The White Swan
About a year ago I’ve been modeling a potential M&A project. A retail company was about to buy its closest rival. The target company was in a brilliant situation – high sales, high margins, very good EBITDA, no debt.
We have modeled the potential development of the target company’s business with seemingly reasonable assumptions – slow growth, moderate synergies in administrative costs, etc. On paper the projections were OK and they were justifying the sales price that the target company should have accepted. But my gut feeling told me that my client should not go ahead with this deal.
I just saw that the upside potential of the deal was very limited (little growth potential). The number of downside risks was very high though. To name a few: the next recession was about to start 1, max 2 years after the deal would go through. The cultures of both companies were very different. The clients perceived the buying company to be more expensive than the target – this could drive some clients away too.
The Black Swan – the impact of the Highly Improbable (by Nassim Nicholas Taleb)
Several months have passed since that deal was considered. The potential buyer has listened to my recommendations and decided not to go for the deal. This was the time when I first read the New York times bestseller the Black Swan by Nassim Taleb. I have to admit, he genuinely summarized the “feelings” that I had into precise statements with strong arguments behind them.
You know, I read quite a lot of books, mostly business books, history books and fiction. There is one thing that pisses me off about most of the modern business books – there usually is just one good idea that the authors smudge over 200+ pages. In some cases I even think about the author “come on, why did you make a bad book out of material that could have made a good blog post?”.
So, the Black Swan is just too different from other books on business. In my opinion it is the best non-financial modeling book for the field of financial modeling. It deals a lot with low-probability things that we usually disregard while making financial models. Sometimes we don’t even know about the risks that could happen.
For example, up until late XVII century the Europeans were 100% certain that swans could be only white-colored. Then in 1697 Dutch explorer Willem de Vlamingh discovered black swans in Australia. This made quite a revolution in the field of zoology. This is also why Taleb called the book the Black Swan – quite often we can’t quantify the risk just because we can’t think that some risk factors could even exist.
So, I highly recommend the Black Swan as the best non-financial modeling book for the fellow financial modelers. I believe that it should allow us to take a wider view on the risks, especially those little-probability high-impact risks that we usually neglect in our financial models.
P.S. This book might hurt your ego – the author is very critical (not to tell aggressive) towards financial analysts, financial modelers and any other specialists that try to predict the future. Still, if you are able to filter his aggressive style, there are a lot of useful ideas in the book!
P.P.S. You are welcome to connect or follow me on LinkedIn to get new ideas about financial modeling. I will be posting useful tips and tricks, as well as tutorials in the field of financial modeling.