FrameworkTechniqueValuationInvesting
Every forecast row is a sentence about the business
Aswath Damodaran · Narrative and Numbers
The idea
Damodaran's book connects the two halves of an analyst's work that are usually kept apart. A story about a company, what it does, who it sells to, why it will grow, has to become a set of numbers to be a valuation; and a set of numbers that cannot be told as a story is not a forecast but a guess. The discipline runs both ways. Each row in the model should be readable as a claim about the business, and each claim in the pitch should point at a row. Where the two disagree, one of them is wrong.
A forecast is a story written in numbers; if a row cannot be said as a sentence about the business, it should not be in the model.
When it works
Building or defending a DCF, writing a stock pitch, or reviewing someone else's model.
When it may fail
A coherent story can still be false, and a good storyteller can make a bad forecast sound inevitable. The book's answer is to keep the numbers honest with base rates, which is the Kahneman insight again.
How to use it
Beside each driver in a model, write the sentence it asserts: revenue grows at twelve percent because the company adds two markets a year at current penetration. A driver with no sentence is where the model is weakest, and where an interviewer will push.
Where it came from
Book Narrative and Numbers · Aswath Damodaran
What the source says. Where a story becomes a forecast and a forecast becomes a valuation: the bridge between a stock pitch and the DCF sitting underneath it.
Connected ideas
Worth knowing first
A DCF is machinery for one sentence: value is the present value of expected cash flowsEvery cell in a DCF is a claim about future cash or about its risk; if you cannot say which, the cell should not be there.
Puts it to work
Anchoring and base rate neglect are the two biases that cost moneyBefore estimating, ask what number is anchoring you and what the base rate is for cases like this.
Puts it to work
An edge usually starts as something you already understand better than the marketStart from an observation you can make and others cannot, then do the work to see whether the market already knows.
Concepts
Put it to work on L3VLUP
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