What do you think?
Rate this book
Narrative and Numbers: The Value of Stories in Business
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.
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.
296 pages, Hardcover
Published January 10, 2017
About the author
Aswath Damodaran
74 books605 followersAswath Damodaran is a Professor of Finance at the Stern School of Business at New York University (Kerschner Family Chair in Finance Education), where he teaches corporate finance and equity valuation. He is best known as author of several widely used academic and practitioner texts on Valuation, Corporate Finance, and Investment Management.
Ratings & Reviews
Friends & Following
Create a free account to discover what your friends think of this book!
Community Reviews
Displaying 1 - 30 of 46 reviews
August 15, 2021
Clear, well-written book that talks about how stories and business fundamentals shape valuation. I read as I was also reading Poor Charlie’s Almanac, and hoped to get a better grip on how to value companies.
FIRST THIRD OF THE BOOK
The first third of the book is about why both storytelling (narrative) and numbers are important when valuing an asset:
- 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)
- But storytelling that is not bounded by numbers can quickly devolve into fantasy land. Understand if a story is possible, whether it is plausible, and how probable it is. Numbers are a great way to figure this out
- This should be the golden age for numbers, more data and better analytics tools. But this surge in number-crunching and computing powers that has created a greater demand for good storytelling, often as a counterpoint to masses of numbers
- If you rely only on numbers, you can suffer from the illusion of precision (estimates are treated as facts, often leading to disastrous consequences), the illusion of objectivity (the map is not the terrain), and the Lemming Problem (if the future is going to be different from the past, the predictions based upon past data will come apart)
SECOND THIRD OF THE BOOK
The second third of the book describes classical business story models. These include:
- The bully: Company with a large market share, a superior brand name, access to lots of capital, and a reputation for ruthlessness. They will steamroll competition to deliver ever-increasing revenues and profits
- The Eureka moment: Company that claims to have found an unmet need in the market, usually in a serendipitous way, and then has come up with a way of meeting that need
- The better mousetrap: Company that contends it has a better way of delivering an existing product or service that will be more desirable and better suited to the need. They will eat into the market share of the existing players in the market
- The disruptor: Company that changes the way a business is run, altering fundamental ways in which the product or service is delivered. The status quo is ineffective and inefficient, and disruption will change the business (while making money).
It also shows how stories can often go awry. Examples are:
- Assuming you are the only one with insights: it is easy to assume that while the rest of the world stays still, your company will move quickly from opportunity to opportunity – but that assumption is usually unrealistic. When you see large market opportunities, rest assured that much of the rest of the world does as well, and when you move decisively to take advantage of them, be ready for others to be making the same moves
- It is very difficult to disrupt businesses that are being run efficiently. Not only will these established companies be better positioned to push back against disruption, but customers will be less likely to shift. If a business is badly run, insofar as the players in the business make little or no money while delivering products and services that leave their customers dissatisfied, you have the perfect storm for disruption
- Stories that assume a high perpetual growth rate (any perpetual growth rate that exceeds the nominal growth rate of the economy is impossible – as the company will then be bigger than the economy)
- Bigger than the market: your market share can never be more than 100%
- Claiming that you can simultaneously capture market share and raise prices in a competitive market
- Big market delusion: a high growth story that’s plausible at the individual company level can become implausible in the aggregate — this is what leads to funding bubbles
FINAL THIRD OF THE BOOK
This discusses the differences between pricing and valuation – and is the bit I found most valuable.
- The value of a business is determined by the magnitude of its cash flows, the risk/uncertainty of these cash flows, and the expected level and efficiency of the growth that the business will deliver. But the price of a traded asset (stock) is set by demand and supply. While the value of the business may be one input into the process, it is one of many forces. The push and pull of the market (momentums, fads, and other pricing forces) and liquidity (or the lack thereof) can cause prices to have a dynamic entirely their own, which can lead to the market price being different from value.
- In pricing, you find comparable assets in the market, look for pricing metrics that investors use in pricing these assets, and then price your asset accordingly. This can be the wrong approach if your asset has attributes that are markedly different from that of “comparable” assets
- Damodaran then gives examples of how he valued businesses in 2014 and 2015, and outlines his process in great detail. What’s fascinating is that he undervalued almost all businesses (specially tech businesses) – but not because his process was bad. He simply believed in the wrong stories (for example, not anticipating how big the online advertising industry would become or how Uber would branch out into food delivery)
CLOSING THOUGHTS
The book will help anyone who is trying to evaluate stories that value a business – from a startup founder to a public market investor. Damodaran’s process – while clearly not bulletproof – is a phenomenally structured and debuggable way to value a business, and will be a great addition to other models (mental or spreadsheet) that you use
FIRST THIRD OF THE BOOK
The first third of the book is about why both storytelling (narrative) and numbers are important when valuing an asset:
- 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)
- But storytelling that is not bounded by numbers can quickly devolve into fantasy land. Understand if a story is possible, whether it is plausible, and how probable it is. Numbers are a great way to figure this out
- This should be the golden age for numbers, more data and better analytics tools. But this surge in number-crunching and computing powers that has created a greater demand for good storytelling, often as a counterpoint to masses of numbers
- If you rely only on numbers, you can suffer from the illusion of precision (estimates are treated as facts, often leading to disastrous consequences), the illusion of objectivity (the map is not the terrain), and the Lemming Problem (if the future is going to be different from the past, the predictions based upon past data will come apart)
SECOND THIRD OF THE BOOK
The second third of the book describes classical business story models. These include:
- The bully: Company with a large market share, a superior brand name, access to lots of capital, and a reputation for ruthlessness. They will steamroll competition to deliver ever-increasing revenues and profits
- The Eureka moment: Company that claims to have found an unmet need in the market, usually in a serendipitous way, and then has come up with a way of meeting that need
- The better mousetrap: Company that contends it has a better way of delivering an existing product or service that will be more desirable and better suited to the need. They will eat into the market share of the existing players in the market
- The disruptor: Company that changes the way a business is run, altering fundamental ways in which the product or service is delivered. The status quo is ineffective and inefficient, and disruption will change the business (while making money).
