Narrative and Numbers

Aswath Daomdaran is a professor of finance at New York University's School of Business. He teaches courses on corporate finance and equity valuation. He has published extensively in academic journals and has also written several books about equity valuation and investments. Dr. Damodaran was previously a visiting lecturer at the University of California, Berkeley and he currently participates in the TRUIM Global Executive MBA Program which is run by NYU, the London School of Economics and HEC School of Management. He is a graduate of the University of California, Los Angeles, Madras University and the Indian Institute of Management Bangalore.

How do you establish the true market value of an asset? This is rather obviously an important question for any investment decision.

One school of thought (left brain) suggests value is driven solely by the numbers and therefore number crunchers can calculate market value with formulas and a spreadsheet. An alternate approach (right brain) is to look at the underlying story or narrative behind the asset and use storytelling to come up with a valuation.A much better approach to valuation is to blend together both the numbers and the underlying narrative. To come up with a good valuation, you have to be able to talk both languages. You have to take the numbers and then give them context on the basis of the background narrative.

Stories without numbers are little more than fairy tails. Numbers without stories are exercises in financial modelling. A good valuation is a bridge which will draw on both the numbers and the stories to come up with a figure that makes sense.