Aswath Damodaran (@AswathDamodaran) is the valuation GOAT.
In this thread, we'll break down his "Narrative & Numbers" presentation.
We'll see the power (& danger) of using only numbers, and how storytelling can create a more complete thesis.
Enjoy👇
people.stern.nyu.edu/adamodar/pdfil…
1/ Setting The Stage
There's two types of investors: numbers (NUM) & storytellers (ST)
NUM believes EVERYTHING should focus on figures, stats, and $ amounts. To them, stories are distractions.
ST believe valuation is about great storytelling, and numbers are ignorant guises
2/ The Numbers People
There are 4 building blocks to NUM investing ethos:
- Accounting
- Modeling
- Data
- Valuation
Each block stresses great detail and precise conclusions. Here, the greater detail you provide, the more valuable your write-up/pitch
3/ The 3 Delusions of Numbers People
a) Illusion of Precision: More numbers = More precision
b) Illusion of No Bias: "Numbers don't lie, bro!"
c) Illusion of Control: If you assign a number to something, you can control it better (DCFs, growth rates, etc)
4/ The 3 Dangers of Numbers-only Valuation
a) Boring & unconvincing: All numbers valuation won't convince investors
b) Miss Internal Inconsistencies: Without a story, you may miss serious problems in valuation
c) Echo Chamber: Easy to find agreement w/ other numbers-people
5/ The Storytellers Game
Your pitch is all about the story. Tell a good enough one, with a good enough *hook* and you'll land investors.
Success = how well your story is structured and how well you tell it
Numbers, if they are used at all, are an afterthought to the story.
6/ The Power of Stories
Humans LOVE stories. It's how we passed down history and ancestral folklore.
Storytelling is as old as humans have existed. Yet the Scientific Method is only ~300 years old.
When investing, a great story is always better than the best numbers model.
7/ What Makes A Great Story
It's all about emotion. This is no different when pitching investment ideas.
Hook the reader with emotion around the problem a product/service is solving.
Leverage an investor's 2 main emotions: greed (money) and nobility (changing the world).
8/ The 3 Delusions of Storytellers
a) Numbers people aren't creative: Creativity and Numbers are mutually exclusive
b) Creativity deserves a reward: If your story is good, the investment OUGHT TO workout
c) Experience is the best teacher: Story is better if you've done it b4
9/ The 3 Dangers of Storytellers
a) Fantasy-land: Narrative with NO numbers to back up story
b) Echo Chamber: Storytellers love to discuss ideas with other storytellers that share their same narrative
c) No Measurement: If you don't use numbers, you can't judge the thesis
10/ Bridging The Gap w/ Valuation
Valuation is the bridge that connects our two camps (numbers and storytellers).
It's a tool that allows you to construct a story around numbers ... and construct a quant model around a story.
The valuation takes the best from both sides.
11/ 6 Steps To Bridge The Gap
1) Survey Biz Model: unit economics
2) Create Narrative For Future: a simple story
3) Check Narrative vs. History: channel checks
4) Connect Key Drivers: 1-2 things that matter
5) Value biz: basic DCF model
6) Keep feedback loop: red-team thesis
12/ Why/How Narratives Change
A company's narrative can change at any time for any reason. Remember, price drives the narrative. A high price = rosy narrative (and visa versa).
Reasons for change:
- Earnings
- Corporate actions
- Management change
- Macro change
- Political
13/ Concluding Thoughts
Good investment pitches tell a story. They squeeze emotions and hook the reader from the start.
We, humans, CRAVE a good story, so as investors, we should give them one. One that connects narratives to numbers.
Thank you, @AswathDamodaran!
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