It also shows how stories can often go awry. Examples are:
- Assuming you are the only one with insights: it is easy to assume that while the rest of the world stays still, your company will move quickly from opportunity to opportunity – but that assumption is usually unrealistic. When you see large market opportunities, rest assured that much of the rest of the world does as well, and when you move decisively to take advantage of them, be ready for others to be making the same moves
- It is very difficult to disrupt businesses that are being run efficiently. Not only will these established companies be better positioned to push back against disruption, but customers will be less likely to shift. If a business is badly run, insofar as the players in the business make little or no money while delivering products and services that leave their customers dissatisfied, you have the perfect storm for disruption
- Stories that assume a high perpetual growth rate (any perpetual growth rate that exceeds the nominal growth rate of the economy is impossible – as the company will then be bigger than the economy)
- Bigger than the market: your market share can never be more than 100%
- Claiming that you can simultaneously capture market share and raise prices in a competitive market
- Big market delusion: a high growth story that’s plausible at the individual company level can become implausible in the aggregate — this is what leads to funding bubbles
FINAL THIRD OF THE BOOK
This discusses the differences between pricing and valuation – and is the bit I found most valuable.
- The value of a business is determined by the magnitude of its cash flows, the risk/uncertainty of these cash flows, and the expected level and efficiency of the growth that the business will deliver. But the price of a traded asset (stock) is set by demand and supply. While the value of the business may be one input into the process, it is one of many forces. The push and pull of the market (momentums, fads, and other pricing forces) and liquidity (or the lack thereof) can cause prices to have a dynamic entirely their own, which can lead to the market price being different from value.
- In pricing, you find comparable assets in the market, look for pricing metrics that investors use in pricing these assets, and then price your asset accordingly. This can be the wrong approach if your asset has attributes that are markedly different from that of “comparable” assets
- Damodaran then gives examples of how he valued businesses in 2014 and 2015, and outlines his process in great detail. What’s fascinating is that he undervalued almost all businesses (specially tech businesses) – but not because his process was bad. He simply believed in the wrong stories (for example, not anticipating how big the online advertising industry would become or how Uber would branch out into food delivery)
CLOSING THOUGHTS
The book will help anyone who is trying to evaluate stories that value a business – from a startup founder to a public market investor. Damodaran’s process – while clearly not bulletproof – is a phenomenally structured and debuggable way to value a business, and will be a great addition to other models (mental or spreadsheet) that you use
May 23, 2017
Talk@Google
https://www.youtube.com/watch?v=uH-ff...
Step 1: Develop a narrative for the business that you're valuing (hypothesis about how the business would develop & evolve over time; start of detective story).
Step 2: Hypothesis testing: Test the narrative to see if it's possible, plausible or probable (Bayesian theorem/base rates). Common sense sanity check.
Step 3: Convert the narrative into drivers of value. Take the narrative apart and look how you'll bring it into valuation inputs starting with potential market sizing (growth rates), down to cash flows and risks. Sanity check growth vs reinvestment capex vs risk. By the time you're done, each part of the narrative should have a place in your number and each number should be backed up by a portion of your story.
Step 4: Connect the drivers of value to a valuation. Create an intrinsic valuation model that connects the input to an end value of the business. What is this business worth?
Step 5: Keep the feedback loop open. Scuttlebutt approach. Talk to people who know the business better than you do. Deepen your understanding of the business. Look for facts that challenges the prevailing hypothesis. Fine tune your valuation to incorporate new/alternative narratives.
https://www.youtube.com/watch?v=uH-ff...
Step 1: Develop a narrative for the business that you're valuing (hypothesis about how the business would develop & evolve over time; start of detective story).
Step 2: Hypothesis testing: Test the narrative to see if it's possible, plausible or probable (Bayesian theorem/base rates). Common sense sanity check.
Step 3: Convert the narrative into drivers of value. Take the narrative apart and look how you'll bring it into valuation inputs starting with potential market sizing (growth rates), down to cash flows and risks. Sanity check growth vs reinvestment capex vs risk. By the time you're done, each part of the narrative should have a place in your number and each number should be backed up by a portion of your story.
