Show Notes

Welcome to Financial Modeler's Corner (FMC) where we discuss the art and science of financial modeling with your host Paul Barnhurst. Financial Modeler's Corner is sponsored by Financial Modeling Institute (FMI)  the most respected accreditations in Financial Modeling globally.

In this episode, Paul Barnhurst is joined by David C. Brown, an Associate Professor of Finance. David focuses on teaching finance and financial modeling, bringing his real-world experience to the classroom with his students. He is also heavily involved in helping students improve Excel skills, including running the Microsoft Excel Collegiate Championship (MECC)

He is very passionate about research and his work has been highlighted by the Wall Street Journal and MarketWatch.

Listen to this episode as David shares:

• His journey and background into Modeling

• His experience starting and running the Microsoft Excel Collegiate Challenge

• How Financial Modeling competitions help you grow and learn

• The key differences between modeling for competition and modeling for work

• His learning from his research and years of experience

• How he would structure the college finance program if he were in charge

• His latest research on Target Date Funds and how they perform relative to other retirement portfolios

• His position on controversial modeling issues, including circular references, dynamic arrays, modeling standards, and more

 

Sign up for the Advanced Financial Modeler Accreditation or FMI Fundamentals Today and receive 15% off by using the special show code Podcast.

Visit www.fminstitute.com/podcast and use code Podcast to save 15% when you register.

Go to https://earmarkcpe.com, download the app, take the quiz and you can receive CPE credit.

Follow David: 

• YouTube - https://www.youtube.com/@docbrownexcels  

• Website - https://www.davidclaytonbrown.com/

• E-mail - dcbrown@email.arizona.edu

·       To learn more about Microsoft Excel Collegiate Challenge, visit this website- https://mecc.college/  

 

Follow Paul:

• Website - https://www.thefpandaguy.com/

• LinkedIn - https://www.linkedin.com/in/thefpandaguy/

• Instagram - https://www.instagram.com/thefpandaguy/

• TikTok - https://www.tiktok.com/@thefpandaguy

• Twitter - https://twitter.com/TheFPandAGuy

• YouTube - https://www.youtube.com/@thefpaguy8376

 

Quotes:

“Collegiate Challenge is not about being the best, its about challenging yourself, learning more and getting better at it.” 

“If you understand Python you can figure out Excel.”

“Excel is the way to get people into data analytics.”

“Challenge the assumptions, challenge the model and eventually figure out whats wrong.”

 

In today’s episode:

(00:22) Intro;

(00:45) Welcoming David Brown;

(01:25) The worst financial model David has ever seen;

(03:17) David’s take away from the worst financial model;

(06:08) David’s background;

(10:05) How David decided to become a Finance Professor;

(12:39 - 13:25) Validate your Financial Modeling Skills with FMI’s Accreditation Program (ad);

(13:27) What is the Microsoft Excel Collegiate Challenge;

(17:20) Excel Tables;

(19:17) Advice to students willing to participate in these competitions;

(21:33) David’s experience with these competitions;

(24:47) How to help students with a hands on experience to building models;

(27:04) David’s suggestion to changes in college curriculum;

(29:07) Financial Modeling for competitions vs. Building it for clients;

(31:10) David’s learning from his research;

(37:58) Rapid Fire;

(42:19) Nugget on how to become a better modeler;

(43:57) Connect with David;

(44:50) Paul’s best picks

–      How David wishes to teach the college program for Finance

(45:23) CPE Credit with this episode;

(45:40) Outro.

Transcript

Host: Paul Barnhurst

Welcome to Financial Modeler’s Corner, where we discuss the art and science of financial modeling with your host, Paul Barnhurst. Financial Modeler's Corner is sponsored by Financial Modeling Institute.

Welcome to Financial Modeler's Corner. I am your host, Paul Barnhurst. This is a brand new podcast where we will talk all about the art and science of financial modeling with distinguished modelers from around the globe. The Financial Modeler’s Corner podcast is brought to you by Financial Modeling Institute.

FMI offers the most respected accreditations in financial modeling. I am excited to welcome on the show, David Brown.

David, welcome to Financial Modeler’s Corner!

Guest: David Brown

 Hey, thanks, Paul!  Thanks for having me.

Host: Paul Barnhurst

I kinda have to laugh because, in the first four episodes, you're the second David Brown I've had on.

Guest: David Brown

Yeah, David and I got a chance to connect probably six months- a year ago, and I actually had a chance to speak at one of his conferences recently. It's a fun running joke in financial modeling now.

Host: Paul Barnhurst

Yeah, I bet! It was kinda funny when I got the list from him, with you know, potential people that he thought would be good on the show, and I'm like, David Brown, look again, David, are these the same people? You know, it took me a minute. I'm sure you get that sometimes.

Guest: David Brown

Yep. It's a fun coincidence, I guess.

Host: Paul Barnhurst

All right. We always like to start off with this question for everybody. Tell me about the worst financial model you've seen in your career.

Guest: David Brown

So I'm not going to single one out. As a little bit of context, I'm a professor at the University of Arizona and I've been teaching financial modeling for about 10 years now. The worst models are the ones where students have not tried. You know, they get going and they just say, ”No, I can't do anything”, and then they come into my office and just show me something blank, and there's just no effort put into it, or there's no thought that you've gone to put into structuring the model or even a first step. Those are the worst ones.

I guess the other classification of worst student models are where we spend a bunch of time talking about how important formatting is and making things consistent, so your user kind of knows what you're doing where, and they'll put together a really nice legend. Inputs are a certain look, you know, references are another look, etc. cause it's standard practice. And then they don't use any of that at all in their model. So they made the cover page look nice, but they just don't apply it. And so it's really kind of an effort thing that I run into more than you know, a particularly poorly designed model.

Host: Paul Barnhurst

And I'm curious, how often would you say you see that challenge of effort? Is that pretty common or would you say most people, you feel like they put good effort into it and you have something to work with?

