Damodaran on narrative in valuations

A recent blog posting by Dr. Aswath Damodaran (Stern School of Business, New York University) talks about the dangers of using numbers without any narrative when constructing valuations. One danger is that valuations become “plug-and-point exercises, tools to advance sales pitches or confirm pre-conceived values.” A valuation needs a marriage of narrative and numbers. “In a good valuation, the numbers are bound together by a coherent narrative, and storytelling is kept grounded with numbers,” he says in the blog.

His inspiration: It is this combination of narrative and numbers that attracted Damodaran to valuation in the first place. In a recent interview with Business Valuation Update, he explains how he got interested in business valuation. “I’ll tell you, it’s the narrative/numbers thing,” he says. “I didn’t want to become an accountant. It’s too numbers-driven for me. I didn’t want to be a strategist because it’s too much storytelling. So in a sense, I wanted something that would help me expand the creative component of business—coming up with great valuation ideas with discipline. So that’s what always attracted me to valuation. Not the model-building, not the spreadsheets, not the number-crunching, and not the accounting.”

He continues: “It’s a fact that if you do a good valuation, it’s like composing a tune, and the tune should actually sound good. So it forces you if you’re a storyteller to be disciplined. And it forces you if you’re a numbers person to think about the narrative. And to me that’s an exciting place to be.”

Read more: The September issue of Business Valuation Update will include the full interview with Damodaran. In the interview he talks about problems caused by the confusion over value versus price and also what he sees as other key issues faced by the valuation profession today. Damodaran will also be discussing the value versus price issue during a special live event on September 10 in New York City.