28
Feb
15

Aswath Damodaran: The Most Reliable Investment Valuations Balance Numbers and Narratives

See on Scoop.itBounded Rationality and Beyond

When it comes to valuing stocks, the most reliable valuations come from imaginative number crunchers and disciplined storytellers, says Aswath Damodaran. And too often pure “numbers” people drift off into what he calls “spreadsheet nirvana.” Similarly, investors who focus purely on the narrative of a potential investment run the risk of quickly “veering from reality to fantasy.”

Damodaran, who teaches valuation and corporate finance at the Stern School of Business at New York University (NYU), made these remarks at the recent CFA Institute Equity Research and Valuation Conference 2014 inBoston, where he urged attendees to bridge the gap between numbers and narratives, insisting that the best valuations are not just “a collection of numbers, but a story connected to numbers.”

Damodaran acknowledged the critical role that numbers play in the valuation process, but he warned that they should be used judiciously. Due to mission creep, he thinks accounting statements have become increasingly difficult to navigate and fair value accounting has become an oxymoron, allowing for bias and the illusion of objectivity in valuations. Similarly, the emergence of Big Data as an input into sophisticated valuation models driven by “Excel Ninjas,” and the accompanying notion that “more is better,” has its limits. Adding an extra decimal place to your model’s projected operating profit margin conveys a false sense of precision with no meaningful improvement in outcomes.

See on blogs.cfainstitute.org

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