The Importance of Stories

My Take-Aways:

I recently did a course on Corporate Valuation at Columbia University. In my view, it is very easy to get drawn into the intricate details of the numbers when you learn how to do D.C.F. models. However, this is something to guard against. Constructing any financial model requires you to make several assumptions, which can have significant effects on your expected share price. As a result, it is very important that there is a reasoning behind each assumption. This reasoning is your story.

Coming at it another way:
Investing is about buying a part of a (good) company for less than it is worth. The market price represents the views of the entire market put together. Things can only seem 'cheap' when your view about the future is brighter than others' view about the future. Hence, you must have either, fantastic insight, or fantastic foresight, to arrive at a valuation different to that of the market. Thus, the value you see in a company is determined by your opinion of the company's future. Hence, there must be a story driving the numbers.

So what?
Let this serve as a reminder about the importance of the story. Remember, that the numbers are never really precise, and a story is the foundation upon which every valuation is built. Indeed, stories will also give you conviction in your investment. Conviction is the most important tool, if you are intending on waiting - patiently - for the market's acknowledgement of this 'value' you noticed. It is worth noting, that your story may change over time: When the facts change, you must change.

The blurb on Youtube:

The world of investing/finance is divided into two camps. In one, you have the number-crunchers, who believe that the only things that matter are the numbers and that imagination/creativity are dangerous distractions. In the other, you have the storytellers, who build on the stories they tell about companies and how these stories will bring untold wealth. Each side believes it has a monopoly on the truth and looks with contempt at the other. Prof. Damodaran contends that stories matter, but only if they are connected with numbers. And numbers are empty, unless they are connected with narratives. In this talk, he looks at the process by which one might build narratives, check them against reality and convert them into valuations. Uber and Ferrari examples are used to illustrate the process.

Other resources to look at:

• Slides for the talk: https://goo.gl/zKVaQL
• Check out the book on Google Play: https://goo.gl/tnGlDe