Clear, well-written book that talks about how stories and business fundamentals shape valuation. I read as I was also reading Poor Charlie’s Almanac, and hoped to get a better grip on how to value companies.
Why both storytelling and numbers are important
The first third of the book is about why both storytelling (narrative) and numbers are important when valuing an asset:
- To be a successful business, not only do you have to build a better mousetrap, but you have to tell a compelling story about why that mousetrap will conquer the business world to investors (to raise capital), to customers (to induce purchases), and to employees (to get them to work for you)
- But storytelling that is not bounded by numbers can quickly devolve into fantasy land. Understand if a story is possible, whether it is plausible, and how probable it is. Numbers are a great way to figure this out
- This should be the golden age for numbers, more data and better analytics tools. But this surge in number-crunching and computing powers that has created a greater demand for good storytelling, often as a counterpoint to masses of numbers
- If you rely only on numbers, you can suffer from the illusion of precision (estimates are treated as facts, often leading to disastrous consequences), the illusion of objectivity (the map is not the terrain), and the Lemming Problem (if the future is going to be different from the past, the predictions based upon past data will come apart)
The classic story models, and how stories go awry
Many stories are just a simplified version of the classic Hero's journey (outline below) – but some are different
Other stories include:
- The bully: Company with a large market share, a superior brand name, access to lots of capital, and a reputation for ruthlessness. They will steamroll competition to deliver ever-increasing revenues and profits
- The Eureka moment: Company that claims to have found an unmet need in the market, usually in a serendipitous way, and then has come up with a way of meeting that need
- The better mousetrap: Company that contends it has a better way of delivering an existing product or service that will be more desirable and better suited to the need. They will eat into the market share of the existing players in the market
- The disruptor: Company that changes the way a business is run, altering fundamental ways in which the product or service is delivered. The status quo is ineffective and inefficient, and disruption will change the business (while making money).
Stories can often go awry. Examples are:
- Assuming you are the only one with insights: it is easy to assume that while the rest of the world stays still, your company will move quickly from opportunity to opportunity – but that assumption is usually unrealistic. When you see large market opportunities, rest assured that much of the rest of the world does as well, and when you move decisively to take advantage of them, be ready for others to be making the same moves