Damodaran Explains Narrative Breaks, Shifts, And Changes

One of the difficulties of investing in companies like Twitter Inc (NYSE:TWTR) or Groupon Inc (NASDAQ:GRPN) is that the market price isn’t justified by profits – you either believe the story or you don’t, and invest accordingly. That’s not to say investing on a strong narrative is always a bad idea, anyone who believed Elon Musk’s narrative on Tesla Motors Inc (NASDAQ:TSLA) a couple years ago has been amply rewarded, but you risk having the story change suddenly (almost always for the worse).

But even for more pedestrian stocks, NYU Stern School of Business professor Aswath Damodaran has argued that the best valuations combine narrative with a...