— notes, quest-for-wealth — 3 min read
If I ask you to classify you as a person, would you naturally think of yourself as a number cruncher or story teller.
Story is what gives soul to your valuation.
You valuate companies because you want to act on those valuations. If i find something undervalued, i need to be able to buy that stock. But its all numbers, whats missing is capacity to tell a story.
Delusions of Number Crunchers
Delusions of Story tellers
Learn enough number crunching skills to develop into a disciplined story tellers.
From story to number : The steps
Step 1 : Develop a narrative for the business that you are valuing.
Step 2 : Test the narrative to see its not a fairy tale. So, got ask three questions,
Step 3 : Convert the narrative into drivers of value
Step 4 : Connect the drivers of value to a valuation
Step 5 : Keep the feedback loop open
Seek out people who think least like you. Like people who say "this is horrible", listen to them, they can give a new way to think.
Understand the company its business model financials, business mix and the story.
Look through its financial statements.
VC don't value companies they price it. Buy it at low sell it in high
Talk to people to learn more about the company
Uber : Can scale up very fast and less capital business. They just have to sign up cab drivers.
In general, Automobile is one of bad businesses
Car business model : Low revenue growth, less margin and lots of reinvestment.
Growth of any companies would be need new plants
Goodwill is a nonasset
Uber business model
Example of impossible : Netflix in 10yrs 600 billion and one subscriber pays around $100/year. Total subscribers required to reach $600 billion : $600 billion / 100 per year per subscriber = 6 billion subscribers required If they get entire population of the world subscribe they can reach $600 billion revenue.
1 in 3 valuations are impossible even the big names.
Example of implausible : Sport Event threatening the city to refurbish stadium. Works all the time. Keyword is "we are moving game to las vegas"
If someone says there is growth and there is nothing set aside to create the growth. Its not going to happen.
Apple narrative(April 2013)
Twitter narrative(October 2013)
Uber narrative(June 2014)
Uber example ( Different Narrative, Different Numbers )
A Company can convince that can do stuff, you never thought they could do
Focus changes