The ability to tell stories is a uniquely human one, and as it stands one of the most powerful means we have of communication. The earliest examples in human history are the numerous cave paintings found in Asia and Europe, some of which date back to over 30,000 years ago; a visual representation of ideas predating written language.
Every culture has developed its own myths and folklore, often reflecting the ideas and values of the time. Some of the most respected members of ancient tribal society were the shamans and elders – and with good reason: oral tradition was the way ideas and accumulated knowledge were retained before people began to write things down. Take Aesop’s fables for example, his stories would not be written down for centuries after his death yet survived because they were passed on from generation to generation by word of mouth.
As oral tradition gave way to the written word, it became easier for humanity to store its wisdom – albeit through the slow tedium of having scribes write down everything. Arguably one of the most important inventions in human history is the printing press, which was introduced to the western world around 1440 by Johannes Gutenberg (Although he wasn’t the first to invent it, that honour goes to the Chinese around 600 AD). This was an important milestone in the democratization of knowledge, for as the printing press diffused through Europe the number of book copies rose, and literacy rates rose with it – becoming a vital contribution to the Renaissance.
Today, the advent of the Internet and eBooks are in my view the second great milestone in the proliferation of knowledge. Anyone with an internet connection can benefit from having access to a well of knowledge so vast it would put the great libraries of antiquity to shame. Stories like the Lord of the Rings and Harry Potter have become almost universally popular, read and beloved by millions worldwide. It is now possible to have stories interwoven into a global cultural fabric.
The Biological angle.
The underlying basis for why storytelling is so compelling lies in the effect that stories have on our brain. If we simply listen to facts such as those being read off a power-point presentation, the major part of the brain that would light up are regions to process those facts such as the Broca and Wernicke’s area. However when we listen to a story being told, it activates parts of the brain that would be necessary for experiencing the story, say the sensory cortex for visuals, smells or sounds and the motor cortex for movement.
Furthermore, a Professor at Princeton University named Uri Hasson’s research has showcased an effect known as Speaker-Listener Neural Coupling. When a tape of a story was played back to 11 listeners, their MRI scans showed that their brains were lighting up in the same areas as that of the speaker, with a slight time delay to account for the flow of information.
The role of stories in Investing
Professor Ashwath Damodaran once pointed out that often investors fall into two camps: story guys and number guys. Story guys are the typical “Venture Capitalist” type investors who invest in early-stage investments where there isn’t much in the sense of assets or earnings, but there is an expectation that both of these will materialize at a future date based on certain qualitative aspects: perhaps the size of the market or the uniqueness of the business model. You may say that this sort of investor tends to be on the optimist side of the spectrum as well. If the story does materialize as planned the investor may reap huge rewards through a well-timed exit or choose to hold on through the public phase as the company continues to grow.
However, the downside of this form of investing is that without some sort of real growth materializing at some point, a story may end up being too good to be true. History is littered with failed companies who were merely inflated bubbles of hype, the tech bubble of the 2000s being an one example and many of today’s eCommerce stories in India being another. Professor Damodaran points out what can happen when runaway stories can blind investors.
On the more pessimistic side of the spectrum, the dyed in the wool value investor is wary about stories and growth expectations. He may focus only on objective metrics such as cash flows, enterprise value, tangible assets and cash on the balance sheet. By paying say a price that implies no growth or a price that is less than the value of the firm’s assets he anchors his purchase to what can be objectively defined today. While this is definitely a valid and very profitable way to invest, it does lead to errors of omission when some of the embedded value through growth may not be seen through only a quantitative lens. An understanding of the underlying story would help put the company’s financial and business elements in a context.
I believe it would be reasonable to infer that in order to become a balanced investor, it is necessary to master both the qualitative and quantitative aspects, working on the weaker side if necessary. Warren Buffett’s rise to mythic status as he graduated from quantitative bargains to the “Moat” style of investing was partly due to his ability to understand both the narrative behind a business while remaining anchored to fundamental aspects of value to ensure he did not overpay for what he was investing in.
For a while I had turned away from reading fiction, seeking to further my understanding of the world by focusing on knowledge from various disciplines. Yet I felt something was lacking in my life without the stories – of heroes and gods, of fantasy and legend, of technological marvels and fantastic futures. Without the ability to imagine and dream, not only could our investing ability be constrained, but also our very humanity lies incomplete.