Narrative Alteration – The Real World Intrudes
“When the facts change, I change my mind. What do you do, sir?”
Continuing with the last chapter, Professor Ashwath Damodaran has listed out why narratives alter in the first place.
The only constant in business is change. It is prudent to respond to new developments and information by revisiting your narrative and evaluating whether any parts of it may need to be changed.
Qualitative vs Quantitative:
- Qualitatives can range from top management change, legal judgment about the company, announcement of activist investors taking substantial stakes.
- Quantitative news changing narrative can be surprises in earnings reports, inflation or economic growth news, etc.
Inside vs Outside:
The information can sometimes be from the company in the form of either a required financial disclosure or as a corporate announcement (of an acquisition, divestiture, or a buyback) and sometimes from external sources (financial news, equity research analysts following the company, or regulatory authorities). In some cases, it may even be from a competitor, with the information that you get changing the way you think about the market and competitive dynamics.
Micro vs Macro news can also affect your narrative about the company.
The following table defines how various news or information changes fundamentals of the company (both narratives and numbers) and hence affects the value.
Professor Damodaran did the same in his Uber valuation saga. His valuation of Uber in June 2014 was USD6bn, while after changing the narrative his estimated value came out to be USD23.4 in September 2015. Let's look at what changed in the company, provoking the professor to change the narrative to affect the value to such a great extent.
Let us see how input changes from new stories in case of Uber:
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Next chapter deals with how to inculcate news in our investment thesis.
