SPEAKER 1: Hello, everyone.

Aswath Damodaran is here and I couldn't

be more pleased because I have learned

a lot about investment valuation from just reading his blogs.

I think he is one person who has single-handedly made

investment valuation open source and available to all of us.

In addition to his original classroom at NYU,

he also has a virtual classroom on YouTube of tens of thousands

of students spread all over the world.

And one thing I really admire about Aswath

is that he does not shy away from discussing current ideas

and let them be examined over time in real time.

He's also somebody who has been very open and transparent

about sharing investment mistakes,

which you don't really see in the investment

community in general.

I think they're the really special thing about professor

is that he brings the side of an academic and bridges it

all the way to that of a practitioner

and does it in a very open, candid way.

He's written phenomenal books about investing

and today he is here to discuss with us

the latest in the edition of books, which

is "Narrative and Numbers."

So without any further ado, I am very delighted, please

join me in welcoming Professor Aswath Damodaran.

ASWATH DAMODARAN: Thank you.

[APPLAUSE]

So let me start with a story.

I came to NYU in 1986, that was when I was hired

as an assistant professor.

And I was given a class to teach called security analysis, which

is an old class with a collection of topics

that I chose to replace with a valuation class.

I actually didn't tell them I was doing it,

I just went into the class and made it a valuation class.

And that was 1986.

This will be my 31st year teaching valuation, my 53rd

semester.

And everything I know about valuation

I've learned in the course of teaching this class.

So one of the lessons I'd like to talk about

is something I didn't know when I started teaching this class

that I had to teach myself.

So I'm going to take you on a personal journey on something

I had to learn to do better to actually do valuation.

So I'm going to start out with a question

that I start off every one of my classes.

Let me give you a sense of what my classes look like.

I have a typical class of about 300.

It's an MBA class, it's about 300 people

who walk into the room.

And if you're familiar with how MBA programs have evolved,

they've become more and more diverse.

So I've got not just bankers, but I've got museum directors,

I've got ballet dancers and NBA players.

In a sense, it's a very diverse classroom.

So here's one of the first questions I ask them,

and I'm going to start off this session with that question.

There's no right answer, don't look at your neighbor.

So here's my question.

If I asked you to classify yourself as a person,

would you more naturally think of yourself

as a storyteller or a number cruncher?

Think about it for just a moment.

What comes more naturally to you, storytelling

or number crunching?

Howard, I know you've known for a long time,

so you probably knew.

I'll tell you when I knew.

I knew when I was about 13 or 14,

right after my first English literature class.

And I was asked to read "Moby Dick," and I did.

And I was ready for the discussion, ready to talk

about whales and captains.

So I show up in class ready to talk about whales and captains

and there's nary a mention of whales or captains.

And about 15 minutes into the session,

the instructor says, there was no whale.

And so what?

I distinctly remember a big black fish going all the way

through the book.

And then she started talking about hidden meanings

in the book and I remember sitting there saying, really?

That's what Herman Melville was thinking when he wrote that?

And my reaction when I came out of that class

was, never again am I going to subject myself

to this kind of bullshit.

And my life was laid out for me--

it was Algebra I, Algebra II, Algebra III,

out of high school.

And these were the good old days when you could go to college

and not have to deal with the crap you have to do today--

core curriculum, you know where they

make you take classes for two years you never want to take.

Those days, you could take numbers class, numbers class,

numbers class, numbers degree out there.

And then you had a numbers job-- you were a banker, an engineer.

And after about four years of entering numbers

into spreadsheets, you got incredibly bored so

what did you do?

Come back to business school, you're in that class.

About 180 people in my class are number crunchers,

recovering number crunchers.

But there were people in that literature class

who loved this hidden meaning stuff.

I've never understood them.

They're the poets.

My youngest son is a poet.

He showed me his first poem and I

don't think he's going to show me too many poems after this

because he showed me the poem and I said, [INAUDIBLE],

I think there's a problem.

Aren't the last words supposed to rhyme?

He said, Dad, you're not a poet, that's why you don't get this.

I said, you're right.

But there were people who loved this hidden meaning stuff.

They took Literature I, Literature II, Literature III,

became history majors at Yale, went to work,

and discovered that even Yale history majors don't

get paid very much.

