The Martinez's Law Of Financial Modelling

I'm sure you're familiar with Murphy's Law.

It's the law that says bread will always land jam-side down when dropped. That it will rain right after you wash your car. That when you're in a queue, the other line always seems to move faster.

There are many more laws.

Finagle's law, Parkinson's law, Hofstadter’s law, Cheops's law...

And on goes the list.

For years, I've been crafting financial models for numerous projects.

During this period, I've noticed a peculiar phenomenon in my models. A pattern that seems to emerge more often when the stakes are high or the decisions are important. An outcome that's more probable when I present my models to top-tier executives or influential stakeholders.

After some research, I found no existing law, hypothesis, lemma, or corollary addressing this phenomenon.

But it's so relevant that it cannot be left unnoticed.

Therefore, today I’m formally introducing a new law to the world.

The Martinez's Law of financial modelling.

The Martinez's Law states:

"No matter how much time, energy, attention, and effort you invest in building and reviewing a financial model. The more relevant the decision or senior your audience, the more they will focus on the sections of the model with anomalies, unexpected outcomes, inaccuracies, or formatting issues."

I've seen the Martinez's Law in action many times.

Let me tell you about last time.

I was developing a financial model to refinance an existing solar project.

Even though I've previously said you shouldn't repurpose an existing model to answer a different question than its original intent, I went against my own advice.

And I paid the price for not walking the talk.

The goal was to select the refinance package maximizing returns for equity holders.

I spent many hours adapting the existing model. Inserting calculation blocks to simulate various refinancing packages. Tweaking formulas and links to repurpose the model.

I reviewed it a gazillion times.

I verified the inputs, confirmed that the balance sheet balanced, tested different scenarios...

Everything worked fine. Or so I thought.

I was ready to present the model to the fund partners.

The meeting began.

I shared my screen to walk the partners through the model.

The fund partner fired his first question:

"How much should the interest rate increase to cause the NPV of the project to go to 0?"

Boom! Hit and sunk.

There was a glitch. The link connecting the interest rate input with the interest payment calculation block was broken.

I had anticipated a comparison of refinancing packages under specific conditions.

The model worked well provided that you didn't test the impact of interest rate changes on the NPV.

It failed when you changed the interest rate input.

It was my fault. I should've expected that question and tested it. I didn't.

I began to mumble and sweat, feeling shivers down my spine, realizing the force of the Martinez's Law taking its toll on my model.

The partners suggested to postpone the meeting so that I could fix the model.

But here's a bright note (for Spanish speakers only, apologies to others).

While I can't escape from the effects of the Martinez's law on my financial models, I can escape from the effects of lack of clarity and procrastination on my life.

I once met a coach.

When I first met him he was starting. Little experience. Few customers.

For some time, I was his guinea pig.

But boy, this guy helped me crystallize my goals, kill my procrastination, and boost my productivity.

This newsletter is a direct result of working with him.

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