Step 4: Connect the drivers of value to a valuation. Create an intrinsic valuation model that connects the input to an end value of the business. What is this business worth?
Step 5: Keep the feedback loop open. Scuttlebutt approach. Talk to people who know the business better than you do. Deepen your understanding of the business. Look for facts that challenges the prevailing hypothesis. Fine tune your valuation to incorporate new/alternative narratives.
June 2, 2018
I give this book four stars not because it lacked anything it should have had but simply out of my desire to reserve five-star review to those books that have an impact on a wide audience; this book's audience will be limited to people interested in valuing public and private companies, an audience of whom I enthusiastically count myself one.
Damodaran starts by recounting his history as a "numbers' guy". His valuations, he says, were precise to the nth decimal, but he lacked confidence in their results because he knew that by changing this or that input, he could obtain whatever result he wanted. Thus, the prologue to this book develops the limits of relying only on numbers to evaluate a business.
Next, he explores the power of stories: their place in history and their ability to capture us in a way that a quantity on a spreadsheet simply cannot. Like many numbers' guys, Damodaran struggled to accept this reality, poo-pooing storytellers as irrational or somehow inferior to the those who are unconscious slaves to the altar of the hyper-rational.
The heart of the book describes Damodaran's eventual synthesis of these ideas. (In this sense, the book is simply but aptly titled.) How does one develop a story about a business, a seemingly inhumane and behemoth entity? How does one determine if that story is likely, or even probable? (Fans of the author will think of the "three P" test.) Finally, how does one turn this narrative into the numbers that form a valuation?
Damodaran answers these questions and takes us through the steps of applying them in a number of diverse case studies. In the end, the valuation looks the same: there is talk of market size and share, gross profit and operating margin, reinvestment and discount rates. But now, we are left with the conviction that these numbers have a solidity to them that they didn't have before, and our job of justifying our work is much easier now that we have the precious tool of narrative.
The material in this book is not entirely new, and Damodaran disciples will notice certain examples from YouTube videos and blog posts, but there is enough new information to satisfy even the most greedy of readers. At any rate, it is worth the sticker price to have the information well organized and in one place.
This book now joins a triumvirate that any practitioner must have: The Intelligent Investor, Investment Valuation, and, now, Narrative and Numbers.
Damodaran starts by recounting his history as a "numbers' guy". His valuations, he says, were precise to the nth decimal, but he lacked confidence in their results because he knew that by changing this or that input, he could obtain whatever result he wanted. Thus, the prologue to this book develops the limits of relying only on numbers to evaluate a business.
Next, he explores the power of stories: their place in history and their ability to capture us in a way that a quantity on a spreadsheet simply cannot. Like many numbers' guys, Damodaran struggled to accept this reality, poo-pooing storytellers as irrational or somehow inferior to the those who are unconscious slaves to the altar of the hyper-rational.
The heart of the book describes Damodaran's eventual synthesis of these ideas. (In this sense, the book is simply but aptly titled.) How does one develop a story about a business, a seemingly inhumane and behemoth entity? How does one determine if that story is likely, or even probable? (Fans of the author will think of the "three P" test.) Finally, how does one turn this narrative into the numbers that form a valuation?
Damodaran answers these questions and takes us through the steps of applying them in a number of diverse case studies. In the end, the valuation looks the same: there is talk of market size and share, gross profit and operating margin, reinvestment and discount rates. But now, we are left with the conviction that these numbers have a solidity to them that they didn't have before, and our job of justifying our work is much easier now that we have the precious tool of narrative.
The material in this book is not entirely new, and Damodaran disciples will notice certain examples from YouTube videos and blog posts, but there is enough new information to satisfy even the most greedy of readers. At any rate, it is worth the sticker price to have the information well organized and in one place.
This book now joins a triumvirate that any practitioner must have: The Intelligent Investor, Investment Valuation, and, now, Narrative and Numbers.
June 17, 2021
My take-away: The three P’s - Probable, Plausible and Possible, different level of possibility of a story, and the Impossible, Implausible, Impossible pitfalls we must identify to build a good story that fits the numbers.
November 11, 2020
So glad I picked up this book.
I've found most material about valuation to be far too dry and theoretical. In the fight to distill lessons from theory, I usually give up on the cause.
This book marries stories and numbers through case studies in a manner that you'll find yourself not only stimulated but also equipped with very usable technical skills by the time you turn the last page.
Recommended for current/aspiring value invetors, and to those who run/lead businesses.
I've found most material about valuation to be far too dry and theoretical. In the fight to distill lessons from theory, I usually give up on the cause.
This book marries stories and numbers through case studies in a manner that you'll find yourself not only stimulated but also equipped with very usable technical skills by the time you turn the last page.
Recommended for current/aspiring value invetors, and to those who run/lead businesses.
