Aswath Damodaran
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Summary
People should always know what they are good at, whether storytellers or number crunching. In business, there is still an aspect of valuation, which is a bridge between numbers and storytelling. In valuation, it is always essential for people to understand why a specific figure has been placed somewhere, and they have to come up with a story concerning the figure in question (Damodaran, 2017). Conversely, when someone tells a story about a company, related to anything that the company holds or the products that the company sells, there has to be a number involved. Excellent valuations have a strong connection between the storytelling bit and the number bit (Damodaran, 2017). The relationship between the two has to be relevant. The story given is what gives meaning to the valuation.
People should always have faith in their valuations. When people value a company, they look at it in terms of undervaluation or overvaluation, which will help them decide whether they want to buy a stock or not. Valuations give the best investment opportunities, and investors will determine whether they will get returns for their investment or risks (Damodaran, 2017). Therefore, the kind of valuation that people will make towards a company makes them decide whether they will be willing to act or not.
Thus, people can either be number crunchers or storytellers, depending on their intellectual ability. Number crunchers have their delusions to overcome. The delusions include precision, the delusion of objectivity, and the delusion of being in control (Damodaran, 2015). For storytellers they think that the stories they tell should be worth some money. They believe that number crunchers do not have imaginations (Damodaran, 2015). Therefore, for valuation, people can be disciplined storytellers or imaginative number crunches. Whichever angle people would like to view the company from, whether the storytelling angle or the number crunches angle, they will always decide based on their judgment.
Valuation in Four Lessons
People should understand that valuation is not accounting. There is a big difference between the two. The accounting balance sheet is different from the finance balance sheet. Valuations depend on the future investment that people have, which will determine the worth of the investors (Damodaran, 2015). Therefore, the value of a company does not come from what the company did in the previous year, but what the company will do in the future. It is ideal for determining whether the growth of the company has the potential of increasing or not before one can invest in the company (Damodaran, 2015). It is also ideal for determining whether the company engages in activities that will create value in the future.
Assessing the future growth of a company does not need financial tools like P/E ratio and others. The economic balance sheet should always be contrasted with the business balance sheet. The valuation of a company has four primary questions. Investors should still know the cash flows that exist in their investments (Damodaran, 2015). They should also see the value that they will create for future cashflows. Investors should know the amount of risk they put in the cashflows. Investors should also wish to know when the business will thrive, and they will get good returns for their investment (Damodaran, 2015). Valuation is all about numbers, and storytelling, as they all bring out the aspect of the growth of a company. Behind the numbers, there are stories about the company. People have to work with both parts to value a company in the right way.
References
Damodaran, A. (2015). Valuation in Four Lessons. Retrieved from https://www.youtube.com/watch?v=Z5chrxMuBoo&feature=youtu.be&ab_channel=T alksatGoogle
Damodaran, A. (2017). The Value of Stories in Business. Retrieved from https://www.youtube.com/watch?v=uH- ffKIgb38&feature=youtu.be&ab_channel=TalksatGoogle