Guest: David Brown

Most people put a good effort in. And this is something that happens, I mean, it happens once a year. You know, you have one student or one group of students that, you know, they're kind of looking for the handout and they quickly realize that this is going to be a class that they're going to work hard in. And I'd say that most of them respond by then working hard and kind of getting everything put together, and they've learned a lot by the end of the semester. A few drop the class and, you know, I don't see them again.

The ones that stick with it kind of know they have to work hard at that point. And I think that's when they start to take a lot out of it, right? You got to put work in before you start to get anythi ng out.

Host: Paul Barnhurst

You got the two types, the ones who just haven't done anything, and the others that they put the nice cover sheet and then just don't follow with it all. So what's kind of been the takeaway from these bad models that you see? What, what have you taken away from that?

Guest: David Brown

So some of it is, as a teacher, different people need different amounts of guidance, right? Some people are just able to start with a blank canvas and just start building. And you might not know where you're going with the model, I mean, I'm sure everybody that's listening has had this experience where, you know, this thing has to get restructured seven different times, but you eventually get to where you want it to be. And that's, that's a skill that gets developed with time though, and some people are just gonna see that blank screen and just not know where the heck to start.

So a lot of what I've done is now I give students kind of beginner models, where there's a lot more structure provided and they start to fill in bits and pieces of it, and kind of hold their hand along the way in those initial models. That way, later on, we can get into models where you start building from scratch. And a lot of that's just been, you know, refining my teaching style over time to where I have the ability, through a couple of tools to automate the grading of these spreadsheets. That way, they can have this hand-holding, without me having to spend an hour with every individual student. Because that's just, there's not enough hours in the day.

Host: Paul Barnhurst

Sure. Yeah. It's just not practical, even if you wanted to do it. I mean, it's amazing the technology we have now to help with modeling and a lot of the things we do.

Guest: David Brown

Yeah! I mean, huge jumps in Excel in the last few years, huge jumps in what I've been doing in class, just from finding the right people with the right technology, and it's exciting to see where it's going to.

Host: Paul Barnhurst

Yeah, no, I agree. I'm excited to see how all these things that are doing with generative AI, continue to change and increase productivity, make it easier to do some of the building, and be able to focus more on the assumptions and the strategy and the things behind what you're trying to accomplish with the model.

Guest: David Brown

I'm very curious to see how many of my students are using chat GPT-generated formulas this fall when I teach again and if they're able to explain to me how the formula works that they're using.

Host: Paul Barnhurst

I could believe that. Funny enough, I was teaching in Excel training the other day, and somebody had asked me a really complex formula, and I just don't write it enough to remember how to write it, and I said, just go ask chat GPT. Like, “Ah, that's a good idea”, and I'm like, “If they don't give you the answer, come back and I'll figure it out.”

Guest: David Brown

Right. And I mean, to me, it's the new Google. I've done a ton of Google in the past, like, “How do I do this in Excel?” And then I end up at, you know, one of a handful of sites that, you know I’ve done a lot of work to provide these elegant solutions out there, and now chat GPT is going to more or less scrape those. Based on probability combinations, provide some answer that also hopefully works. It's just a shortcut a little bit.

Host: Paul Barnhurst

Agreed. I mean, I do think in many ways it's kind of the new Google. I've heard that. Or it's like a personal assistant or a junior intern, you still got to check the work, you still have to know what you're doing, but it can simplify it. So yeah, It'll be really interesting with students who use it to write everything and don't necessarily know what's going on. I'm sure there'll be some where you're like, okay, there's no way the student did that.

Guest: David Brown

Yeah, exactly.

Host: Paul Barnhurst

Well, can you tell us a little bit about your background? We've asked you about the horrible model, we know you're a professor, but just give us a little bit about your background and how you ended up where you're at today.

Guest: David Brown: Yeah, I started out at the University of Kansas, this is where I did my undergraduate education. I studied finance and accounting there. And really my introduction to financial modeling was through one of these portfolio classes. Lots of colleges and universities have them now where students are actually given real money to run, and we had one of these classes and, you know, each week we would have a different stock to analyze. The professors did a great job of actually bringing in executives of these companies, and so there would be a lot of pressure on us to, you know, put together a good valuation of this stock.

And so that was just a ton of three Smith statement model building with valuations, and that's really kind of where I cut my teeth in both financial modeling and Excel. So I got really into the kind of equity analyst idea.

I ended up going from undergrad actually into high-frequency trading. At a high-frequency trading shop is where I learned to program. So I kind of programmed a little bit before that, but I started to learn much more about VBA and how I could essentially build back testers for strategies, within VBA. So, you know, dump a bunch of return data into Excel, use VBA to run through a trading strategy, see how it does for a given day on, you know, one stock, but then 100 different stocks.

I kind of self-taught my VBA at that point, to be able to build those kinds of models. From there, I actually left high-frequency trading. I went into student loans for a little while, less FP&A-type of work, but more, I was actually the head of marketing for a company there and, you know, doing credit scoring, dealing with big credit data sources, and then marketing lead generation and managing call center volume and this kind of thing, so it was very different ways to use Excel, but definitely kind of helped me along in that journey.

And then the crisis came and, you know, a couple of layoffs led to grad school, which is ultimately, you know, kind of where I knew I was going. I always had this dream of being a finance professor. It was just, you know, it took, you know, some outside influence and a couple of professors telling me, David, you should really think about going back and getting your Ph.D.

And then I went to the University of Colorado Boulder, spent five years there doing my Ph.D., started teaching entrepreneurial finance, so building three statement models for new companies and valuing them. I got even further into that than I did back as an undergrad, so I started teaching that and then my first job out of school was at the University of Arizona, where I'm at now. And this will be my 10th year starting this fall.

I've taught financial modeling- this will be 10 years now, along with some courses in critical thinking and international finance, and I've actually developed an Excel lab course. It's kind of an intro to finance but also paired with Excel that I developed in the last couple of years.

