A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
Narratives/Stories/Fiction/Figments of our imagination - call them what you want - have played a very important role in human evolution. They have been the thread that has bound us together in our religious, social, and national fabrics. Their influence transcends most other walks of our lives like legal, moral, commercial, and even marital. Yuval Noah Harari explains it well in his book, Sapiens: A Brief History of Humankind
How did Homo sapiens manage to cross this critical threshold, eventually founding cities comprising tens of thousands of inhabitants and empires ruling hundreds of millions? The secret was probably the appearance of fiction. Large numbers of strangers can cooperate successfully by believing in common myths.
Any large-scale human cooperation – whether a modern state, a medieval church, an ancient city or an archaic tribe – is rooted in common myths that exist only in people’s collective imagination. Churches are rooted in common religious myths. Two Catholics who have never met can nevertheless go together on crusade or pool funds to build a hospital because they both believe that God was incarnated in human flesh and allowed Himself to be crucified to redeem our sins. States are rooted in common national myths. Two Serbs who have never met might risk their lives to save one another because both believe in the existence of the Serbian nation, the Serbian homeland and the Serbian flag. Judicial systems are rooted in common legal myths. Two lawyers who have never met can nevertheless combine efforts to defend a complete stranger because they both believe in the existence of laws, justice, human rights – and the money paid out in fees.
Yet none of these things exists outside the stories that people invent and tell one another. There are no gods in the universe, no nations, no money, no human rights, no laws and no justice outside the common imagination of human beings.
People easily understand that ‘primitives’ cement their social order by believing in ghosts and spirits, and gathering each full moon to dance together around the campfire. What we fail to appreciate is that our modern institutions function on exactly the same basis. Take for example the world of business corporations. Modern businesspeople and lawyers are, in fact, powerful sorcerers. The principal difference between them and tribal shamans is that modern lawyers tell far stranger tales.
This issue is a celebration of the power of these narratives that make us who we are. We shall look at these narratives from two different perspectives. We'll start with a very wide perspective of how we can make the best of the hand we are dealt with. Then we'll narrow our focus to how narratives have an impact on how we value our investment. The first will help us become better humans, while the second will nudge us into better investors (hopefully!!).
As with Issue 68, we'll ditch our usual sections for a more free-flowing and wide-ranging experience.
Let's commence business with a very powerful story of human resilience and the will to not just survive, but strive. This is the story of Jon Morrow whose whole body is paralysed. The only parts of the body that he can move are his eyes and lips. And before you picture Jon lying on a hospital bed in a sorry state, here is a image of Jon:
Indeed Jon's life has been extremely painful (his paralysis: he cant move his muscles, but he can still feel physical pain) and tough. But that hasn't stopped him from becoming a millionaire, and a business owner. As he recounts some dreadful events of his life, he draws 7 Life Lessons for us. These lessons are worthy of being part of a collection of articles that you should re-read each year.
Someone who spent more than 27 years of his life in a condition similar to Jon (but a different disease) is a former Lt. Col. in the U.S. Army named Jack Hurst. He couldn't walk, talk, move a finger, go to the bathroom or even breathe without mechanical assistance. Other than a few muscles in his forehead and face, he was completely paralysed. His condition, however, did not stop Jack from becoming a proficient investor. In an article titled The Soul of an Investor, journalist and writer Jason Zweig profiled this extra-ordinary investor.
Both the above stories teach us that the game is never about the cards that we are dealt, rather it is about what we do with these cards. Most of us view the glass half empty and never realise our full potential. However, people like Jon and Jack exemplify that no obstacles are big enough for the human spirit.
Thanks to the internet, stories like these are available to us long after they were told. Blessings like these are often forgotten in world focused on the half empty glass. We need to realise that we are probably living in one of the best times possible so far. We stand to gain from the collective lessons, writings, and innovations of the multitude of human generations that have existed thus far. However, rather than counting such blessings, we choose to focus on negatives ranging from increasing work loads to rising inflation and increasing violence.
Talking about violence, the topic of mass shootings and gun ownership is hard to ignore. Every time there is a mass shooting in the US, we are reminded that nearly 40,000 people are killed by guns each year. That's a shocking number, but how large and significant is this number? Especially given the fact that more half of those deaths are due to suicide, making deaths due to mass shootings far lower.
