From Publishers Weekly
Instead of focusing on the short term–earnings per share, price-earnings multiples–Rappaport (Creating Shareholder Value), formerly a professor at Northwestern’s Kellogg School of Management, and Mauboussin, chief investment strategist at Credit Suisse First Boston, recommend “expectations investing,” which “starts with the current stock price and uses the discounted cash-flow model to `read’ what the market implies about a company’s future performance.” The…
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5.0 out of 5 stars
I enjoyed reading this book
As a value investor, I found this book very interesting. The author says that stock prices provide a signal of the market’s expectations about a company’s future performance.
An interesting read for the serious investor. The central tenet of the book might be stated as “investors do not earn superior rates of return on stocks that are priced fully to reflect future performance – even for the best value-creating companies – which is why great companies are not great stocks.” This book posits that investors can read market expectations contained in a stock’s price and anticipate revisions in those expectations to achieve superior returns. It book provides a detailed, step-by-step way to accomplish this process.
“Expectations Investing” is divided into three parts. Part I details how to determine the expectations for a stock based upon its current market price. Interestingly, rather than determine a “fair price” based upon a company’s free cash flow, the book turns this process upside down, using a company’s stock price to determine the market’s expectations for free cash flow going forward. Next, the book helps identify “expectations opportunities” – places where revisions in the stock market’s expectations are likely to take place. By focusing on key areas where expectations opportunities may take place (so-called “turbo triggers”), the skilled investor can modify their discounted cash flow projections to determine the appropriate price. This section further provides a framework to determine when to apply buy, sell, and hold decisions. Lastly, Part III of the book explains how certain, specific corporate events (mergers, share buybacks, and incentive compensation) may signal that expectations revisions are in order.
Within the book itself, I found the chapter on “Analyzing Competitive Strategy” to be an outstanding, investor-focused distillation of many of the points contained in Porter’s “Competitive Strategy.” Moreover, the chapters on specific corporate events were interesting insofar as they explain, in greater detail than I had read before, the quantitative analysis that underlies decisions related to mergers, share buybacks, and incentive compensation.
Potential readers should be aware that the authors of this book, like many stock analysts, adhere to the so-called “Capital Asset Pricing Model” school of thought (that the value of a security equals the rate on a risk-free security plus a premium, beta, which is determined based upon the volatility of the security in question). This model is just one of many that investors may use. Moreover, although stock analysts may have access to customers, creditors, competitors, and company insiders, many individual investors will lack those contacts, and thus face some difficulty in determining possible expectations revisions. Even if an investor had access to such information, the developing field of behavioral finance (see Belsky and Gilovich, “Why Smart People Make Big Money Mistakes” as but one example) would caution that investors seeking to implement the methods set forth in this book need to be careful of confirmation bias (tending to view information in a way that supports their pre-determined preferences) and information cascade (too much information), among others.
Lastly, readers should be aware that modeling out the process described by this book requires some math, and the ability to create spreadsheets of middling-level complexity. This is not a “buy low P/E” book – readers will have to do their homework to use these methods. Anyone who isn’t looking to put several hours into investigating each stock they are interested in should look elsewhere.
In all, this is a well-written book that makes a very complicated process relatively simple. It is not designed for the casual reader, and implementing the expectations investing process certainly takes considerable work. However, the book provides valuable insights into how analysts function and how stocks are priced by public markets.
However, if forced to pick a well-written, fairly sophisticated book on investing, I’d recommend a few other books ahead of this one, including “Security Analysis” by Benjamin Graham and either of Martin Whitman’s books (“The Aggressive Conservative Investor” or “Value Investing”).
5.0 out of 5 stars
Must read for investors who invest in individual companies
I am an individual investor investing primarily in individual companies. “Expectation investing” provides me with an effective process that I can trust, believe and most…
“Expectations Investing” presents a powerful idea – From a company’s stock price, derive what the market is expecting of the company’s performance. Then, based on your own expectations, decide if the stock is a worthy investment. One might say, isn’t this what investors do all the time, using multiples like P/E? The book talks about the drawback of such multiples. Then it presents a clear and elegant framework to identify the true drivers of a company’s value. You need to perform a strategic analysis of the company and industry to identify the plausible ranges for these value drivers. You can see where your assumptions stand with respect to market expectations (which you reverse engineer from the stock price and consensus estimates for future performance). You assign probabilities to various outcomes based on your convictions, and decide to buy/sell.
In 195 pages, this book presents a bunch of insights. The presentation on valuing a company’s stock options, as well as discussion of value capture by buyers/sellers in mergers and acquisitions, are the clearest I’ve seen in any finance/valuation book. The discussions on incentive compensation, as well as management signals in share buybacks, are also quite impressive and accessible to the general reader. The accompanying website for this book is highly complementary, and presents excel models for all topics covered. I adapted them for a sample company and was quite delighted! While DCF valuations are not every investor’s cup of tea, this book goes the farthest in trying to make its DCF-based framework manageable by the average person.
Now for the caveats which I hope are minor – A couple of earlier chapters pack the gist of several MBA classes (corporate finance, strategy, behavioral finance). If you are not an MBA, the profoundness of the ideas might be lost on you in the rat-a-tat-a-tat rapid fire presentation. Also, you will appreciate this book better if you have some conceptual understanding of corporate finance, such as cost of capital issues.
5.0 out of 5 stars
A Refreshing Look at Market Performance
There is no question stock prices climb and fall based on investors’ current perceptions of their future performance.
2.0 out of 5 stars
Is it just me
Seeing the other 5-star reviews makes me wonder, eihter those reviewers are clueless or I might have missed something big.
3.0 out of 5 stars
Somewhat Basic
This is a good book for those new to investing or those who feel that they need a more fundamental grounding to their trading activity.
5.0 out of 5 stars
Expectations Investing
Very well written. Answers questions on valuation of public stock that have puzzled me for years. Would highly recommend this read.
3.0 out of 5 stars
Not as good as it should have been, but worth to be read
La récente débâcle boursière a laissé la plupart des actionnaires non seulement appauvris, mais aussi désemparés face aux révisions brutales de cours d’entreprises prestigieuses…
2.0 out of 5 stars
A Different Approach
Stock market investing books usually come in two flavors.The first group of authors tell you to look for certain price and volume patterns; that the stock price depends on…
3.0 out of 5 stars
Recommended by Enron!
I haven’t read the book but I saw an unintentionally funny quote on the book jacket. Amongst other people praising the book and urging you to buy it, there is a quote from one…
5.0 out of 5 stars
Expectations Investing: Reading Stock Prices for Better Retu
I used to always wonder how do investment analysts evaluate stocks.Buffett never beleived in P/E nor P/S or P/CF.