Host: Paul Barnhurst

Sounds like a lot of great classes to teach there, and I liked the background. I can relate to the 2006-2008 when you said being in a class portfolio, I had one 2006 to  2008 in our MBA program. And I remember when we did our final presentation, the investment committee that oversaw it was also supposed to be an endowment at some point there. They’d wait until they’d raise a certain amount, and then they'd use it for, I think, scholarships or something, and the guys were like, we did our presentation and that's the best presentation we've seen, but we don't want to go through another year like that. The numbers weren't good because it had been brutal with the stock market, you know, 2006 to 2008, but especially being, you know, middle of 2008, everything had collapsed.

So that was an interesting time because our portfolio didn't do well. We got beat pretty bad by the undergrads because they had one stock that they picked right before it got acquired at like a crazy number and it covered out everything else they had done. So, you know, they took a high-risk approach and hit a home run.

Guest: David Brown

Right. This is the difference between diversifying for a long-term portfolio versus playing a tournament where you just have to win. We have lots of students do these stock-picking challenges. And the advice is always, you got to max out variants, right? Cause there are a thousand students playing this, the only way that you win is by having a huge variant strategy and getting lucky.

Host: Paul Barnhurst

Totally makes sense when you're competing in that type of thing, and I remember doing that in simulations like I'm going to take a risk. If I do what everybody else is doing, I'm going to finish somewhere in the middle.

So how did you decide to become a finance professor? You mentioned you kind of always knew, but when did you know?

Guest: David Brown

So when I was in high school, I actually did a lot of hard science work. You know, I did biochemistry type labs, I did some genetics research and would do science fair projects that were much more hard biology because that's, you know, my mom's background is there and we had some connections to some research scientists around the Kansas City area where I grew up. So that's where I started it. In by like junior-senior year of high school I started getting into reading kind of stock valuation books, opening my first accounts, getting much more interested in the markets and so, when I went to KU I studied both biochemistry and finance.

Host: Paul Barnhurst

I'm gonna guess there weren't many students with that combination.

Guest: David Brown

No, there weren't many, and I actually got stuck in this spot where I'd finished all the biochemistry major requirements, but I hadn't finished all the Gen Eds, and so I had this choice in my senior year- do I want to take more accounting and get a finance and an accounting degree, or do I want to take more Western civilization and get a finance and a biochem degree? And I realized that you know, I'm going into finance, so the accounting degree is going to be more valuable.

Biochem doesn't show up anywhere, but in a lot of, you know, organic chemistry and all the stuff that goes past that. So I knew I was interested in research, and I liked doing that. It just, I had this mindset of, I want to get out in the world, in the business world, make a name for myself, make a bunch of money kind of idea. And you know, I worked, it was probably six jobs in like four years out of undergrad, and I just kept getting bored pretty quickly with these jobs, and another professor finally explained to me the joy of research and that you get to pick the problems you work on that are interesting to you and you get to examine them how you want on your own schedule and kind of become the expert in the world at that thing.

If you're getting bored in my job, it's only, it's your own fault. So I have tons of intellectual challenge, I love how it gets paired with teaching. You know, I typically teach one semester a year and I focus on research in the other semester. And that kind of, that pattern of going back and forth between the two is really great for kind of keeping the creativity going and having a variety of the type of work I do.

Host: Paul Barnhurst

Keeps you from getting too bored, so to speak, like you were at your jobs. I've done this four times now, this is boring. I can relate to that a little bit after like five years of doing variance commentaries every month in FP&A. There's parts I loved, this is not one of them, especially when I managed Traveler’s Check for a couple of years. That was about as consistent as you could be. I could write the commentary without even seeing the month-end results.

Guest: David Brown

If only you had chat GPT back then.

Host: Paul Barnhurst

Yeah, exactly. Yes. I would have pretty much been done in like 30 seconds and just relaxing.

Commercial break

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Join the Financial Modeling Institute's community of top financial modelers, gain access to extensive learning resources, and attain the prestigious advanced financial modeler accreditation. Visit www.fminstitute.com/podcast and use code PODCAST to save 15% when you register.

Host: Paul Barnhurst

Next question here. I know you're actively involved in the Microsoft Excel, the Collegiate Challenge. I think that's through FMWC, if I'm right, Financial Modeling World Cup, but can you talk a little bit about what that is for our audience and how you came involved in it?

 Guest: David Brown

Yeah, so this is actually kind of my baby. I founded this with the FMWC a couple of years ago. The way it came about is, you know, back in 2014, when I started teaching at the U of A, I wanted my financial modeling students to have a chance to get involved in kind of real-life modeling, and the opportunity was Model Off.

Host: Paul Barnhurst:

Yeah, I remember that. I remember Model Off.

Guest: David Brown

Yeah, exactly. And so the students who do that have extra credit. So I had them doing that, and they kind of got this real-world experience. I would do it alongside them whenever it fit my schedule, and in 2016, I actually made the finals, so I got to go to London and kind of meet a lot of the other people involved in this world, and I kept in touch with them, and in 2019, they decided to shut down Model Off.

And I kind of pitched the idea of, what if we do this with college students instead, right? We're going to have fresh people coming through. It can be about learning as much as it is about, you know, having a tournament, so to speak. And we were excited about that, we got it going and then COVID happened.

That derailed it. What got it back on track was I got tenure, which was great. And it gives me a lot of freedom in what I spend my time on. And so I decided I think I could add a lot of value to the world by rebooting this, and at that point, Andrew and his team at FMWC had built up that whole FMWC season, they had the external Esports in the works. And so we got set up at that point, decided, hey, this looks like something we need to work on together. And then last year, we had the Financial Modeling University Championships in the spring, and then the Microsoft Excel Collegiate Challenge in the fall. We kind of, we really partnered to make that all happen.

And really, I do want to say just a little bit about why we transitioned. You know, it was the Financial Modeling University Championship, which was centered on two things, a championship and financial modeling. What we realized is, and this is partly with the birth of Excel Esports, is that Excel education is much broader than financial modeling.

