Finance
by Aswath Damodaran
Is a valuation a story or a sum?
Aswath Damodaran teaches valuation at NYU's Stern School of Business. He sees two tribes. Storytellers fall for a good pitch, and number crunchers trust the spreadsheet. Each misses something. His book shows how to tie a company's story to its numbers so each keeps the other honest.
Hear a sample · read by Laura
Damodaran works in steps. Tell the company's story. Test whether it holds up. Turn it into the few numbers that drive value, like the size of the market and profit margins. Build the valuation from those. Then keep listening to critics, and revise when the evidence says so.
Damodaran checks a story at three levels, each stricter than the last. It has to be possible, which rules out fairy tales. It should be plausible, with some evidence it could happen. And the parts that drive value most should be probable, the likely outcome.
Once a company is valued, news keeps arriving. Damodaran sorts it. A narrative break ends the story, like a lost licence. A narrative change alters the story in a big way. A narrative shift keeps the story but nudges its numbers. Work out which you're facing before you react.
Damodaran ties this to a company's life cycle. A start-up has almost no history, so its value rests mostly on narrative and the numbers are guesses. As it matures, results pile up and the numbers take over. The older the firm, the less a good story should move its price.
Two halves
A good valuation is a story and a set of numbers that agree with each other.
Testing it
Test a story in stages, asking first if it's possible, then plausible, then probable.
Value drivers
Every part of the story should show up in a number, such as growth, profit margins or risk.
Critics
Share your story with people who disagree, and change it when they spot a real flaw.
Real change
Update the story when real events change it, and leave it alone when only the market's mood shifts.
A story from the book
In 2014 Damodaran valued Uber as an urban car service, well below what investors were paying. Bill Gurley, an Uber backer, replied with a blog post, How to Miss by a Mile, arguing Uber would grow far beyond taxis. Damodaran took it seriously and valued Uber again on Gurley's story.
One thing to try
Pick a company you own shares in, or one you use every day. Write its story in three sentences. Underneath, write the two numbers that story depends on most, such as sales in five years or profit margin. If you can't find them, the story isn't finished.
Knotd has the key ideas from 250+ non-fiction books, each in a few minutes, in plain words. Narrative and Numbers comes with a Spot the Trap case to make it stick.
Get the whole book on KnotdOpen in the appIs a valuation a story or a sum? Aswath Damodaran teaches valuation at NYU's Stern School of Business. He sees two tribes. Storytellers fall for a good pitch, and number crunchers trust the spreadsheet. Each misses something. His book shows how to tie a company's story to its numbers so each keeps the other honest.
From story to value; The 3P test; Break, change or shift; Young firms run on stories.
Pick a company you own shares in, or one you use every day. Write its story in three sentences. Underneath, write the two numbers that story depends on most, such as sales in five years or profit margin. If you can't find them, the story isn't finished.
Yes. Knotd has the key ideas from Narrative and Numbers in a few minutes, in plain words, plus a Spot the Trap case to test them. It's one of 250+ non-fiction books in the app.
