Narrative and Numbers: The Value of Stories in Business by Aswath Damodaran

In today’s world of finance and business valuation there is one person at the absolute center of knowledge, theoretical and practical development. He is a professor of at the Stern School of Business at New York University, author of several highly regarded books and academic articles and the person behind the famous blog Musing on Markets. Yes of course, it’s Aswath Damodaran that I’m talking about!

What I really like about Aswath is his humble personality and bounteous attitude towards learning and sharing knowledge. Musing on Markets is one evidence of that statement, but then we have his webpage at Stern as well. There you can find material and webcasts to all his classes, links to his writings and all kinds of other useful data and tools (lots of excel spreadsheets). The best part is that all of his high quality material is available and free for everyone.

nbWhen I found out that Aswath was releasing a new book I was excited from that fact alone. But what got me really excited was the title and the description of his new book, ‘Narrative and Numbers’. This book is not a hardcore theoretical valuation bible that you might expect if you have read some of Aswath’s earlier work (if you are interested in that I recommend reading his book ‘Damodaran on Valuation’). I would say that Narrative and Numbers is mainly a book about understanding and connecting the two types of investor-species that the world/market consist of; the storytellers and the number crunchers, into an improved one. In other words, the books is about connecting the two endpoints of valuation; the qualitative and the quantitative factors and how to combine them in order to end up with a good business valuation. Also, Narrative and Numbers is about those on “the other side”, the founders and managers of companies, and how they use numbers and stories in different ways and with different purposes.

If you want more of Aswath I have one more final tip before I present the worldly wisdoms from his book Narrative and Numbers. Go listen to this episode of Masters in Business with him as a guest, it’s awesome!

Please comment if you have read the book and what you thought of it. Also, if you have found a worldly wisdom in the book that you think I should have included please comment on that as well. I’m very interested in what caught your eye while reading and why.

Five worldly wisdoms from the book

Much as we love stories, though, most of us are also aware of their weaknesses. For the storytellers, it is easy to wander into fantasyland, where the line between good stories and fairy tales gets crossed. That may not be a problem if you are a novelist, but it can be a recipe for disaster if you are building a business. For those listening to stories, the danger is a different one. Since stories tend to appeal to the emotions rather than to reason, they also play on our irrationalities, leading us to do things that do not make sense but feel good, at least when we do them. In fact, as con men through the ages have discovered, nothings sells better than a good story. (p.2)

As a novice to storytelling, there are three thoughts that come to mind as I look at the long and well-researched history of storytelling. The first, and most humbling, is the realization that much of what is offered as good business storytelling practice has been known for centuries, perhaps going back to primitive times. The second is that good storytelling can make a huge difference in the success of a business, especially early in its life. To be a successful business, not only do you have to build a better mousetrap, but you have to tell a compelling story about why that mousetrap will conquer the business world to investors (to raise capital), to customers (to induce purchases), and to employees (to get them to work for you). The third is that storytelling in business come with more constraints than storytelling in novels, since you are measured not just on creativity but on being able to deliver on your promises. The real world is very much a part of your story, and much as you would like to control it, you cannot. (p.3)

So why are we drawn to numbers? In a world of uncertainty, numbers offer us a sense of precision and objectivity and provide a counterweight to storytelling. That precisions is often illusory, and there are uncountable ways in which bias can find its way into numbers. Notwithstanding those limitations, in investing and finance, as in many other disciplines, the number crunchers or “quants” have essentially used the power of numbers to both inform and intimidate. The crisis of 2008 was a cautionary note to those who would let common sense be overwhelmed by complex mathematical models” (p.4)

In The Little Prince, a children’s book, the Price visits an asteroid and meets a man who counts the stars, insisting that if he were able to count them all, he would own them. The children’s tale has resonance, since many people seem to feel that measuring something or putting a number on it will allow them to control it better. Thus, even though a thermometer can only tell you that you have a fever and a blood pressure monitor provides a reading of your blood pressure at the time you take it, both seem to give you a sense of control over your health(p.39)

If you invest primarily in mature companies, with established business models, this i perhaps the state of play for you, and your intrinsic value will follow the smooth path that value schools assume is a universal one. Is this good or bad for investors? While at first sight it seems like a blessing to have stable stories and values, there is a downside, at least from an investing standpoint. The market prices for these stocks will also reflect this stability in story line and will be less likely to wonder away from values. In the language of value and price, the gap between price and value will be smaller at these companies. Since investors make money from exploiting the gap, it stands to reason that you will find fewer and smaller market mistakes with stable companies than with younger and more unstable companies that are exposed to narrative breaks and changes. That is the reason why I prefer to spend my time and resources valuing companies on what I term the “dark side”, where there is significant uncertainty about how narratives will evolve in the future” (p.179-180)

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