For me, investing has always been a game of numbers, logic, and reasoning. As a numbers person, I feel at home analyzing balance sheets, income statements, and cash flows.
But after twenty years in this field, I’ve learned that numbers alone aren’t enough. Investing isn’t about the past; it’s about the future.
And since the future is unknowable, you have no choice but to tell stories—your own vision of what lies ahead. This creates a tension that I experience every single day.
Fear or Greed: The Keys to Selling
One important lesson I’ve learned while writing this newsletter is that you either appeal to fear or greed. These two emotions are the driving forces behind human decisions, and, therefore, also behind stock market prices.
Good salespeople understand this. They paint enticing visions of the future or warn of impending doom. But staying rational? That doesn’t sell.
I am not a storyteller, though. My strength lies in analyzing numbers, separating fact from fiction, and searching for value. This means my writing is often less appealing to a broad audience. People don’t want tables; they want stories. That makes my work as a numbers person especially challenging in a world dominated by narratives.
Why Stories Matter
This is where Aswath Damodaran’s work comes in. In his book Narrative and Numbers, he explains exactly why both stories and numbers are essential in investing. Damodaran calls himself a “number cruncher,” but he acknowledges that you can’t make an investment decision without a good story.
Stories connect numbers to reality. They make dry data comprehensible and provide a vision of the future.
But stories can also be dangerous. They can gloss over reality, hide cognitive biases, and create expectations that are impossible to meet. A great story without solid numbers is nothing more than a fairy tale.
The Three P’s: A Tool for Evaluating Investment Stories
When assessing a company’s story, I often use Damodaran’s three P’s: Possible, Plausible, and Probable. This simple model helps me connect stories with numbers.
Possible: Is the story technically possible? For instance, a company growing by 50% annually in a stable market sounds impressive, but wouldn’t it eventually outgrow the market itself? That’s simply impossible.
Plausible: Is it believable? Here, I look at comparable companies and sectors. Are there examples that support this story?
Probable: Is it likely? This is where the numbers matter most. What do the financial results say? Do they support the story?
If a story doesn’t pass these tests, it isn’t worth investing in. If it fails the third P—probable—it’s not an investment; it’s speculation.
Investing Is About Predicting the Future
Numbers offer a false sense of certainty. You can read a balance sheet, analyze cash flows, and calculate ratios down to three decimal points, but the future remains uncertain.
Investment analysis forces you to make predictions. As a numbers person, I’ve always struggled with this speculative aspect. But I’ve learned that even the most conservative estimator needs a story. That story helps frame the numbers in context and work out plausible scenarios.
Storytellers vs. Rational Investors
The investment world today is dominated by storytellers. Some are brilliant at painting beautiful visions of the future but lack the critical eye needed to substantiate those stories.
This makes them vulnerable to the whims of the moment and the volatility of the market. Many of these “natural storytellers” neglect the fundamentals of valuation. This leads to dangerous cognitive biases, misplaced expectations, and, in the worst case, capital loss.
I will never be a natural storyteller. For me, investing is about consistency, discipline, and rationality.
My strength lies in reading, analyzing, and interpreting numbers, in building a robust foundation for investments. But stories—your vision of the future—are an essential component.
The art lies in connecting stories to numbers, testing them against reality, and reinforcing them with hard facts. I try to keep these stories as simple as possible because the simpler they are, the lower the risk of errors.
I stay true to my strengths. I won’t become a teller of fairy tales, but I don’t have to. My role is to ground stories in reality, to anchor my analyses firmly in numbers. That is where my value as an investor lies.
With the 3P Check, I’ve written previous articles to analyze stock prices and assess whether the stories behind them are realistic. Do you have a specific stock you’d like to see subjected to a 3P Check? Let me know!
Articles and updates this week
Next week, the first of our companies, Investor AB, will release its earnings, and I’m looking forward to it. That’s just how it is with a portfolio that mostly consists of smaller companies: the majority of the earnings reports tend to come a bit later.
Still, this gives us an opportunity to get a sense of how things are going with the larger companies, allowing us to gauge the overall economic climate.
This past Tuesday, the article Don’t Lose Money was published. I held back from once again playing the role of a doom prophet, but I’m sure you all understood that I was referring to the current market. Some companies are simply being overvalued.