The world of investing/finance is divided into two camps. In one, you have the number-crunchers, who believe that the only things that matter are the numbers and that imagination/creativity are dangerous distractions. In the other, you have the storytellers, who build on the stories they tell about companies and how these stories will bring untold wealth. Each side believes it has a monopoly on the truth and looks with contempt at the other. Prof. Aswath Damodaran contends that stories matter, but only if they are connected with numbers. And numbers are empty, unless they are connected with narratives. In this talk, he looks at the process by which one might build narratives, check them against reality and convert them into valuations. Uber and Ferrari examples are used to illustrate the process.
Aswath Damodaran: "The Value of Stories in Business" | Talks at Google
Aswath Damodaran’s Narrative And Numbers – Book Review
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
Narrative and Numbers: The Value of Stories in Business by Aswath Damodaran
How can a company that has never turned a profit have a multibillion dollar valuation? Why do some start-ups attract large investments while others do not? Aswath Damodaran, finance professor and experienced investor, argues that the power of story drives corporate value, adding substance to numbers and persuading even cautious investors to take risks. In business, there are the storytellers who spin compelling narratives and the number-crunchers who construct meaningful models and accounts. Both are essential to success, but only by combining the two, Damodaran argues, can a business deliver and sustain value.
Through a range of case studies, Narrative and Numbers describes how storytellers can better incorporate and narrate numbers and how number-crunchers can calculate more imaginative models that withstand scrutiny. Damodaran considers Uber’s debut and how narrative is key to understanding different valuations. He investigates why Twitter and Facebook were valued in the billions of dollars at their public offerings, and why one (Twitter) has stagnated while the other (Facebook) has grown. Damodaran also looks at more established business models such as Apple and Amazon to demonstrate how a company’s history can both enrich and constrain its narrative. And through Vale, a global Brazil-based mining company, he shows the influence of external narrative, and how country, commodity, and currency can shape a company’s story. Narrative and Numbers reveals the benefits, challenges, and pitfalls of weaving narratives around numbers and how one can best test a story’s plausibility.
Damodaran’s success in combining storytelling with traditional financial analysis and valuation is unprecedented. The book has the potential to be a cornerstone of both traditional valuation and business “pitching” as it shows how individuals from each world can benefit from co-opting tools from the other. The author takes us on his personal journey into the realization that numbers need a narrative in order to make them persuasive. (Paul Johnson, Nicusa Investment Advisors)
Professor Damodaran’s point-counterpoint case studies make valuation a good read. Self-critical in his contemporary examples, he wisely cautions the reader that quality valuation requires both the right and the left side of one’s brain?the number cruncher and the storyteller. (Thomas E. Copeland, University of San Diego)
Damodaran, instructor to many on valuation, clearly demonstrates that quantitative valuation formulas are not sufficient: they must be applied with a more qualitative narrative about the business. But qualitative analysis has its dangers, not the least that we insert our own biases into the narrative. Damodaran nicely weaves stories into the more formal quantitative analysis, with check and balances that yield a more confident valuation. (Stephen Penman, author, Accounting for Value)
No one has contributed more to the craft of valuation than Aswath Damodaran. In Narrative and Numbers, he correctly shows that you can’t understand the stock without the story. After Damodaran’s eye-opening tour, you will forever appreciate the vital contribution of human nature to number-crunching. (Michael Mauboussin, Head of Global Financial Strategies, Credit Suisse)
Damodaran takes us to the place where Joseph Campbell, Warren Buffett, and the best quantitative analyses of Nassim Taleb intersect, and his journey uncovers new value and risk missed by analysts who bias themselves by relying solely on storytelling or number-crunching. It’s a hero’s journey best supported by humility?and this first-person account of Aswath’s own evolving narratives, analyses, and valuations of Alibaba, Amazon, Uber, Theranos, Ferrari, and more. He may have started as a quant, but Damodaran’s now one of the most balanced analysts?and wonderful business and financial storytellers?writing and teaching today. (David Foster, CEO, Business Valuation Resources)