"Your bear case, you got margins decreasing on lower revenue growth and you think there's 10% [downside], so what multiple did you put on it?" Chilton asked.
The speaking MBA student, adjusting to the judge's interjection amid the team's presentation, responded without a change in facial expression: "What multiple?"
"How did you get to the 10%?" Chilton said.The student, stumbling through how his team came to the 10%, explained that they conducted sensitivity analysis within a DCF model, and "ran EBIDT margins declined to that value and revenue only increases a certain amount within those segments." Chilton, peering through the top of his reading glasses and sitting forward in his chair, softly responded: "Yea, but that's not the way you do it. You got to put a multiple on there; you got to say, 'OK, this is what your earnings are going to be, this is what your multiple's going to be' -- you didn't do it that way?" "We did not do it that way," the student said. Silence. Behind me, a team of students who failed to make the final round of the nation's preeminent stock picker competition among the leading MBA programs whispered to one another. The room squirmed from the aggressive questions. Even I began to shrink in my seat. As the team resumed its presentation, Chilton again cut in. "Hold on -- can we ask questions now, or do we ask later?" he said. One event organizer made an uncomfortable chuckle and said he should wait for the question and answer period afforded judges at the end of the presentation. It was a brutal thirty minutes for the Carnegie Mellon team, which managed a fourth place finish behind Yale, University of Virginia and champions University of Chicago. But as I learned throughout the weekend, this was simply one obstacle aspiring stock pickers face as they attempt to enter the "buy-side" world.
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