So after about three years of poverty-stricken lives,

they come back to business school,

they're the other 120 people in my class.

That's roughly speaking what my class breaks down into,

60% number crunchers, 40% storytellers.

And once this classification happens,

the number crunchers start to preen.

They say, what the hell are you guys doing in this class?

This is a numbers class, it's a valuation class.

And that's when I let them in on what

I think is the biggest hidden secret in valuation.

Valuation can never be just about the numbers.

If you have just a collection of numbers in a spreadsheet,

you just have a collection of numbers in a spreadsheet.

To me valuation, is a bridge between stories and numbers.

And let me explain what I mean by that.

When you show me a valuation, I point to a number

and ask you, why is that number what it is, I need your story.

And when you tell me a story about a company, about

great management, about a brand name

and I say, what does that story mean, I need to hear a number.

Good valuations bridge that divide.

And it is what--

I mean, I know this word is going to sound strange

in the context of valuation.

The story is what gives soul to your valuation.

A valuation, that's a spreadsheet.

The story is what gives your valuation a soul.

And here's where my personal journey begins.

I started teaching the valuation class in '86.

And when I first started teaching it,

I taught it as a number cruncher does, which is what?

All numbers all the time.

When in doubt, add an equation.

You're in further doubt, add two equations.

That's how number crunchers think.

And about six years into the process,

I discovered I had no faith in my own valuations,

another word you don't see in the context of valuations,

right?

And here's what I mean about faith in your own valuations.

When you value a company, especially if you're not

being paid to do the valuation, why do we value companies?

It's not because we're intellectually curious.

I don't lie awake and say, I wonder what

Facebook is worth right now.

If you do, see a psychiatrist.

I value companies because I want to act on those valuations

in what sense?

If I find something to be undervalued,

I need to be able to buy that stock, right?

And what I discovered about six years into this process was

I could value a company, but I wasn't

willing to act because I knew it's a collection of numbers.

I knew how easily I could make those numbers

move if I wanted to, make that revenue growth from--

I could hide my biases all over the place

and you would never find it.

That's when I started thinking about what am I missing?

And what I found I was missing was the capacity

to tell a story.

So what I'd like to do is take you on this journey

because if you're a number cruncher,

you have some delusions to overcome

and if you're a storyteller, you have your own set of delusions.

So let me ask this room that question, how many of you

are natural number crunchers?

So let me list some delusions.

Let's see if we share these delusions.

The first is the delusion of precision.

The way I describe this is when a number cruncher is in doubt,

you know what he or she does?

Adds decimals.

It makes you feel much better, right?

Three decimals, maybe make it five--

delusion of precision.

The second is the delusion that you being objective.

Why-- I just use numbers, I'm not being biased.

And the third is the delusion of being in control.

Just because you have a number for something

doesn't mean you control it, but it gives you

the delusion of control.

Those are the number cruncher's delusions.

If you're a storyteller, you have your own set of delusions

and here are some of those delusions.

The first is you think being creative

should bring its own reward.

I told you such a great story, it

should be worth at least $3 billion, right?

You think number crunchers dream in black and white,

they're incapable of dreaming in color,

they have no imaginations.

And you love anecdotal evidence.

You're like my mother-in-law, and I don't

mean that as a compliment.

She comes up with the most outlandish conclusions.

You wonder, where did that come from?

I'll give you an example.

About 10 years ago, she mentions in passing

that the best car to drive in a snowstorm is a Volkswagen bug,

you know the old ones that you could pick up

with two errands and move?

I said, how do you come up with this?

And she told me--

I should never ask her, how do you come up with this

because she always tells me.

She said 25 years ago she was driving

in Lake Tahoe in a Volkswagen bug in a snowstorm.

There were two cars in front of her which went off the road

and she made it back home.

Therefore, a Volkswagen bug is the--

sample size of one.

Amazing how you can extrapolate from there.

So when I look at my 300 students, I tell them,

this is what I hope this class will do for you.

I turned to the storytellers first and say,

by the end of this class, I hope you

learn enough number crunching skills

to develop some discipline.

Because when you tell stories, you sometimes get

carried away, right?

You wander across that line between fact and fantasy

and you're not even sure that you walked across the line.

I hope you develop enough number crunching that you know