Book Summary: Narratives and Numbers

Book: Narratives and Numbers

Author: Ashwath Damodaran

Key takeaways: An exceptional book, and I wish I had read it before.

 

PART I : NUMBERS

Key Aspects of Data Management:

To use numbers well in decision-making, one needs to manage data and the key aspects in collecting and managing data is as below –

  1. Collection: Need to think of our biases and judgement involved in-
    1. Amount of data one needs to collect
    2. The time-period one needs to look at when collecting this data
  2. Making Sense of the Data
    1. if the dataset is large enough, one needs to use basic statistical tools to make sense of the data
    2. Damodaran doesn’t talk about this, but more often than not, in investing, datasets are not large enough, and people use heuristics/rules of thumb to arrive at conclusions (this is why understanding of behavioral finance comes into play).
  3. Presenting Data

 

Precise vs. Accuracy: aim for accuracy first.

Precision vs. Accuracy
Precision vs. Accuracy

 

PART II : NARRATIVES

When people are involved in a story, they are willing to accept arguments uncritically (dropping their guard). This is where, one needs to keep remembering that stories need to be supported by numbers.

3Ps:

Is the narrative-

  • Possible–this could happen, but what “this” is, is hard to envision
    • valuation response: this has to be valued as an option
  • Plausible–this could happen, and here’s what “this” looks like, but isn’t happening yet
    • valuation response: needs to be shown as expected growth, or expected decline
  • Probable–this is happening, the extent of “this” could remain a question
    • valuation response: base-year estimates need to come down (question may remain as to how much)

 

Managerial Imperative:

The following is an exceptional chart, and I am embarrassed to screenshot it like this. Please please go and buy the book. There are many more nuggets like this that you could benefit for that I haven’t highlighted here.

IMG_6324
CEO’s message needs to line up with the company’s status in its life-cycle
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