Financial modeling is my passion, but we want to make these skills accessible to everyone. Financial modeling is scary to people that aren't financial modelers. So by making it the Microsoft Excel Collegiate Challenge, now it's much more accessible, it's not about being the best and being the champion, it's about challenging yourself, learning more, and getting better for whatever it is that you want to use it for, whatever career you're in.

Host: Paul Barnhurst

I love that. And I think you make a great point, right? Modeling is one small part of Excel. There can be people that are fabulous in Excel that have never built a financial model. They've built models, probably. Maybe they've done forms, maybe they've done programming, I mean, there's just so many things. I put out on LinkedIn one time, I saw it from someone else, so I created it because I couldn't find the image, it had like 15 different things Excels use for like 20, and every single one of them said second best. And it was like, you know, procurement, AR, everything, sales commissions, you know, whatever it might be, second best software and then always lowest price, right? And that's kind of the way to think about Excel. If you want a purpose build tool, there's plenty of things you can buy. It's going to cost you a lot but make it easier, may do some things better, but if you want flexibility, versatility, ad hoc analysis, spreadsheets are the go to and Excel’s the dominant spreadsheet.

Guest: David Brown

And it's such a great teaching platform now. It's a way to get people into data analytics, right? You don't have to like be big into running regressions or even get into things like machine learning, until you've learned the basics of how to get data into something, how to manipulate that data, you know, how to filter a set of data or run summary statistics, like those are all things that we need to do before you can even start thinking about, like, how does chat GPT work?

And so I see it as a wonderful thing to teach because it gives so many people entry points into other more advanced things.

Host: Paul Barnhurst

Agreed. I teach a lot of Excel training and I try to always teach design principles in most of the courses I do. Here's how to think about designing a model. And then I'll go into Excel tables and I'll say, look, understanding tables is really opening up to more data. Cause if you understand tables, you can start using Power Query, you can start using Power Pivot and you're getting more into those data analytics. And it will open up what you can do. It helps you start to learn what I call modern Excel, right? Your dynamic arrays, your Excel tables, your Power Query, your Power Pivot, the stuff that most people still don't use, and it just amazes me because there's so much power in that, that people miss out on.

Guest: David Brown

Yeah. And it's, you know, I will admit that I am not very well versed on a lot of those new tools. I love dynamic arrays and those get used in the Excel Esports world a lot, which is kind of where I've developed my skills.

When I need to do database stuff, I go to SQL. And when I need to do, you know, more complex simulation stuff, I'm going to MATLAB. Or you're going to Python & R. But I do love that Excel provides ways into all of these things now and that like, you know if I would have learned it that way, it's probably more of a coordinated effort in learning than just kind of piecemealing “Oh, I have to go learn Python? All right, let's work on that a little bit”.

Host: Paul Barnhurst

One of the books, it's called Advancing into Data Analytics, and it starts with Excel and then shows you the same exercises in Python & R and slowly kind of gradually brings you up to start learning it. It was written by a guy who's a Microsoft MVP, but he also teaches a lot of Python & R.

And I've always been telling myself, but since I started my own business, I just don't do heavy data analytics with the work I'm doing. So I've just never been able to bring myself to find enough time to learn, you know, Python & R. But if I was starting a career over, no question, I'd want that in the toolkit, in addition to Excel. I look at them as complementary.

Some people are like, well, if I know Python, I never need to use Excel. And I'm like,I don’t know, there's plenty of places you can use both.

Guest: David Brown

Right. And I mean, the ubiquity of Excel, I don't think it's responsible to go away from it for students, right? There are too many places it gets used and too many people that will want to see an Excel file to say you can just do Python.

And I mean, if you understand Python, you can figure out Excel.

Host: Paul Barnhurst

100% agree.

Next question here is what advice would you offer to students who learn about the program and who are considering participating in those events?

Guest: David Brown

I'd say you don't have to win. Get in to learn something. You don't have to do everything. There are bits and pieces that you can take away with you. But I think by participating and trying out a couple of challenges, you're going to learn something, you're going to get more efficient in Excel. I think this is one of the most positive NPV investments you can make in the sense that, you know, spend an hour on a challenge, and that's going to save you way more than an hour over the course of the next year even. Never mind the rest of your career.

So learning to get more efficient than Excel now is a very worthwhile investment for I think students in all disciplines. Like, almost everyone touches Excel at some point in their life. Getting that much better now means you save that much more time later.

Host: Paul Barnhurst:

Yeah! And so, I think you probably know him, Dim Early. I had him on the podcast, we’re releasing that here soon, and, you know, he commented how much he's learned from that and gave the advice that, look, if you commit to doing it, you're going to learn, you're going to be better, it just advances your skills.

Guest: David Brown

Yeah, and I encourage people to do both the, you know, Microsoft Excel World Championships, the World Cup Series, but also the Collegiate Challenge, because the Collegiate Challenge, I mean, you can get to it at mecc.college is the website for it, and you can register as a student, as a high school student, or as other. We want this material to be available to anyone, So, you know, if you're not a college student, you can still try everything and participate, you're just not going to be able to get prizes at the end of the day.

Host: Paul Barnhurst

Sure. You're not going to be a winner or really part of the competition, but you can still learn.

Guest: David Brown

Exactly. And I do want to give a little shout-out to Dim here, and one of the last times we were talking, he was saying, “So I could register at a community college to be a degree-seeking student and then compete for the prize money, correct?” And I said, “Technically, yes, but please don't”.

Host: Paul Barnhurst

You know, I could totally see just having interviewed him and the way his brain works, I could totally see him saying something like that.

Guest: David Brown

Yeah, it'd be a nice arbitrage for him. I don't see many students beating him in the finals.

Host: Paul Barnhurst

If they do, they're going to be heavily recognized, I would say, because they're on the path to doing incredible stuff if they're beating him in college.

You listed the website they can go to, we'll put that all in the show notes. Anything else you want to say about the competitions or kind of the experience in doing that? Maybe favorite memory or anything you would add from just being involved in that over the last few years?

Guest: David Brown

Yeah, I'll give you a favorite memory from last year.

