BOOK REVIEW
BY JAMES P. PROUT
Narrative and Numbers: The Value of Stories in Business
By Aswath Damodaran Columbia University Press, 2017 270 pages with notes $ 29.95
Businesses, whatever their structure, are legal fictions, developed over time to allow enterprises to scale up, attract capital and employees, and lower risk. And, as in all fiction, there are births, growing pains, setbacks, marriages, offspring, old age and even death.
What sets business stories apart from popular fiction is the torrent of numbers generated at every stage of development. Numbers are used to measure success, size, scale, competitiveness, investment attractiveness, risk and other factors. Woe be the modern CEO or CFO who cannot marshal an army of numbers to prove how a missed quarter was actually a good thing rather than a stumble.
There is a tension between the“ story” of an enterprise and the numbers that align next to it. Which is more important? And knowing that both have an impact, how can we best weigh them to get to the heart of the value and price of any business? In Narrative and Numbers: The Value of Stories in Business, Aswath Damodaran, a finance professor at NYU, has the answer— or more precisely an answer— to navigating between Scylla and Charybdis, between the emotion of business stories and the hard data. Whether you are pitching for investment in your food delivery start-up or you’ re the CEO of a decades-old industrial concern, this book will help frame your conversations.
Damodaran starts off by reassuring us that although there will be math( Excel jockeys relax! Spreadsheets dead ahead!), there will also be plenty of stories. This is a rare business valuation book that includes discussion of Aristotle, Gustav Freytag and Joseph Campbell’ s works on heroes.
The fact is, stories excite us, firing up our imagination. Think Ferrari, Apple, Under Amour. They are a crucial part of embracing and celebrating human endeavor. The key to good business storytelling is to truly understand what a business does and wants to do, and submit that vision to critical qualitative and quantitative analysis. Is Uber a ride-sharing business or is it a global transportation and networking company?
Lest our imagination and emotion lead us to investment ruin, the author suggests next how stories can be made even more compelling if grounded in solid numerical backing. Numbers alone, of course, are of no comfort. They can be manipulated or interpreted in so many ways that give a false impression of control, or distort the health or sickness of any enterprise. Numbers must be collected, analyzed and presented in a structured fashion to avoid bias and distraction. Tools and case studies are offered to drive this point home.
Having set a framework for seeing stories and numbers in their proper place, Damodaran suggests a method of building narratives solidly girded by numerical evidence. Business stories need to be subjected to possible, plausible and probable tests. The case studies begin in earnest: Amazon, Alibaba, Uber and others are put through their paces.
Over the next several chapters, Damodaran moves the reader back and forth between evolving narratives and the numbers. He is a big fan of DCF( discounted cash flow) as a lodestone in fixing on value, which is crucial to comparing how public markets might price or misprice a given enterprise. He“ de-constructs” a business story, as a P & L is put through a line-by-line narrative inquiry.
Central to the professor’ s approach is continually subjecting both the narrative and numbers to“ feedback loops.” How has the narrative changed either internally or via external factors? Do the numbers reflect the impact of altered macro and micro economic circumstances? Variables outside the economic sphere are discussed including news flow, regulatory pressures and managerial vigor and skill. The story is never static, and those who let emotion get in the way of vigorous testing and retesting are most susceptible to mistakes. Valeant and Vale are cited here.
The storytelling methodology suggested in Narrative and Numbers isn’ t foolproof. The author asserts his humility, admitting to having made some errors in analyses along the way, some of which cost him real money. I am glad when academics have real-world skin in the game— it makes the story more believable.
There is only so much time in a single book, and not all scenarios can be subjected to his analysis. Although there is a chartheavy discussion of business life cycles, I wish there was more time and counsel for corporate storytelling in middle-age, when companies have to shift their narrative and write a new vision for what they are creating. Maybe that comes next.
This is not a financial history book in the strictest sense. Much more in the here and now. But the next time I read about some fantastic business love story( Theranos) or shake my head as the love story sours( Theranos), I will keep this excellent book close at hand.
James P. Prout is a lawyer and business consultant. He can be reached at jpprout @ gmail. com.
36 FINANCIAL HISTORY | Winter 2017 | www. MoAF. org