method
Numbers need a story
The rule
A valuation is a story kept honest by numbers. A spreadsheet with no story you can defend is a fantasy dressed in decimals.
Where it flips
But a good story can also fool you, dressing a weak business in a lovely tale until the numbers are bent to fit. The discipline runs both ways. The story must survive the numbers, and the numbers must trace back to a story.
Every input in a model, whether growth, margin or reinvestment, is a claim about how the business will behave. Damodaran ties each number to a plain-language story, so the two can check each other. A number with no story is a guess in disguise. A story with no numbers is just a sales pitch.
A worked example
A model assumes a retailer grows sales at twenty percent for ten years. Made to tell the story behind it, new cities, new formats, steady margins, the reader can see whether that tale is believable, or whether the number was typed to reach a target price. [illustrative]
How to spot it
- ·model assumptions with no plain reason attached
- ·a story told with no numbers to test it
- ·inputs that look worked backwards to hit a wanted price
Aswath Damodaran · Narrative and Numbers