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