So, I have a group of students here that I coach at the U of A. I'm helping them develop the skills kind of both, you know, financial modeling, but also kind of Excel Esports. And we had two of these students make the finals last year. So we had 30 students from around the world that kind of got to come into Tucson and compete in the finals, and they were among those 30. They didn't make it to the final eight, where we take the eight, we take them to the Esports arena and we actually broadcast that. So what was fun, though, is watching them watch the live competition and having them argue back and forth over how they would approach the problem and which functions they would use, and one of them was like, “Well, you got to use a lambda here”, and it's like, ah, they retained and they learned, and they've got these approaches now to these problems that they didn't have before. And it's so fun to see them engaged in it. And so as a professor and, you know, coach in that respect, it was really fulfilling to see that.

Host: Paul Barnhurst

I can totally see that. Recently I got an email from somebody going, “We took some of your training and we had a project that was taking us six hours every Monday and it takes me 20 minutes”. And you know, I'm just like, okay, it was actually worth something more than they gave me a paycheck. I didn't just waste four hours to get some money.

Guest: David Brown

Right. You're adding value to the world.

Host: Paul Barnhurst

Yeah, I totally get that. I love when people come back to me and say, you saved me two hours, or I actually use this, or they ask me a question because I always say, you can always email me. I'll respond to any question you send me. Yeah, 99% of them don't take you up on it. They just want to get their training hours for whatever reason and move on, and so I always love when you see that moment where it's like, okay, I know this is going to stick, it's made a difference.

Guest: David Brown

Yeah, yeah, I love teaching financial modeling because the students see it as valuable and they, you know, they recognize that even as they're graduating, like, oh wow, this is something I'm going to start using right away.

Host: Paul Barnhurst

I'm sure they do. I wish I had done finance in undergrad, I actually did entrepreneurship, surprising enough, which was great. I mean, it was a good experience, but I went and worked for the government for four years, went back to grad school, wasn't planning on doing finance, loved my finance professor, and I was supposed to take two classes that semester and I’ve only taken one of them. And so when I asked him about it at first, he's like, “Uhm, no, I don't know if we can let you, you know, into the finance specialization”, and then he saw how hard I was working in class and that I was competent, and he came back to me later, he was like, just make it up during the summer, cause my internship was local.

So I've taken an MBA course during the summer and did the finance program and absolutely loved it, and it was, you know, one of the better decisions I made, but at first, it wasn't my plan, so it was kind of fun how things happen.

Guest: David Brown

Yeah. I mean, one thing I would say to any students out there listening, the thing that will get a professor fired up is just engaging in the material. You don't have to be the best, but if you're trying hard and you're showing interest in it, like we're going to help you out and we're going to work hard to help you learn that material and really understand it.

Host: Paul Barnhurst

And that was exactly it. At the beginning of the semester, it's like “We'll see”, and when I went and talked to him toward the end of the semester, it's like, “You're engaged, you're working hard, I can tell you enjoy this, the answer is yes”. Like he would bend over backwards at that point, but he wanted to see that I wasn't just saying that and then no commitment.

Guest: David Brown

Yeah, exactly.

Host: Paul Barnhurst

I'm sure that's really frustrating. I know it is as a teacher and as an employee when you have somebody that you can tell they're just there and they want to check the box, right? Like the bad models you see.

So, you know, next question here. I know a lot of people come out of college, at least in my experience, most people who build models, they learn from their managers, right? Feels like there hasn't historically been much on design, how to really think about building the model. You learn a lot of finance and you teach some modeling classes.

So what do you think is being done to really help students get the hand on experience and to learn some design principles that ensure they don't just build Frankenstein models, as I like to call them, right? The ones that the next person just has to start over because there's no design to it.

Guest: David Brown

Not much. A classic problem in college curriculums is that we design a curriculum as a business school, for example, and we decide what classes go where, and then we give them to different professors to teach without really coordinating, you know, what kind of technical skills are going to go alongside that, right?

We'll split up, you know, investments from corporate finance, and we don't really know what goes in those topics, but how are we going to get our students familiar with working with data and Excel generally and, you know, beyond those principles of financial modeling, which, you know, there aren't that many financial modeling classes out there, and they're usually not part of a curriculum, they're an elective, perhaps, right?

And so I think we're really at kind of the beginning of a time where financial modeling takes more prominence. FMI has been doing a huge amount to like make it more legitimate via the certification channel. And I know they have the foundation’s program, which is very accessible to college students and a great way to get built into a curriculum a little bit more, but essentially not enough is being done. I'm hoping that just the data analytics push that we're seeing across college campuses will lead to more financial modeling emphasis as well, and how to structure, you know, data generally, but also specifically for financial modeling.

So this is an area that really I am passionate about and hope through my own curriculums that I've been building that I can kind of push things more in that direction. We have a gigantic barge of a college system and it takes a very long time to move it anywhere.

Host: Paul Barnhurst

I mean, it's very bureaucratic, right, just the size of it. You have to be fairly bureaucratic to run something that big. It's really hard to stay lean and entrepreneurial at that size of scale.

Guest: David Brown

The encouraging part is that I'm starting to hear more and more schools being focused on bringing Excel skills in earlier and more financial modeling. Over the last couple of years that has definitely accelerated, which is also a great thing to see.

Host: Paul Barnhurst

100% agree!

What would you like to see kind of change? I mean if you had control and you could change it, how would you like to see that incorporated to help students be more prepared to build those first models when they get into work.

Guest: David Brown

So if I were to build a program from scratch, I would almost put a one credit lab with each course the students take. You know, the intro to finance could have intro Excel with it, and your investments class, maybe we're gonna use some Python there to get you familiar with that, and maybe some R, and then we're gonna get some advanced Excel in and we're gonna layer on these technical skills and kind of pair them alongside the core theoretical material that we still want to teach and we still think is very important. But being able to layer on the technical skills so people can graduate and really be ready to jump into their job, I think would be a great way to design it, but you know, there are only so many credits they can take and how do you fit that all in? So that would be my way to tear it down and rebuild it.

