harder to run scenarios in off-the-shelf models and those that do offer it are often limited and/or expensive.

Risk Management

Custom models can be tailored to align with your individual risk tolerance and investment horizon. By customizing the parameters and metrics within your model, you can focus on identifying and managing the types of investment risks most relevant to you.

Learning and Skill Development

The process of building your own financial models is not just about the end result. Model construction will enhance your financial literacy and analytical skills. Creating and refining models deepens your understanding of financial data and investment principles. The process of model building is, therefore, an investment in your own financial education and future success.

Getting Started

Creating a financial model specifically for stock investments can provide insightful analysis and enhance your investment strategy. Here’s how to get started:

1. Define Your Goals: Identify whether your focus is on long-term growth, dividend income, value investing, or another strategy. This will shape the direction and parameters of your model.

2. Get the Data: There are many data sources available online. You can source the data yourself from the SEC website, Yahoo finance and other free data sources but this does make it difficult to maintain. To save yourself the headache of sourcing and cleaning the data, register for findl.com’s API to access a wealth of stock market data. The API provides access to a wealth of financial data for US public companies that is meticulously curated and updated daily.

3. Choose Your Tool: Choosing the right analysis too depends on your modelling requirements. Excel and Google Sheets are common choices for financial models, while Python is common for more advanced analysis. The findl API supports connections from any tool.

   • Get Started with Excel
   • Get Started with Google Sheets
   • Get Started with Python

4. Educate Yourself: Learn about valuation methods like Discounted Cash Flow (DCF), Comparative Company Analysis, or Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) analysis.

5. Build Your Initial Model: Start by integrating basic financial data from findl.com’s API into your chosen tool. You could start with building a basic financial statements view, a DCF analysis or a stock screener.

6. Expand Your Model: Leverage the vast data available from findl.com to expand your model.

7. Analyze and Iterate: Run various scenarios in your model to analyze potential stock performance under different market conditions. Continuously refine your model based on the insights gained.

8. Keep Your Model Up to Date: One of the benefits of using the findl API is that the data is updated daily. By building your model based on the API, you can easily update the data and model at any point in time.

Remember, the more you work with your model, the more intuitive and effective it will become. Leveraging findl.com’s API in your stock investment model not only saves time but also provides a depth of analysis that can be pivotal in making informed investment decisions.

Conclusion

Building your own financial models is more than a technical exercise; it's a strategic approach to investment that offers numerous benefits. From enabling customization to specific investment needs and enhancing your understanding of data, to providing flexibility, adaptability, and effective risk management, custom models are powerful tools. They also contribute significantly to your learning and skill development in financial analysis.