The Value of Stories in Business
Bridging the qualitative and quantitative
The Value of Stories in Business
1) Learn to be a disciplined story teller or a visionary (Contextual) number cruncher.
Without numerical discipline to tie your story to, you are simply building castles on air.
Without contextual knowledge in your spreadsheet / checklist, you simply have a large chunk of easily manipulable numbers on a spreadsheet.
2) Dangers of pure quantitative and correlation based valuations.
i) You can hide your bias in the numbers in your inputs and conveniently hand wave it. If you do not keep a positive and open feedback loop, you will blindly believe that whatever you input is true.
ii) The ever changing nature of financial markets mean that what historically successfull formula and strategy will eventually be adopted by others and priced into the markets.
iii) You can simply delude yourself into thinking you are precise, objective and being in control.
Dangers of pure qualitative based valuations
i) Being creative and hardworking doesn't mean you will get rewarded.
ii) Dangers of extrapolating from a single instance of a successful business story, and assuming it can be applied to all scenarios
3) Creating a story from the numbers
Creating a story from the numbers
i) Story Logic check
Understand the nature of the business and industry
Google search, Annual report, Industry report
Scuttlebutt. Talk to people working there, Talk to suppliers, competitors, people using its products and services,
Piece together a story from its discrete parts.
Is it possible?
Is it plausible?
Is it probable?
ii) Quantify story into a number in DCF
Nature of Cash flow (Especially OCF and revenue, operating profit margin)
Moat of the business (required CAPEX, networking benefits, scale-ability and growth)
Stability and nature of cash flows.
Discount rates ( Damodaran Amalgamate through industry groups)
Reinvestment Expenditure (How much cash reinvested into business, capex, R&D)
Growth rate (Which industry and market, growth rates, market share)
iii) Keeping open and positive feedback loop.
Always seek feedback from experts / Industry insider whom think differently from you
iv) Learn to detect bullshit language into the DCF / numbers / story another is trying to sell you on.
Be wary of Venture capital pricing games as they are merely flipping companies to sell them at a higher price to another.
Be wary of banking analyst DCF as they are designed to sell the company, and may use or conveniently omit important facts to present the illusion that the company worth higher.
4) Intellectual Honesty to yourself and acknowledging that you are wrong, will free you from sticking to your original story, and reevaluate your investment with a fresh pair of eyes. It is dangerous to insist you are right and stayed anchored to the previous thesis and valuation, and be wrong for an indefinite period of time.
Diversify sufficiently is acknowledging that you will inevitably make mistakes, and political, legal and economic conditions are unpredictable. Sticking to just 4 great companies could easily lead to hubris.
Design position limits and portfolio control measures with respect to your individual investment personality and strategy. You can design an automated and mechanical process to prevent yourself from making catastrophic mistakes, whether in divestment or accumulation.
In valuation, there is no confirmation mechanism that can guarantee that you are right. You have to be comfortable with living in uncertainty, and have faith in the due diligence and the process that you implemented and trust.
Learn to enjoy the valuation process more than the proceeds. You could spend large amount of hours and effort and yet still NOT beat the market indexes. No honest investor / formula can ever guarantee you that following the methods / teachings can allow you to beat the market. Be wary of those whom over-promise so.
The Value of Stories in Business
1) Learn to be a disciplined story teller or a visionary (Contextual) number cruncher.
Without numerical discipline to tie your story to, you are simply building castles on air.
Without contextual knowledge in your spreadsheet / checklist, you simply have a large chunk of easily manipulable numbers on a spreadsheet.
2) Dangers of pure quantitative and correlation based valuations.
i) You can hide your bias in the numbers in your inputs and conveniently hand wave it. If you do not keep a positive and open feedback loop, you will blindly believe that whatever you input is true.
ii) The ever changing nature of financial markets mean that what historically successfull formula and strategy will eventually be adopted by others and priced into the markets.
iii) You can simply delude yourself into thinking you are precise, objective and being in control.
Dangers of pure qualitative based valuations
i) Being creative and hardworking doesn't mean you will get rewarded.
ii) Dangers of extrapolating from a single instance of a successful business story, and assuming it can be applied to all scenarios
3) Creating a story from the numbers
i) Story Logic check
Understand the nature of the business and industry
Google search, Annual report, Industry report
Scuttlebutt. Talk to people working there, Talk to suppliers, competitors, people using its products and services,
Piece together a story from its discrete parts.
Is it possible?
Is it plausible?
Is it probable?
ii) Quantify story into a number in DCF
Nature of Cash flow (Especially OCF and revenue, operating profit margin)
Moat of the business (required CAPEX, networking benefits, scale-ability and growth)
Stability and nature of cash flows.
Discount rates ( Damodaran Amalgamate through industry groups)
Reinvestment Expenditure (How much cash reinvested into business, capex, R&D)
Growth rate (Which industry and market, growth rates, market share)
iii) Keeping open and positive feedback loop.
Always seek feedback from experts / Industry insider whom think differently from you
iv) Learn to detect bullshit language into the DCF / numbers / story another is trying to sell you on.
Be wary of Venture capital pricing games as they are merely flipping companies to sell them at a higher price to another.
Be wary of banking analyst DCF as they are designed to sell the company, and may use or conveniently omit important facts to present the illusion that the company worth higher.
4) Intellectual Honesty to yourself and acknowledging that you are wrong, will free you from sticking to your original story, and reevaluate your investment with a fresh pair of eyes. It is dangerous to insist you are right and stayed anchored to the previous thesis and valuation, and be wrong for an indefinite period of time.
Diversify sufficiently is acknowledging that you will inevitably make mistakes, and political, legal and economic conditions are unpredictable. Sticking to just 4 great companies could easily lead to hubris.
Design position limits and portfolio control measures with respect to your individual investment personality and strategy. You can design an automated and mechanical process to prevent yourself from making catastrophic mistakes, whether in divestment or accumulation.
In valuation, there is no confirmation mechanism that can guarantee that you are right. You have to be comfortable with living in uncertainty, and have faith in the due diligence and the process that you implemented and trust.
Learn to enjoy the valuation process more than the proceeds. You could spend large amount of hours and effort and yet still NOT beat the market indexes. No honest investor / formula can ever guarantee you that following the methods / teachings can allow you to beat the market. Be wary of those whom over-promise so.
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