But, you know, I think building the content is kind of the first step, right? If the content is there, now we can start to figure out ways to get into the classes and maybe instead of being a one-credit add-on, we start to incorporate some of these assignments that bring in more of these technical aspects. That way, the students can be more prepared when they're graduating.

Host: Paul Barnhurst

I really like how you mentioned the lab, I mean, in an ideal world, I think that'd be great, right? You see that in some of your science and other, where you have lab courses and having a lab for each of those classes like you said, learn a little bit of Excel, maybe a little bit of Python, maybe there's some in there where, some of it's related to PowerPoint presentations, whatever it might be, but giving you a little more technical and yeah, you can do some assignments, you get a little bit of that. But I hear what you're saying, and that makes a lot of sense to me, what you mentioned there. I think FMI, like you mentioned is another great way, right, what they're bringing.

Guest: David Brown

Well, I think the other nice thing about this, and I don't have any, you know, research studies to back this up, but I think when you're learning a theory and then you go put it into practice via a lab, you're going to understand that theory better at the end of the day. And so I think there's really a complementarity there. The lab helping to reinforce the theoretic material while also building those technical skills.

Host: Paul Barnhurst

I would agree with that.

So one other question I want to ask you, you're going a little bit back to competition, but kind of a mix. What do you see is the main difference when someone's building a model for competition versus the real world?

Guest: David Brown

I think the biggest thing is understandability, right? When I'm building something in competition, I'm worried about the fastest solution I can get to, and often that means building very complicated formulas in maybe one cell with dynamic spilled arrays and lambdas and lets that are going to let me do that in a concise framework, and then make it so I can drag it down over multiple questions in a level.

Right? So that's a formula you would never want to present to a client or a professor or have anybody try to audit. Whereas, you know, you're building the model for someone else to ever look at, you need to think about, you know, breaking out the steps as much as possible to make it very clear what the model is doing. You know, clearly labeling and organizing things, kind of using best practices in that case, where all of that is out the window when you're competing.

I think the other big difference is that when you're competing, you kind of got to figure out which way you're going to go pretty quickly. You might see that there are two or three different ways to solve something, and you don't have time to think through the optimal way, and so you kind of got to go with your gut and say, all right, I'm going to go with option A and we're going to see where it takes me, and I know that I'm already five minutes into it, so there's no chance I'm going to win if I go to option B at this point. Whereas, you know, maybe you take option X, if you're building a model for a client, and it took you a while to get there, but that's okay, you had the time, it wasn't time pressured.

Host: Paul Barnhurst

Yeah, you go talk to Tom or Bill, get their opinion, talk to Emily, and oh yeah, this makes sense, we'll go with option Z versus, like you said, in a competition, I started with the VBA solution and I don't like it, I'm hosed if I can't finish it, so to speak. You really don't have options B or C. You can't be like, oh, well now I'll try this, or maybe I want dynamic arrays. Once you've committed, you're pretty much down that rabbit hole.

Guest: David Brown

Right! I would say you can even go out to option XFD just to throw an Excel joke in there.

Host: Paul Barnhurst

I like that. I did catch that one. So now how many columns is that? What is that? 25,000?

Guest: David Brown

I do not know that one. Good question.

Host: Paul Barnhurst

So next question I have here, I just want to ask you a little bit about the research you do. You mentioned you spend one semester teaching, one semester researching, I know you've written a number of different articles, some about IPO and different things, so maybe just talk a little bit about what you specialize in and maybe share something you've learned through your research that you're really proud of.

Guest: David Brown

Yeah, I work in a lot of areas, like you mentioned the IPOs. More recently I'm focused more on investment products, you know, I've done a lot of work on ETFs, but right now I'm focused on target date funds or TDFs and they're used basically for retirement savings. They're the most popular and quickest-growing area of investment in the world right now. You know most 20-30 something that are starting their first jobs are getting defaulted into these.

And just as a quick bit of background, you know, if you're starting right now, you might say that I'm going to retire in 2060. And so you get a 2060 target dated fund. And that fund is then going to do some dynamic asset allocation for you and kind of handle everything for you and saving for retirement, right?

It's going to do the stock versus bond mix, it's going to change it as you get closer to retirement. What we don't understand very well yet is how we should benchmark these things, how we should analyze are they doing a good job or not. And so that's a lot of what my work is right now is trying to come up with a good way to benchmark them and evaluate the activities they're taking on investor's behalf, like, are they doing a good job for investors or not?

And kind of the sad, but interesting thing that I've found so far is they generally are underperforming what we would hope for.

Host: Paul Barnhurst

I figured. I was afraid you were just going to say that, I'm like, let me guess they're underperforming.

Guest: David Brown

Very basically, what we do is we benchmark a TDF portfolio to a similar portfolio but made from ETFs that are very low cost. And what we see is that the difference between those two portfolios is about 1% per year on average. And that's not all TDFs. There are lots of good TDF providers out there, particularly if you get some of the index TDF products and Vanguard is almost always a good bet. But there's still a lot of people out there that are charging way too much, and so, what we hope our research does is make that more accessible so people can realize, well, this target date fund is 1% too expensive. Let's go somewhere else. It's just, there's not much transparency. It's very hard to understand, the cost that you are paying, and that's where academic research can come in and kind of help hopefully guide better investment decisions going forward.

Host: Paul Barnhurst

Well, you'll definitely have to let us know when you have some of that published. We'd love to, you know, share some of that. Sounds really interesting and I don't think people realize, you hear 1%, you're like, oh, that's not a big amount, but you think 1% over 45 years of your career every year, it's a huge number when you add that all up.

 

Guest: David Brown

It's massive. You can spend 50% more per year based on those fees.

Host: Paul Barnhurst

Yeah. And people just don't realize it because they think, oh, 1%, it's no big deal. I mean, I've been guilty of that a few times, I ran the math and I'm like,uh, that was a really bad decision.

Guest: David Brown

Compounding. That's one of the most powerful forces in the universe, right?