December 3, 2020
I’ve felt this book to be kind of a letdown by a great author. While it is useful for providing a framework/checklist about the issues one must consider when doing valuation in a very didactic form, it really does not add that much regarding how to evaluate the qualitative aspects it mentions. Maybe that is a problem of authors that publish lots of books and give lectures/interviews frequently, or books that market themselves as providing a “formula” for tackling a subject that are intrinsically complex and not entirely quantitative, but I did not feel that Mr. Damodaran really added a lot to what he frequently says in other media.
I greatly appreciated the discussion on the limitations of each type of investor (quantitative vs qualitative) and the common misconceptions that each hold.
I greatly appreciated the discussion on the limitations of each type of investor (quantitative vs qualitative) and the common misconceptions that each hold.
April 5, 2022
"Nothing sells better than a good story".
As popularly referred to as the "Dean of valuation", Aswath Damodaran draws the relation between the numbers of a business and the story of a business in this book. As a novice investor, I found my way into the book very easily, only to have struggled with the numbers part but in the end, I was able to ease my way into the numbers facet of a business as well as the narrative to back those numbers, thanks to Damodaran and his erudition.
Valuation isn't just all about the numbers and the financials but also the story that the business weaves in the different stages of its corporate cycle.
As popularly referred to as the "Dean of valuation", Aswath Damodaran draws the relation between the numbers of a business and the story of a business in this book. As a novice investor, I found my way into the book very easily, only to have struggled with the numbers part but in the end, I was able to ease my way into the numbers facet of a business as well as the narrative to back those numbers, thanks to Damodaran and his erudition.
Valuation isn't just all about the numbers and the financials but also the story that the business weaves in the different stages of its corporate cycle.
May 7, 2020
Damodaran was successful at showing how narratives drive value and vice versa. He cited concrete and detailed examples about this process. I liked how he emphasized the need for consistency between the two and the potential impact of a disconnection. My take-away is a framework to easily deconstruct a valuation story and I hope to apply it in the future.
October 3, 2020
Because all profound learnings happen at the intersection of disciplines, this book is a must read for investors. Damodaran identifies where are the strongest links between business stories and valuation inputs in a very easy to read and entertaining manner. (Only 4 stars to mantain a coherent relative ranking)
February 3, 2019
That Aswath Damodaran is a teacher is abundantly clear on every page of this book. That he is (self confessedly) predominantly a numbers guy is also clear. What he does here really well, is bring together how stories about companies, either told by the companies and their insiders themselves, or by potential investors to themselves, are as dominant part of the valuation of a firm as are the core numbers. But stories by themselves are vacuous and often just plan wrong. For those interested in valuing firms intrinsically, both the numbers and the stories are as important.
To me, the case studies interspersed throughout the book were the best part of the read. Whether it is a traditional old economy mining company or new World companies like Uber and Amazon, Aswath does a fascinating job of building on 5eir stories slowly, throughout the book, and inter playing the numbers along with the stories. Even better, he shows us exactly how we valued a firm at a particular time, and then emerging stories, or updates to the news cycle, made him revisit the valuations, and accept that his original thinking hadn’t quite planned out.
For those interested in learning the craft of valuations, for those interested in telling (or selling) the stories of their firms, this is a great addition to the bookshelf.
To me, the case studies interspersed throughout the book were the best part of the read. Whether it is a traditional old economy mining company or new World companies like Uber and Amazon, Aswath does a fascinating job of building on 5eir stories slowly, throughout the book, and inter playing the numbers along with the stories. Even better, he shows us exactly how we valued a firm at a particular time, and then emerging stories, or updates to the news cycle, made him revisit the valuations, and accept that his original thinking hadn’t quite planned out.
For those interested in learning the craft of valuations, for those interested in telling (or selling) the stories of their firms, this is a great addition to the bookshelf.
Read
April 16, 2020Professor Damodaran basically holds that narrative and numbers are linked: The founder needs a story to justify his valuation, and the publicist needs numbers to validate her pitch. Quants will enjoy Damodaran's portfolio manager approach, judging from the sharp-pencil references to Tufte and Bayes in the margins of my borrowed copy. Still, communicators who can handle a bit of MBA-level analysis can learn a lot from his observations. A forecast can be imprecise yet accurate (reading this in 2020, I thought about Bill Gates warning of a once-in-a-century pathogen). A market can grow only so big, and one brand gets only a share of it. VCs and value investors have different outlooks on growth. Corporate news is better framed around assets rather than earnings (would accountants agree?). Often the economy's in charge, not the boardroom. Startups have more room for narrative than mature companies. Finally, CEOs should stick to their story and act accordingly to reach a satisfying conclusion.
December 10, 2017
A disappointing book. I follow Prof Damodaran's blog, and this book is pretty much a copy of his blog. Lack of efforts and lack of ideas.
The whole point of the book is that every investment is a story and also valuation. Depending on what narratives, valuation changes. This is very intuitive and not helpful at all. People can be biased to believe in stories but not putting down valuation work, or people can be too rigid in believing in numbers and ignores changing narratives.
The examples in the book include Amazon, Alibaba, Uber, and Ferrari. I find his assumptions are almost always too conservative and therefore he must have found all of these growth stocks overvalued.
Not worth buying the book. You can just read his blogs for the valuaiton examples he runs through.
