Numbers and Narrative
I have taught valuation to undergraduates, MBAs, executives and pretty much any one who will listen to me for close to three decades now and I can attest to the fact that most people walk into my valuation class expecting to be inundated with numbers and immersed in models. While they see plenty of both, my class is neither a modeling class nor a number crunching class, and my objective is different.
The world divides us early in life, perhaps as early as middle school, into storytellers and number crunchers, and once divided, we stay in out preferred habitats. The numbers people seek out numbers classes in school and go on to numbers disciplines in college (engineering, physical sciences, accounting) and over time, lose their capacity for story telling. The storytellers populate the social science classes in school and then burnish their skills by going on in college to become history, literature, philosophy and psychology majors. Over time, each group learns to both fear and be suspicious of the other and by the time they come into my valuation class as MBA students, that suspicion has deepened into a divide that seems unbridgeable. You truly have two tribes, each speaking its own language and each convinced that it has a monopoly on the truth and that the other side is the one that is wrong.
I must confess that I am more a numbers person than a storyteller and that when I first started teaching valuation, I catered almost entirely to those of my ilk. As I have taught valuation, one of the most important lessons that I have learned is that a valuation that is not backed up by a story is both soulless and untrustworthy, and that human beings remember stories better than spreadsheets. While it did not come naturally to me, I started to animate my valuations with stories, and over time, I have rediscovered the story telling side that I have suppressed since sixth grade. While I am still a left-brainer instinctively, I have, in a sense, rediscovered my right brain.
It is this experience of tying stories to numbers (or vice versa) that I plan to bring into this book on narrative and numbers. I will be using companies that I have been valuing (and telling stories about) for a long time as illustrations, but only in the context of creating a structure that readers of the book can use to strengthen their weak sides. Thus, if I accomplish my objectives, a number-cruncher reading this book should be able to use my template to pick a company and use it to build a narrative to back his or her valuation of the company and a story-teller should just as easily be able to take a story, no matter how creative, and convert it into numbers. More generally, I hope that the book becomes a bridge between the two tribes (storytellers and number crunchers), giving them a common language, and making them both better in the process.
Valuation does not work well in the abstract and the companies that I plan to use to illustrate the narrative-to-numbers process are all high profile and stretch across the life cycle. I will use Uber, very early in its life, to examine how narrative drives value and cause wide differences in value judgments. I will continue with Apple and Amazon, two companies with much more established business models, to illustrate how your history can shape narrative and how size and success can constrain in. I will move on to Vale, a mining company incorporated in Brazil, to evaluate how the narrative for a company can be shaped by macroeconomic forces (country, commodity and currency). I will end with Blackberry and JC Penney, two companies in the declining phase of the corporate life cycle, to show that not all narratives have happy endings.
In the last section of the book, I plan to look at the narrative-to-numbers process from the inside out, by first identifying the drivers of value at each stage in the life cycle and the management qualities that are necessary to augment value. Thus, early in a company’s life cycle, it is the masterful storytellers who are most successful, since they can spin the big-picture narratives that extract the most value. It should come as no surprise, therefore, that some of the highest profile young businesses have charismatic visionaries at their head. As companies continue to grow, the skill set shifts to delivering numbers that back up narratives and actions that are consistent with the narrative, requiring top managers to focus more on results and to adapt to reality. While some visionary managers are able to make this transition, many are not, explaining the changing of the guard that you often see at successful growth companies. A mature company is one whose narrative is mostly written, making big changes difficult but still requiring someone at the helm who finds way to alter the narrative in small, but positive, ways to keep it going. The most difficult and thankless task of all is to be the top manager of a declining business, where the focus in narrative is not so much to rewrite history but to have a happy ending.
I would like this to be a cross over book that both history majors and accountants will like, that comes into use when investors value companies, VCs price investments and bankers build spreadsheets. In short, I would like a big market and a global one, since the need for narrative plus numbers cuts across geographies, sectors and time periods.
Chapter outline (with blog post links)
The Lead in
Chapter 1: A tale of two tribes and valuation as a bridge
Chapter 2: The Allure of Story Telling
Chapter 3: The Power of Numbers
Chapter 4: The Mechanics of Story Telling
Chapter 5: The Basics of Valuation
The Story Unfolds
Chapter 6: Telling a story
Chapter 7: The Three Ps (Possible, Plausible, Probable)
Chapter 8: There is always a number
Blog post on Ferrari:
Blog post on Valeant:
Chapter 9: The Valuation unfolds
Chapter 10: The Feedback Loop
Chapter 11: Narrative breaks, shifts and tweaks
Blog post 2: Valeant
Blog post 3: Theranos (Narrative break or shift)
Chapter 12: The News Story Effect
Chapter 13: The Macro Moments
Blog post 3:
From the Inside Out
Chapter 14: A Life Cycle Perspective
Chapter 15: Shifting Focus
The End Game
Chapter 16: Left Brain, meet Right Brain!