Narrative and Numbers: The Enchantment of Business Stories
-By Aswath Damodaran
Embark with me on a journey where we unravel the mystical dance between narrative and numbers in the realm of business. Imagine, if you will, a valuation devoid of a story — a soulless, untrustworthy endeavor. Stories linger in our minds far longer than cold spreadsheets; they are the heartbeats of our understanding.
In the grand theatre of our minds, where the left brain orchestrates logic and numbers, and the right brain conducts intuition and creativity, we often find ourselves using only half our cognitive symphony. The crescendo, my friends, lies in this revelation, and this book aims to be the magnum opus of such a revelation.
The Allure of Storytelling
Why, amidst the numerical sea, are we captivated by stories? Numbers offer the allure of precision and objectivity in an uncertain world, a counterweight to the whimsy of storytelling. To wield numbers effectively, one must master the art of data management — collecting, analyzing, and avoiding the biases that seek to infiltrate.
Yet, in the intricate dance of investing and business, one must marry both stories and numbers, and valuation becomes the bridge that binds them.
Let us delve into the art of storytelling in the context of valuing businesses and making investments.
1. Meaning
Begin by understanding the company — a historical voyage, its business landscape, and the dance with competitors. Craft a narrative of revenue generation, defining the business’s prowess and the quality of its earnings. Also, try to understand the drive that is generating the revenues for the business.
2. Market
Determine industry and sectoral growth rates, unraveling the corporate life cycle. From the startup’s spark to the mature and stable juggernaut, understand the story each stage whispers. Determining the stage of the business is crucial in understanding and valuing the business.
3. MOAT
Venture into the moat — a fortress protecting revenue growth, where pricing power, cost advantages, and distribution weave a narrative of resilience. Uncover the story through Porter’s 5 forces, SWOT analysis, and a PESTEL analysis, revealing the external and internal forces shaping the tale.
4. Management
In the realm of management, scrutinize credibility through compensation, ownership, and corporate actions. Narrate the past goals achieved and assess the journey through related party transactions. At the same time, looking at the tenure of the management is important to get familiar with the manager’s experience with the concerned business.
5. Margin of Safety
Navigate the labyrinth of DCF tables to determine cash flows and fair business value. This is the denouement, where over or undervaluation reveals itself.
A typical DCF uses 3 elements to determine the fair intrinsic value of the business. These are:
- Risk — which is measured using a discount rate
- Growth Rates — which is analyzed using moats and risks
- Cash Flows — This looks at the ability to generate free cash flows from the amount reinvested in the business.
Instill discipline in your storytelling, subjecting it to the 3P test — possible, plausible, and probable. A well-told story, woven with discipline, enthralls listeners, making them not just accept but embrace your assumptions and perspectives.
The Power of Storytelling in Business
Storytelling is the linchpin in selling and advertising. The best salespeople are master storytellers, and advertising thrives on narratives that linger, enticing customers to not just buy but remember brands.
Christopher Booker’s timeless insight into storytelling plots — overcoming the monster, rebirth, quest, rags-to-riches, voyage and return, comedy, and tragedy — reveals the essence of narratives that captivate generations.
In the dynamic business world, companies have dual narratives, evolving as they traverse the life cycle. Storytelling, learned from these timeless plots, is the beacon guiding you through these business epochs.
Crafting a Better Story
1. Understand your business and know yourself
Dive deep into your business, unravel its intricacies, and understand your role in the grand narrative.
2. Understand your audience
Tailor your story to resonate with your audience, connecting on a personal level.
3. Marshal the facts
Adapt the journalistic “Five Ws” to business — know your customers, competitors, and employees, envision your business’s future, and understand the market’s dynamics.
4. Talk in specifics
Paint vivid pictures with details, transforming your story from abstract to tangible.
5. Show, don’t tell
Let your narrative unfold through actions and experiences, engaging your audience emotionally.
6. Have a good ending
Conclude your story with a flourish, leaving your audience inspired and ready to act.
Remember, storytelling creates connections, making assumptions and perspectives palatable to your audience. Yet, storytelling alone does not guarantee success; it’s the marriage of narrative and numbers that fortifies your business stance.
The Precision of Numbers and Nuance of Stories
In the business landscape, the mantra echoes: if you cannot measure it, you cannot manage it. Numbers bring precision to the chaos, portraying an accurate picture of the business reality.
The law of large numbers unfolds its magic, enhancing the precision of statistics as sample sizes grow. Mean and standard deviation stand as sentinels, capturing the essence of data variability. But in this numerical symphony, storytelling adds nuance, making replication a daunting task.
Number-Crunching Tools
The journey into number-crunching begins with statistics — mean, standard deviation, median, mode, skewness, and kurtosis. These tools provide a lens to view the variability, symmetry, and frequency within your data. An open mind, coupled with a thirst for learning from data, augments storytelling skills, leading to informed investment and business decisions.
Challenges in Business Narratives
Building a narrative for a young company in a shifting business landscape is a challenge. Valuing Twitter in 2013 required predicting its trajectory — remain in online advertising or venture into uncharted territories. The narrative must be simple, credible, inspiring, and actionable, but crafting it is no simple feat.
The Essence of a Good Narrative
Simplicity
A good narrative is not a labyrinth; it’s a clear path that all can tread.
Credibility
Trust is the cornerstone; your narrative must withstand scrutiny and resonate with truth.
Inspiration
Your story should kindle the spark of motivation, urging action and change.
Actionable
A good narrative isn’t just a tale; it’s a call to action, setting the stage for transformation.
Taking cues from classic story structures, Damodaran reveals the seven basic plots that resonate through time. From overcoming monsters to rags-to-riches tales, these archetypes echo in literature, cinema, and, as Damodaran suggests, in the business narratives we construct.
The Dynamic Nature of Valuation
A business’s value evolves with its cash flows, risks, and growth. The Discounted Cash Flow (DCF) methodology should reflect this dynamism, adapting the discount rate to changing business dynamics.
Analyzing Uncertainty
Uncertainty lurks in the shadows of business decisions. What-if analysis, scenario analysis, decision trees, and simulations are tools to illuminate this uncertainty. Each offers a unique perspective, enabling a comprehensive understanding of the risks and rewards.
Restructuring the Narrative: Balance Sheet as a Story
Investment announcements, akin to restructuring, find resonance in the balance sheet. Framing these announcements around the balance sheet creates a narrative that echoes the company’s financial symphony.
Qualities of a Top Manager
A manager’s qualities shift with the company’s life cycle. From a visionary storyteller in infancy to an administrative realist in decline, the right match is crucial. As companies transition, the potential for managerial mismatch grows, paving the way for conflict and change.
In this dance between narrative and numbers, precision and nuance, storytelling emerges as the magical thread that weaves through the fabric of business. A compelling story, aligned with robust numbers, is a symphony that resonates with the minds and hearts of investors and stakeholders alike.
In the grand tapestry of “Narrative and Numbers,” Damodaran emerges not just as a financial wizard but as a storyteller extraordinaire. He beckons us to appreciate the symphony of numbers and stories, where precision and nuance dance together, creating a narrative that stands the test of markets and time. So, as we venture forth, let the numbers be our guide, and let the stories be our soul.
Happy Reading! 🚀
