Why the story behind the numbers is equally important in investing

There are two things that are important while considering a business as a worthwhile investment opportunity – storytelling (narrative) and the numbers. Every investor will have one of the things coming to them naturally, and the other will have to be learned and adapted to over the years. Since there is enough literature and videos out there to explain the numbers part of investing, we will be focusing more on the narrative part.

Noteworthy stories

In the age of data, analytics, quant investing and computing, it is really difficult to stay away from the numbers for a bit and focus more on the softer, qualitative aspects of the business. Just to name a few examples of some famous stories that have stayed in our minds for a long time – Warren Buffet’s story of American Express and the oil scandal gets told and retold in almost all the investing discussions. Also, Steve Jobs and his storytelling capabilities made Apple what it is today.

A well-told story connects with the listeners in a way that numbers never can. Stories work even better if the listeners are required to think on their own and make their own connections. As in most things in life, less is more in stories. Stories allow for emotional connections between storytellers and listeners and get remembered more vividly as well as for a longer period of time.

It is important to keep the story simple with a beginning, middle and end. Wherever possible, the narrator should try and bring reversals and successes both in a story to make it more interesting. Narratives should be less about specifics and details and more about big picture and vision. There should be a feedback loop and the narrative should be updated quite frequently based on the qualitative/quantitative changes to the assumptions.

Now let us look from the eyes of an entrepreneur who wants to tell his own story. They need to understand their own business as well as themselves. They also need to gauge the intellect and the motive of the audience to whom they are going to narrate the story. Stories are not about throwing words in the air; it should always try to talk in specifics. Actions always speak louder than words and, hence, the story should be such that can be enacted upon. Last but not the least, whatever narrative you give, it should be possible, plausible and probable.

The dangers

Mind you, there are dangers to storytelling as well. Not all stories are authentic and not all work as per expectations. So, all stories need to be backed by numbers and a clear path of how the numbers will be evaluated compared to the stories. To give you an example of a story that went wrong or was a fraud, Theranos is a wonderful example of how a young girl Elizabeth Holmes cheated everyone with a new innovation. In the India context, we have seen such things in Educomp, Satyam, Gitanjali Gems, where the narratives were taken to another level.

To conclude, a story should be simple, credible, authentic and emotional to have an impact on the listener. Storytelling is both an art and a craft. While there are some aspects that cannot be taught, there are many aspects that are not only teachable, but also can be improved with practice. At the time of investing in any business, always make sure that you write a thesis on why you are investing in the business – both narrative as well as the numbers. This thesis should be revisited annually and in case the business is deviating from the thesis that you had thought of, it would be better to exit the company.

This article is based on the book ‘Narrative and Numbers’ by Prof Aswath Damodaran. The writer is a Fund Manager with PPFAS Mutual Fund