Host: Paul Barnhurst

Yep. It either works for you or against you, but it always works.

Guest: David Brown

Very true.

Host: Paul Barnhurst

Last question before we move into our Rapid-Fire Question section. So you teach a critical thinking and finance course. Can you talk about why critical thinking is so important in finance and financial modeling?

Guest: David Brown

Yeah, I think there are a couple of levels of it.

One is really stopping before you do any modeling and thinking about what the most important business question is, right? Like, why are we modeling? This actually translates to research very well, because I've built a lot of models in my research, theoretic models, and they're to help us better understand the world. And so you got to think about how am I going to set that up? What are the important drivers coming in, and what are the important outputs coming out? And this is something any financial modeler will do when they're working with a client, they have to define like, what are the outputs that you're looking for to make a decision. And then we can kind of work back towards to what do we need to know and then, you know, how are all the calculations going to happen. But really, we got to define what it is we want to know at the end of the day, and how are we going to make a better decision? So I think there's a lot of critical thinking in that respect.

The other thing that I think is really important to think about with financial modeling is when the model can teach us something about how the world works, but also when it looks funny and is wrong. For example, if you see a model that tells you one plus one equals three, some of my students are going to take that and say, “Huh, didn't know that one plus one is three”.

Others are then going to dig in and say, “Oh, okay, so something's wrong. Let's figure out where it is”. And so that critical thinking aspect is recognizing when your intuition goes against the model and diving in and figuring out, well, is the model wrong or is your intuition wrong? Right? Because that's a super valuable thing to learn too. If you've built the model right and you're getting an answer you don't expect, maybe there's something new about the world that you have to learn. Either of those are going to be a great way to kind of use critical thinking and have it help our thinking through modeling.

Host: Paul Barnhurst

 I love what you said there, the example because I just think of some people I've worked with where they don't have that ability to do a sniff test, right? The model told me this is the answer, so it must be right.

Well, you're expecting a number in the millions and you got a number in the billions. Probably something going on here, but they just, they don't think that way. I've run into a few people that I work with and I'm like, okay, they work really hard, but until they can figure that out, they need to be doing something different, or we need to find a way to get them there because you have to have that ability, that intuition, if you want to call it, whatever you want to call it, sense check to just be able to critically think about something and say does it make sense? Like one plus one equals three. Although, funny story on that, I had a roommate that had all these funny shirts and he said, one plus one equals three for larger values of one. Math people would get it, but everybody else would look at him like, what are you talking about?

Guest: David Brown

Well, I remember, I did a problem in grad school where we had one plus one equals three, or we had one equaled zero at the end of the proof. And we scoured this proof and we were convinced it was right, and we went to the professor and he was like, oh yeah, sorry, I gave you something a little bit wrong at the beginning. And so we got that fixed and then the proof carried through and it was all okay. But again, you gotta challenge the assumptions, challenge the model, eventually figure out what's wrong.

Host: Paul Barnhurst

Yeah, I can relate to that. I'll tell one more and then we'll go to rapid fire. But I remember I was in grad school and we had a finance assignment, some accounting thing. I have to admit, I was dominating the conversation saying this could be the only thing that's right, but it just didn't make sense. I remember we asked a professor about it, and he goes, you know, if that's what you're thinking, I'm going to guess someone's dominating the conversation. But I had everybody convinced, they all went home and wrote the answer that way. I went home and thought about it later. And late that night, I'm like, this can't be right, it has to be the other way. So I changed mine. And I think I got an A and everybody else got like a C on the assignment and they all hated me. Cause you know, cause I finally just come to the conclusion, I'm like, this just can't, there's no logical way this could work. And I completely flipped my answer, and I remember a few of them were not too happy with me on that one.

Guest: David Brown

Well, maybe it wasn't the days when you can send a quick teams message or whatever else, so…

Host: Paul Barnhurst

Yeah, it wasn't quite as easy then!

So Rapid-Fire section, we have about seven of these, and here's how it works. You get no more than 10 seconds to answer each. “It depends” is not allowed, so it's a yes or no. At the end, you can pick one to elaborate on. And so these are going to be common questions, I know you've seen them, so I'm guessing you have your thoughts on them.

Circular references or no circular references in models?

Guest: David Brown: No circular references unless I absolutely have to.

Host: Paul Barnhurst

That's the usual.

VBA or no VBA?

Guest: David Brown

VBA.

Host: Paul Barnhurst

Excel dynamic arrays. Yes or no?

Guest: David Brown

 Always, and as many as I can.

Host: Paul Barnhurst

External workbook links. Yes or no?

Guest: David Brown

Never.

Host: Paul Barnhurst

 Named ranges versus no named ranges

Guest: David Brown

Yes, and I'd like to use them more.

Host: Paul Barnhurst

Do you follow a formal standard? Should people use a formal standard for building models like Smart or some of the others out there? Yes or no.

Guest: David Brown

I don't, but I probably should.

Host: Paul Barnhurst

Fair enough. And then what is your lookup function of choice? Do you like VLOOKUP, INDEX MATCH, XLOOKUP or CHOOSE?

Guest: David Brown

XLOOKUP.

Host: Paul Barnhurst

All right. And when I asked one person that, he goes, you realize there's a lot more than four options, and I'm like, yes, I realize that. So which one would you like to elaborate on?

Guest: David Brown: The VBA, cause I went back and forth on that one a lot. My initial thoughts were no VBA. You've got lambdas today. Lambdas are more accessible to students. You know, you don't have to get the editor out and deal with teaching all that. And so, you know, if we can accomplish most things in lambdas anyway, let's just avoid the VBL altogether.

VBA is also temperamental. One thing I do is I teach a lot of students to use macs. Probably two-thirds of college students use macs. When we get to the part of my course where I teach VBA, it breaks a bunch. It's just finicky. I tell those students “Go to the computer lab when you're having issues”.

