NARRATIVE AND
NUMBERS THE VALUE OF STORIES IN BUSINESS
ASWATH DAMODARAN
pre fac e
As early as middle school, the world divides us into storytellers and number crunchers, and once divided, we stay in our preferred habitats. The numbers people seek out numbers classes in school, go on to numbers disciplines in college (engineering, physical sciences, accounting), and over time lose their capacity for storytelling. The storytellers populate the social science classes in school and then burnish their skills by becoming history, literature, philosophy, and psychology majors. Each group learns to both fear and be suspicious of the other, and by the time they come into my valuation class as MBA students, that suspicion has deepened into a divide that seems unbridgeable. You have two tribes, each one speaking its own language and each convinced that it has a monopoly on the truth and that the other side is the one that is wrong. I must confess that I am more a numbers person than a storyteller and that when I first started teaching valuation, I catered almost entirely to those of my ilk. As I have wrestled with valuation questions, one of the most important lessons I have learned is that a valuation that is not backed up by a story is both soulless and untrustworthy and that we remember stories better than spreadsheets. While it did not come naturally to me, IÂ started to animate my valuations with stories, and I have rediscovered the storytelling side that I had suppressed since sixth grade. While I am still
viii
p r e fa c e
instinctively a left-brainer, I have in a sense rediscovered my right brain. It is this experience of tying stories to numbers (or vice versa) that I have tried to bring into this book. On a personal note, this is my first book written in the first-person singular. While you might find the repeated use of “I” and “my” off-putting and perhaps an indication of an outsized ego, I realized as I was writing about my valuations of individual companies that the stories that I was telling about those companies were my stories, reflecting not only what I thought about them and their managers but also my reading of the landscape. Thus, I will describe my attempts to tell stories about Alibaba in 2013, Amazon and Uber in 2014, and Ferrari in 2015, and to convert these stories into valuations. Rather than use the royal “we” and force you, as readers, to adopt my stories, I felt it would be much more honest (and more fun) to let you pick apart my stories and disagree with them. In fact, you can put this book to best use by taking my story about a company, say Uber, thinking about what parts of my story you disagree with, coming up with your story, and then valuing that company based on your story. A related peril of laying bare my narratives on real companies is that the real world will deliver surprises that will make each of my narratives wrong, sometimes horrendously so, over time. Rather than be scared of that prospect, I welcome it, since it will allow me to revisit my stories and improve and enrich them. I will try to wear many hats in this book. I will, of course, spend a great deal of time looking at companies as an investor from the outside and valuing them, since that is the role that I most frequently play. I will sometimes play the role of an entrepreneur or founder trying to convince investors, customers, and potential employees of the viability and value of a new business. Since I have not founded or built any multibillion-dollar companies, you may not find me convincing, but there is perhaps something of value that I can offer. In the last few chapters, I will even look at the connection between storytelling and number crunching through the eyes of top managers of publicly traded companies, with the admission again that I have not been a CEO of a company in my lifetime. If I accomplish my objectives, a number cruncher reading this book should be able to use my template to build a narrative to back his or her valuation of a company and a storyteller should just as easily be able to take a story, no matter how creative, and convert it into numbers. More generally, I hope that the book becomes a bridge between the two tribes (storytellers and number crunchers), giving them a common language and making them both better at what they do.
6.125 × 9.25 SPINE: 0.875 FLAPS: 3.5
NARRATIVE
AND
NUMBERS
“No one has contributed more to the craft of valuation than Aswath Damodaran. In Narrative and Numbers, he correctly shows that you cannot understand the stock without the story. After Damodaran’s eye-opening tour, you will forever appreciate the vital contribution of human nature to number-crunching.” —MICHAEL MAUBOUSSIN, head of global financial strategies, Credit Suisse
ASWATH DAMODARAN
“Damodaran, instructor to many on valuation, clearly demonstrates that quantitative valuation formulas are not sufficient: they must be applied with a more qualitative narrative about the business. But qualitative analysis has its dangers, not the least that we insert our own biases into the narrative. Damodaran nicely weaves stories into the more formal quantitative analysis, with checks and balances that yield a more confident valuation.” —STEPHEN PENMAN, author of Accounting for Value “Damodaran’s success in combining storytelling with traditional financial analysis and valuation is unprecedented. Narrative and Numbers has the potential to be a cornerstone of both traditional valuation and business ‘pitching’ as it shows how individuals from each world can benefit from co-opting tools from the other. Damodaran takes us on a personal journey into the realization that numbers need a narrative to make them persuasive.” —PAUL JOHNSON, founder and senior advisor, Nicusa Investment Advisors
NUMBERS
COLUMBIA UNIVERSITY PRESS NEW YORK CUP.COLUMBIA.EDU
University of San Diego School of Business
NARRATIVE AND
AND
is the Kerschner Family Chair in Finance Education and professor of finance at New York University’s Stern School of Business. He is the author of Applied Corporate Finance, 4th ed. (2014), Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, 3rd ed. (2012), The Little Book of Valuation: How to Value a Company, Pick a Stock, and Profit (2011), and Damodaran on Valuation: Security Analysis for Investment and Corporate Finance, 2nd ed. (2006).
“Damodaran’s point-counterpoint case studies make valuation a good read. Self-critical in his contemporary examples, Damodaran wisely cautions the reader that quality valuation requires both the right and the left side of one’s brain—the number-cruncher and the storyteller.” —THOMAS E. COPELAND, Distinguished Professor of Finance,
NARRATIVE
—DAVID FOSTER, CEO, Business Valuation Resources
THE VALUE OF STORIES IN BUSINESS
“Damodaran takes us to the place where Joseph Campbell, Warren Buffett, and the best quantitative analyses of Nassim Taleb intersect, and his journey uncovers new value and risk missed by analysts who bias themselves by relying solely on storytelling or number-crunching. Damodaran walks us through his evolving narratives, analyses, and valuations of Alibaba, Amazon, Uber, Theranos, Ferrari, and more. He may have started as a quant, but Damodaran is now one of the most balanced analysts— and wonderful business and financial storytellers—writing and teaching today.”
H
DAMODARAN
Praise for
NUMBERS THE VALUE OF STORIES IN BUSINESS
$29.95
ISBN: 978-0-231-18048-1 52995
Jacket Design by Diane Luger
9 780231 180481 PRINTED IN THE U.S.A.
ASWATH DAMODARAN
ow can a company that has never turned a profit have a multibilliondollar 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 those of 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.