Narrative and Numbers: The Value of Stories in Business (Columbia Business School Publishing)

by Aswath Damodaran

Breaking down stories by using this spectrum also allows us to get perspective on how different investment philosophies think about investing stories and, by extension, investment value. Old-time value investors, weaned on the dividend-based valuation models in Ben Graham’s book on security analysis1 and brought up on the adage that you only invest in the known and predictable, will invest in “highly probable” narrative companies, complaining even then that they would prefer total certainty for those companies. More aggressive value investors may venture a little further down the probability path and invest in companies with lower probability outcomes at the right price. Growth investors have to be more willing to bet on plausible story lines and build them into growth projections, accepting the fact that these projections come with more risk. Later-stage venture capitalists tend to be bunched up toward the lower end of the plausibility spectrum, investing in companies that have promise and potential (another way to think of low-plausibility narratives). Early-stage venture capitalists are taking their chances on possibilities, knowing full well that only some of these possibilities will become plausible and fewer still will make it all the way to the probability end of the spectrum. Figure 7.4 captures the range of investment philosophies and where they fall in the possible to probable spectrum.