The whole point of the book is that every investment is a story and also valuation. Depending on what narratives, valuation changes. This is very intuitive and not helpful at all. People can be biased to believe in stories but not putting down valuation work, or people can be too rigid in believing in numbers and ignores changing narratives.
The examples in the book include Amazon, Alibaba, Uber, and Ferrari. I find his assumptions are almost always too conservative and therefore he must have found all of these growth stocks overvalued.
Not worth buying the book. You can just read his blogs for the valuaiton examples he runs through.
May 20, 2019
It's a good read for number crunchers who do stock analysis, to take their game to the next level by
seeing behind the numbers and building plausible narratives based on numbers that in the end would drive better investment decisions. It really comes handy when trying do evaluate startup companies, that are not backed up yet by the numbers.
Some general takeaways that can be applied in data analysis:
- average is a simple metric but not the best metric, it depends a lot of the values distribution
- the normal distribution rarely exists in real life
- be careful with discarding extremities to suit the narrative
seeing behind the numbers and building plausible narratives based on numbers that in the end would drive better investment decisions. It really comes handy when trying do evaluate startup companies, that are not backed up yet by the numbers.
Some general takeaways that can be applied in data analysis:
- average is a simple metric but not the best metric, it depends a lot of the values distribution
- the normal distribution rarely exists in real life
- be careful with discarding extremities to suit the narrative
August 20, 2018
The procedure of valuing a stock through is rather simple once it has been learnt. And when looking in retrospect on why old valuations turn out to be incorrect it is rarely due to getting the mechanics of the valuation tool wrong. Instead it is almost always because the sales or profits turned out very differently from what was forecasted since the company, its strategy or business environment developed in an unanticipated way – the narrative was wrong. This is a book on how to combine the numbers of the valuation tools with a narrative that brings life, understanding and, by this, increased precision into the valuation made. The author is a well-known finance professor at NYU who has written a large number of finance books.
As I understand it the book started with the author posting and updating the narratives and subsequent valuations for a number of stocks like Uber, Amazon, Apple, Alibaba etc. online. They now feature as case studies throughout the book. Taking a step back, Narrative and Numbers is also a personal journey for Damodaran as he over time has developed from a pure number cruncher to taking a more holistic approach. I find that when a reader is invited to share an author’s personal development the result is often very likable. This book is no exception and it is evident that the author has enjoyed writing it.
The structure of the text is very, well… structured. Damodaran tells you that he will combine narratives and numbers, he describes the basics of one of those, then he describes the basics of the other one, he merges them and finally discusses the consequences. The author who describes himself as a “teacher first” gives us short but thorough accounts of the two components before merging them into a greater whole. And to clarify, the narrative referred to in this book is the fundamental story of long-term value creation drivers for the company, not the flimsy, often biased and constantly shifting stories that always surround listed companies on the stock exchange. All the way through the book we get to follow the described process through the case studies and there are further several illuminating pictures giving good oversights of the reasoning.
The advocated valuation process is to:
1. develop a narrative for the business,
2. test the narrative to see if it is possible, plausible and probable,
3. convert the narrative into drivers of value,
4. connect the drivers of value to a valuation and
5. keep the feedback loop open.
Interestingly the author calculates one value of the company as a going concern and one liquidation value and then estimates the probabilities of each life-or-death scenario. I very much appreciate the 3P test in stage 2 and the openness for change in stage 5 importantly tries to ensure that the narratives are reasonable and don’t becomes stale and outdated in the light of changes. Damodaran’s arguing for the importance of having enough humility to alter ones opinion brings to mind similar arguments from George Soros.
My main caveat is that the process doesn’t explicitly enough ensure a combination of an inside view and an outside view when developing the story. When forming a narrative it is very easy to focus on the uniqueness and thrill of the situation at hand and extrapolate from the recent history. Often this leads to too high expectations and bottom-up sell side analyst estimates are partly due to this almost always too optimistic. The outside view treats the situation statistically and takes into account the outcome of many similar historical situations. In business where success is governed by both skill and luck both viewpoints have merit.
To make good forecasts narratives must meet numbers. Without the verbal structuring of the fundamental business story of a company it isn’t even possible to understand the numbers to start with. Damodaran shows that good decisions benefit from several points of view such as the numerical and the verbal and I fully agree.
As I understand it the book started with the author posting and updating the narratives and subsequent valuations for a number of stocks like Uber, Amazon, Apple, Alibaba etc. online. They now feature as case studies throughout the book. Taking a step back, Narrative and Numbers is also a personal journey for Damodaran as he over time has developed from a pure number cruncher to taking a more holistic approach. I find that when a reader is invited to share an author’s personal development the result is often very likable. This book is no exception and it is evident that the author has enjoyed writing it.
The structure of the text is very, well… structured. Damodaran tells you that he will combine narratives and numbers, he describes the basics of one of those, then he describes the basics of the other one, he merges them and finally discusses the consequences. The author who describes himself as a “teacher first” gives us short but thorough accounts of the two components before merging them into a greater whole. And to clarify, the narrative referred to in this book is the fundamental story of long-term value creation drivers for the company, not the flimsy, often biased and constantly shifting stories that always surround listed companies on the stock exchange. All the way through the book we get to follow the described process through the case studies and there are further several illuminating pictures giving good oversights of the reasoning.