But on the flip side, there's so much you can do with VBA. It's the way I teach students programming, right? It allows Excel to be this entry point to programming, which I think is wonderful. There's also a ton of cool stuff you can do with micro automations. Erik Oehm is doing some of this stuff. Being able to use these things and use those tools, I think it's, you're putting handcuffs on if you're not going to use any VBA.

So I think it's still worth having, but there are definitely arguments to be made to move away from it.

Host: Paul Barnhurst

So I'm curious, what about, you know, Power Query, Office Script, some of the other things they've done? Do you think you can accomplish just about everything without VBA, because it feels like Microsoft's done a lot to try to limit the use of VBA given the fact it doesn't work online, Cloud, it's a temperamental language, it's 40 years old, you know, those challenges that you mentioned.

So what's your take on that?

Guest: David Brown

So I haven't dug into it yet, but Office Scripts are definitely on my list because I think a lot of where Excel is going is going to be on the Cloud. And so having students able to start programming there with office scripts and doing the same thing rather than doing it in VBA, I think it will be an important piece. Hopefully, they'll have some recording macro-type options where you can generate some Office Script. I mean, maybe they do already and I just don't know about it.

Host: Paul Barnhurst

I've heard they just released some recently. I haven't tested it all, I haven't used OfficeScript, but I heard from someone they've created something kind of like the macro recorder.

Guest: David Brown

Yeah, and I think once that's there, because that's some of the beauty of teaching programming in Excel is that you can record a macro and generate those lines of code and the students can see that instantly. So I think once that capability is there, it'll be, I think in five years, probably I'll move to OfficeScript rather than VBA at that point, but you know, it's going to take a long time to pull VBA out of all of the offices in the world and to make that transition, so, I mean, this is the other thing I teach my students. I like XLOOKUP, but you got to know INDEX MATCH and VLOOKUP because a lot of your employers aren't going to be on Office 365 and you're not going to have all these cool new dynamic array things and you got to be able to do it kind of old school.

Host: Paul Barnhurst

I'm with you. I teach the same thing, you know, I teach XLOOKUP a lot, but reminding people: one, someone might not be on it, two, they may have no idea how it works and you may need to adjust to the audience you have. So it's important to know all the different options. For me, it's do what works. Sometimes I feel like people look at VLOOKUP INDEX MATCH as a battle over what religion's right.

Guest: David Brown

Yeah!

Host: Paul Barnhurst

And now XLOOKUP and I'm always like, use what works, but what's more important is you understand the logic behind them and you know when you can use one over another and what the disadvantages and advantages are so you don't end up with errors.

Alright, so we're coming up on the end of time here, I know we've run a little bit over, but just last question here before we give you the opportunity to just tell our audience how they can connect with you. So, if there's one thing you've learned over your career about financial modeling that you could share with our audience, what would that be? What's maybe kind of one thing that's really helped you be a better modeler?

Guest: David Brown

I'm gonna talk about modeling in general, cause there's financial modeling, a lot of modeling I do is mathematical modeling, and what's great about modeling is that it provides discipline and structure to your thought, right? A lot of times you'll have thoughts moving around in your head and you gotta get them down at some point. Or, teaching entrepreneurial finance, for example, you have a business plan and you can talk all day about how great this is gonna be, but you gotta start putting in the numbers, and ultimately get to the evaluation of the business and that's where the financial modeling is going to provide that discipline.

You really have to be thoughtful about what assumptions you're putting in, how this all ties together, but then it also informs your thinking. You know, you start building the model as an entrepreneur and you're like, oh, the employment line, when am I going to hire employees? How many? What are their salaries going to be? What benefits do I have to pay? Oh no, do I need an HR department? Like, you start getting into really putting a structure on problems. In a sense, it almost serves a project management role. Right? And you're managing all the thoughts that you have going into this model. I've really found that as a very beneficial way to think about modeling and that by starting modeling early, it's going to save me time down the road by disciplining my thought and putting structure on what I'm doing.

Host: Paul Barnhurst

And I like how you use the word structure. Cause for me, the discipline, the structure, the design, you get those right, and almost always you're going to have a valuable model, right? You get those wrong and, sure, you may have valuable in that you get the answer, right, per se, I don't know if there's a right answer with the model, but you get a valuable answer, but it's going to be really hard for people to use it down the line.

Last question! If our audience wants to learn more about you, what's the best way to get in touch with you? How can they reach you?

Guest: David Brown

So the easiest is probably just my email dcbrown@arizona.edu. You can find me on LinkedIn, but like we talked about earlier, there are a lot of David Browns out there. And then the third route would be, I have a YouTube channel where I post most of the videos I've built for teaching and that's under Doc Brown Excels.

Host: Paul Barnhurst

All right. Great! Thanks again for carving out some time for us, David! Really enjoyed chatting with you and learning a little bit more about what you're doing and excited to see how you continue to move the finance and financial modeling forward, especially for college students.

Guest: David Brown

Thanks so much, Paul. This was a great fun chat!

Host: Paul Barnhurst

Thanks for joining us for that interview with David Brown. That is the David Brown of U of A. Not the David Brown from Nigeria. One thing I really enjoyed that he talked about that I just want to cover for a minute is I love how he explained how he would teach the college program for finance if he could. To really focus on people getting those technical skills, not just the theoretical, by adding one credit to each course. I thought that was a great example of how, you know, education needs to evolve. I think we've all been frustrated. I know I have with education being so theoretical and not practical enough. So that's the one thing that really jumped out to me from that interview. There were a lot of things I enjoyed from it, but just as we wrap up here, I would like to remind each of you that, if you're CPA, CMA, you can earn CPE credit for this podcast by going to earmarkcpe.com, downloading the app and answering a few questions.

Finally, if you enjoyed this episode, please share the podcast with your friends and subscribe and leave a review on your podcast platform of choice. We'd really appreciate it if you could give us a review.

Thanks again for joining us for this episode because we could not do it without you, the audience.

Financial Modeler's Corner was brought to you by Financial Modeling Institute. Visit FMI at www.fminstitute.com/podcast and use code PODCAST to save 15% when you enroll in one of their accreditations today.