The purpose of the above data was not to judge whether gun violence is severe or not, but to draw a relationship between numbers and narratives.
You see, on a stand-alone basis, numbers make very little sense to us. For instance, what do you make of the fact that a country's debt is $14tn? It's a large number, for sure. But how large is it? More importantly, is it just a very large number or an alarmingly large number? Without a lot of supporting data, this number has no meaning to us (or statistical significance, for the nerds). This is where narratives comes in. Narratives help us make sense of such numbers. Consider this: “If you stack up 14.3 trillion dollar bills, the pile would stretch to the moon and back twice.” This narrative provides some perspective on how large the number 14tn is. Although, it doesn't still tell us whether this number is an alarmingly large number. Now consider this fact: At the end of 2019, US federal debt was nearly $23tn, which is about $70,000 per US resident. The per capita income in 2019 was around $65,000 in the US. This provides an even better perspective. The debt per capita is more than the income per capita and hence this is an alarmingly large number.
Now let's turn this around on its head. Consider the following: the UK health secretary Matt Hancock claimed that the NHS could save £100m in five years if all overweight people lost five pounds. 100mn pounds surely sounds like a large number. Asking overweight people to shed five pounds in order to save such a large sum seems reasonable. However, 'A few seconds with a search engine and a calculator will tell you that this works out as 30 pence per person in the UK per year.' Suddenly, the number does not look as large as earlier. Would you still consider losing five pounds of weight?
The above examples demonstrate two important facts:
The first is that numbers and narratives are intertwined. One without the other wouldn't hold much significance in matters of statistics.
Secondly, and more importantly, narratives can alter the significance of numbers, based on how they are framed.
As investors, we deal with a lot of numbers. Therefore, it is important that we understand this relationship well. One of the best cases (in my view) to understand how narratives can shape the perception of numbers is an exercise involving the valuation of Uber.
In June of 2014, valuation guru Aswath Damodaran put up a post valuing Uber at about $6bn. His post was in response to Uber raising capital at a $17bn valuation. Clearly, there was a disconnect in the market's assessment of Uber's value and that of the Prof. A month later, one of Uber's investor and a well known VC, Bill Gurley put out an article contending that the Prof's assumptions were off by a factor of 25 times or more. When two intelligent people disagree, in general, the rest of us have some very important lessons to learn. The lesson, this case, was how each of them estimate the potential use case of Uber. In other words, their individual narratives of what Uber could become played a major role in the large difference in the value of the business that each of them arrived at.
This thought was further formulated in to a number of interesting presentations and eventually a book by the Prof. This talk at Google is probably the most detailed presentation on the value of stories in business valuations that I have heard so far (there was another shorter version that was equally interesting, but I cant seem to find it in my archives). In addition to outlining the importance of narratives in determining the value of a business, Prof. Damodaran also details the steps he uses to build a narrative and determine the value of a business.
If you are short on time, you can also read this twitter thread (which reminded me of this subject in the first place - h/t to Brandon Beylo for writing it and the generous Neeraj Marathe for sharing it), although I would encourage you to listen to the entire talk.
As you soak in the importance of narratives and numbers for business valuation, it is imperative to also be aware of the darker side. The following two short articles will provide a good enough perspective:
This article looks at how narratives can change our perception about numbers depending on how they are framed. It also provides some simple tips in dealing with large statistics so as to avoid being misled by narratives. It is also the source of the examples quoted above (US federal debt and UK NHS budget).
This article focuses specifically on the role of narratives in distorting your investment actions. It draws the difference between narratives that are based on emotions and those are that backed by facts.
Lastly, while we are still on the subject of narratives, I wanted to share this amazing advert that is not just a powerful narrative, but also a very well executed project. It a short 3min video that will surely make your day:
* * *
That's it for this weekend.
If you enjoyed reading this issue → please hit the like button
If you have any feedback/interesting articles that you’d like to share → simply reply to this email/leave a comment below.
Have a wonderful week ahead!!
- Tejas Gutka
[Apr 10, 2021]
Thanks for sharing this Tejas. Was a wonderful read.