The advocated valuation process is to:
1. develop a narrative for the business,
2. test the narrative to see if it is possible, plausible and probable,
3. convert the narrative into drivers of value,
4. connect the drivers of value to a valuation and
5. keep the feedback loop open.
Interestingly the author calculates one value of the company as a going concern and one liquidation value and then estimates the probabilities of each life-or-death scenario. I very much appreciate the 3P test in stage 2 and the openness for change in stage 5 importantly tries to ensure that the narratives are reasonable and don’t becomes stale and outdated in the light of changes. Damodaran’s arguing for the importance of having enough humility to alter ones opinion brings to mind similar arguments from George Soros.
My main caveat is that the process doesn’t explicitly enough ensure a combination of an inside view and an outside view when developing the story. When forming a narrative it is very easy to focus on the uniqueness and thrill of the situation at hand and extrapolate from the recent history. Often this leads to too high expectations and bottom-up sell side analyst estimates are partly due to this almost always too optimistic. The outside view treats the situation statistically and takes into account the outcome of many similar historical situations. In business where success is governed by both skill and luck both viewpoints have merit.
To make good forecasts narratives must meet numbers. Without the verbal structuring of the fundamental business story of a company it isn’t even possible to understand the numbers to start with. Damodaran shows that good decisions benefit from several points of view such as the numerical and the verbal and I fully agree.
January 15, 2020
The goal of this book was lofty, it was why I even read it in the first place. It set to combine qualitative and quantitative data to tell the story of how we value a business. The result is too close to call but for me personally, it fell woefully short of what I had hoped it to achieve.
What Aswath called "narratives" turned out to be a few lines of what is the company's core business and what gives it its competetive advantage and these were mostly obvious and self evident that I don't think there is any person out there who does valuation and not write or intuitively know the so called narrative. I had expected a more qualitative view of the story and it would have been better for the book had Aswath co-written it with a financial journalist, a person in the business of telling stories. You cannot teach that which you do not know. Aswath tried but the end result read like an academic paper rather than the smooth flow of a business story.
The book was heavy on quantitative valuation, this part was good and well executed a strong suit for Aswath but I was familiar with most of these things that I gained very little from this. Perhaps this might suit someone who did a unit or two of finance in uni and is looking to brush up on valuation knowledge but when you are fresh from years of doing a post graduate course that is heavy on finance, you realise you know much that there is to know about valuation.
Aswath tried to instill some respectability to valuation but a little more honesty was required. Valuation is not a concrete science, it's mostly an exercise in clever guessing and the result depends on whose drumbeat you are dancing to. Sell side analysts values differs markedly from buy side and venture capitalists values are almost always speculation and an exercise in respectable gambling.
Needless to say I have strong opinions on this matter. Prospective readers should approach it on their own personal terms and decide what they make of it.
What Aswath called "narratives" turned out to be a few lines of what is the company's core business and what gives it its competetive advantage and these were mostly obvious and self evident that I don't think there is any person out there who does valuation and not write or intuitively know the so called narrative. I had expected a more qualitative view of the story and it would have been better for the book had Aswath co-written it with a financial journalist, a person in the business of telling stories. You cannot teach that which you do not know. Aswath tried but the end result read like an academic paper rather than the smooth flow of a business story.
The book was heavy on quantitative valuation, this part was good and well executed a strong suit for Aswath but I was familiar with most of these things that I gained very little from this. Perhaps this might suit someone who did a unit or two of finance in uni and is looking to brush up on valuation knowledge but when you are fresh from years of doing a post graduate course that is heavy on finance, you realise you know much that there is to know about valuation.
Aswath tried to instill some respectability to valuation but a little more honesty was required. Valuation is not a concrete science, it's mostly an exercise in clever guessing and the result depends on whose drumbeat you are dancing to. Sell side analysts values differs markedly from buy side and venture capitalists values are almost always speculation and an exercise in respectable gambling.
Needless to say I have strong opinions on this matter. Prospective readers should approach it on their own personal terms and decide what they make of it.
May 14, 2019
Si te interesa el análisis de compañías, o simplemente entender por qué unas empresas (de un mismo sector) se valoran más que otras, este es un libro muy recomendable.
Como digo a mis alumn@s, muchas veces se ve la valoración de empresas como una ciencia, en la que "solo" hay que introducir números en un modelo y nos sale un resultado cartesiano. Ojalá fuera tan fácil. Analizar y valorar empresas es un arte en sí mismo, en el que la experiencia es un grado. Y "Narrative and Numbers" habla del "arte" que hay detrás de la ciencia, y lo hace el "gurú" de la valoración de empresas: el profesor de NYU Aswath Damodaran.
