The Value of Stories in Business – Aswath Damodaran

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.


  • Valuation is a bridge between numbers and stories
  • Numbers people delusions: precision (data is precise), objectivity (data has no bias) and control (data can control reality)
  • Narrative people delusions: creativity cannot be quantified, if the story good, the investment will be, experience is the best teacher
  • Story is what your valuation a soul
  • Best valuation comes from disciplined story tellers or imaginative number crunches

From Story to Numbers: The Steps

  1. Develop a narrative for the business that you are valuation: in the narrative you tell your story about how you see the business growing over time
  2. Test the narrative to see if it is possible, plausible and probable
  3. Convert the narrative into drivers of value: analyze potential market size down to cashflow and risk. Each part of the narrative should have a place in your numbers and each number should be backed up by a portion of your story
  4. Connect the drivers of value to a valuation: create an intrinsic valuation model that connect the inputs to an end value of the business
  5. Key the feedback loop open: listen to people who know the business better than you do and use their suggestion to fine tune your narrative

Step 1: Survey the Landscape

  • Assessment of your company (it’s product, it’s management, and it’s history)
  • Assessment of the market or markets that you see it growing in
  • The competition it faces and will face
  • The macro environment in which it operates
  • Build a macro picture of the company

Step 2: Create a Narrative for the Future

  • A story you see unfolding for your company in the future
  • Show a pathway for making money
  • Keep it simple + focused

Step 3: Check the Narrative Against History, Economic First Principles + Common Sense

  • Is it possible, is it plausible, is it probable?
  • Possible: It is not possible
  • Plausible: Doesn’t sound impossible
  • Probable: Likely to happen or be true
  • Map probability of occurrence to the valuation response (if it happens, what happens to the valuation)

Step 4: Connect your Narrative to Key Drivers of Growth

  • Total market x Market Share = Revenues
  • – Operating Expenses = Operating Income
  • – Taxes = After tax operating income
  • – Reinvestment = After Tax cash Flow
  • Adjusted for operating risk with a discount rate and for failure with a probability of failure = Value of operating Assets

Step 5: Keep the Feedback Loop Open

  • Face up to the uncertainty in your own estimate of value
  • Present the valuation to people who don’t think like you do
  • Create a process where people who disagree with you the most have a say
  • Provide a structure where the criticisms can be specific and pointed, rather than general
  • Don’t wait too long because the world changes around you

How Narratives Change

  • Narrative break/end: events, external (legal, political or economic) or internal (management, competitive, default)
  • Narrative Shift: Improvement of deterioration in initial business model, changing market size, market share and/or profitability
  • Narrative Change: Unexpected entry/success in a new market or unexpected exit/failure in existing market

Other Notes

  • Reputation matters in value. Example is his investment in Valent (company that bought other drug companies and raises prices by 5-10X). Company soon unraveled and price dropped from $200 to $30. Company continues to struggle because the damage to their reputation was so severe that no one trusted the company (to either work for, or do business with)
  • Position sizing: entries at about 5%, if it does well then gets to 10%
  • Uses Monte Carlo simulations: model used to predict the probability of different outcomes when the intervention of random variables is present
  • You will never know that your valuation is right or not when you complete the valuation. You have to trust and back test the valuation to get a degree of certainty that the valuation will play out
  • Did an analysis on tech by age and noticed that tech grows by dog years. High growth, low cash cow years, and high declines.