Damodaran reconoce que, al principio de su carrera, era mucho más "cuadriculado" respecto a la importancia de los números. Pero conforme fue analizando más y más empresas y viendo los éxitos y fracasos con los inversores, se dio cuenta de que la historia y cómo se contaba tenía un papel fundamental, y que una historia y un equipo directivo coherente eran pilares fundamentales. Y que estudiar la historia no significaba despreciar los números, pero que eran estos los que tenían que seguir a la historia y no al revés. No se podían proyectar unos números realistas si no estaban basados en una narrativa. Y sin ese tipo de proyecciones la valoración no serviría para nada ("garbage in, garbage out").
Damodaran explica muy bien (no es casualidad que haya sido votado "Mejor Profesor" en NYU varios años seguidos), desglosa en detalle cómo analiza y valora, traduciendo la narrativa en números y después en una valoración, y pone numerosos ejemplos: tanto de éxitos como de fracasos.
Un libro fácil de leer y muy instructivo. Súper recomendable.
Como digo a mis alumn@s, muchas veces se ve la valoración de empresas como una ciencia, en la que "solo" hay que introducir números en un modelo y nos sale un resultado cartesiano. Ojalá fuera tan fácil. Analizar y valorar empresas es un arte en sí mismo, en el que la experiencia es un grado. Y "Narrative and Numbers" habla del "arte" que hay detrás de la ciencia, y lo hace el "gurú" de la valoración de empresas: el profesor de NYU Aswath Damodaran.
Damodaran reconoce que, al principio de su carrera, era mucho más "cuadriculado" respecto a la importancia de los números. Pero conforme fue analizando más y más empresas y viendo los éxitos y fracasos con los inversores, se dio cuenta de que la historia y cómo se contaba tenía un papel fundamental, y que una historia y un equipo directivo coherente eran pilares fundamentales. Y que estudiar la historia no significaba despreciar los números, pero que eran estos los que tenían que seguir a la historia y no al revés. No se podían proyectar unos números realistas si no estaban basados en una narrativa. Y sin ese tipo de proyecciones la valoración no serviría para nada ("garbage in, garbage out").
Damodaran explica muy bien (no es casualidad que haya sido votado "Mejor Profesor" en NYU varios años seguidos), desglosa en detalle cómo analiza y valora, traduciendo la narrativa en números y después en una valoración, y pone numerosos ejemplos: tanto de éxitos como de fracasos.
Un libro fácil de leer y muy instructivo. Súper recomendable.
January 23, 2020
If you're looking for a book to guide you on process to become better storyteller in any business-setting? This book probably wouldn't be the right pick. But if you're an investor or a manager or in general curious person about the process of deriving valuation of companies or may be preparing for your interviews in VCs/Value investment firms, this book would definitely be insightful.
For a person like me, who is a rookie (as of Jan 2020) at value investing, this book didn't make the valuation process seem scary. Damodaran's language is super simple to comprehend and flow of the stories is so smooth that you can't miss the plot.
By the end of the this book, I concluded that - just as in life - change is the only constant when it comes to valuation of companies. And if you want to improve on your narratives, and eventually valuations, keep the feedback loop wide open.
What I liked the most about Damodaran is his complete acceptance of failure and openness to feedback. Time and again in the book he accepts that he was wrong in valuing, say company X and probably that's the reason why he's good at his job.
I'd recommend this to book to both investors and managers (armatures as well as professionals). Although don't expect this book to be a theory book/textbook. I'd say, it's more of a guide. Does that make sense?
For a person like me, who is a rookie (as of Jan 2020) at value investing, this book didn't make the valuation process seem scary. Damodaran's language is super simple to comprehend and flow of the stories is so smooth that you can't miss the plot.
By the end of the this book, I concluded that - just as in life - change is the only constant when it comes to valuation of companies. And if you want to improve on your narratives, and eventually valuations, keep the feedback loop wide open.
What I liked the most about Damodaran is his complete acceptance of failure and openness to feedback. Time and again in the book he accepts that he was wrong in valuing, say company X and probably that's the reason why he's good at his job.
I'd recommend this to book to both investors and managers (armatures as well as professionals). Although don't expect this book to be a theory book/textbook. I'd say, it's more of a guide. Does that make sense?
March 28, 2021
Well written book. Gotta appreciate Prof. Damodaran's contribution to value investing, laying out things in clear terms so that investors don't delude themselves with labels like value, growth.
Striking a healthy balance between narrative and numbers while valuing companies, an attitude to accept challenging narratives/risks, to adapt your story to the newer data and humility form the core values of this book.
Learning about corporate life cycle and how management needs to adopt different strategies while running companies at different stages was the most powerful take from this book.
As someone who is not from an economics/finance background, I've often used macro environment (listening to macro gurus on Youtube) as a guide to craft my investment portfolio and to my complete lack of surprise I did not have a lot of conviction on most of my bets. Now it makes sense for Investors picking cyclical companies to factor in the macro details before valuing the companies, but otherwise most macro news is just noise.
I'm probably not going to sit down and value companies using DCF model but the knowledge gained from this book will definitely make me do a better analysis of business models instead of relying on macro factors outside our control.
Striking a healthy balance between narrative and numbers while valuing companies, an attitude to accept challenging narratives/risks, to adapt your story to the newer data and humility form the core values of this book.
Learning about corporate life cycle and how management needs to adopt different strategies while running companies at different stages was the most powerful take from this book.
As someone who is not from an economics/finance background, I've often used macro environment (listening to macro gurus on Youtube) as a guide to craft my investment portfolio and to my complete lack of surprise I did not have a lot of conviction on most of my bets. Now it makes sense for Investors picking cyclical companies to factor in the macro details before valuing the companies, but otherwise most macro news is just noise.
I'm probably not going to sit down and value companies using DCF model but the knowledge gained from this book will definitely make me do a better analysis of business models instead of relying on macro factors outside our control.
April 14, 2021
Prof. Damodaran is a "mastermind" in valuation and that was made clear on this book. His approach to valuation is consistent, and much different from what you usually see on the mainstream.
In this book, he breaks down this approach with real exemples, demonstrating that the story created for the company being valued and the quantitative data of it have to walk hand in hand. Damodaran walk us through his valuations for Uber, Ferrari, among other companies, describing his entire view - both qualitative and quantitative - and helping even the most inexperienced reader understand the concepts presented for such valuations.
The books is highly recommended to anyone interest in finance and valuations, from the most experienced financial analyst, to the individual who is completely new to the world of finance.
In this book, he breaks down this approach with real exemples, demonstrating that the story created for the company being valued and the quantitative data of it have to walk hand in hand. Damodaran walk us through his valuations for Uber, Ferrari, among other companies, describing his entire view - both qualitative and quantitative - and helping even the most inexperienced reader understand the concepts presented for such valuations.
The books is highly recommended to anyone interest in finance and valuations, from the most experienced financial analyst, to the individual who is completely new to the world of finance.
February 26, 2023
The book was a big let down but that’s not to doubt the credentials of the author but more on the deceptive title and the intended audience. Mention of “narratives” and “stories” made me assume it’s a book about marketing, positioning, story-telling aspects of businesses, but it’s purely targeted to VCs/ investors and founders. (Maybe I was mistaken for thinking that)
If you’re someone who understands balance sheets, spends your time evaluating business valuations and likes to be up-to-date with business metrics and that too of mostly US businesses, then this is for you.
If you’re someone who understands balance sheets, spends your time evaluating business valuations and likes to be up-to-date with business metrics and that too of mostly US businesses, then this is for you.
April 25, 2020
A great guide linking numbers and narratives giving examples of one of the successful companies in the globe today. It intrigued me to get into basics of how corporate cycle works, important aspects that drive the business. Besides, it sheds light on why stories play a significant role in attracting investors.
January 16, 2022
Totally amazing book. Teaches Discounted Cash Flow to value companies by the fag end of the book.
This book teaches how to connect stories to determine the valuation of a company using established numbers and metrics available.
A book that has taught me lots of stuff that I've highlighted bunch of them for perusal. Will definitely come back to this book after a while.
This book teaches how to connect stories to determine the valuation of a company using established numbers and metrics available.
A book that has taught me lots of stuff that I've highlighted bunch of them for perusal. Will definitely come back to this book after a while.
November 29, 2022
Great "big idea" book for folks interested in forecasting and valuation. Hammers home the point that in order to determine how much you think a company is worth, you need to decide what you think the "story" is behind the valuation. I refer to this book every time I teach a class on biopharma finance.
May 30, 2017
This book is gold in term of giving you advices on how to:
- Make your researches more solid.
- Make your arguments more compelling
- And especially, make your valuation more of a captivating story rather than soulless spreadsheets.
- Make your researches more solid.
- Make your arguments more compelling
- And especially, make your valuation more of a captivating story rather than soulless spreadsheets.
July 10, 2020
As an investor,this book really gave me a wide perspective on valuation with over complicating anything,and as a start up CEO the book should be Read by every entrepreneur especially in the idea stage.
September 14, 2020
The book could’ve been better BUT the uniqueness and freshness of this structure and angle deserve four stars, even five. Nicely followed case studies maybe taken too far at points, still enjoyable for the investing-minded.
June 17, 2022
This book was very helpful in helping me to be able to do DCF projected values on companies. Walks you through the concept in a very insightful way. I still have a few issues understanding how certain parts work using different assumptions but this book is definitely worth the read.
June 20, 2022
well done professor
As a career-long equity research analyst, I can attest to the valuable lessons and insights Professor Damodaran so enjoyably illustrates in this book. I only wish I had taken his class BEFORE my career started!
As a career-long equity research analyst, I can attest to the valuable lessons and insights Professor Damodaran so enjoyably illustrates in this book. I only wish I had taken his class BEFORE my career started!
May 30, 2017
Excellent merger of numbers and stories.
This is a great recap of how words and numbers make a compelling investment thesis. It provides a structure for both types of analysis.
This is a great recap of how words and numbers make a compelling investment thesis. It provides a structure for both types of analysis.
June 18, 2017
Took me 3 months to read it because it was an actual textbook with lots of insightful material that takes me longer to soak up. Great book and a must recommendation.
Displaying 1 - 30 of 46 reviews