Expectations Investing

Reading Stock Prices for Better Returns

Alfred Rappaport, Michael J. Mauboussin

Publisher: Harvard Business School, 2001, 224 pages

ISBN: 1-57851-252-2

Keywords: Finance

Last modified: July 12, 2021, 8:09 p.m.

About 75 percent of active investors consistently deliver returns below those of passive index funds. Why? In part, it's because proven methods for valuing assets are too complex to apply — causing investors to rely on commonly used benchmarks such as current earnings and price-earnings multiples that simply don't reflect how the market prices stocks.

Now, leading valuation experts Alfred Rappaport and Michael J. Mauboussin argue that the secret to beating the market stands in plain sight. Embedded in the stock price — the most accessible piece of information in the investment arena — lies all investors need to know about how the market expects a company to perform. By correctly decoding that information, say the authors, investors are on the way to anticipating changes in a company's competitive position that the current stock price doesn't reflect — and making informed buy, hold, or sell decisions before the rest of the crowd. This proven approach, expectations investing, holds the potential to change the rules and improve the odds of the stock selection game forever.

The beauty of expectations investing is that it harnesses the power of the market's own tried-and-true pricing model — discounted cash flow — without requiring difficult and often dubious long-term forecasting. Highly practical, the book provides a strategic framework and corresponding tools for using price-implied expectations (PIE) to:

  • Interpret current prices and anticipate revisions in expectations.
  • Monitor signals from managerial actions such as mergers and acquisitions and share buybacks and estimate their impact on shareholder value.
  • Devise, adjust, and communicate management strategy in light of shareholder expectations.

In addition, a unique expectations infrastructure helps track value creation from the initial triggers that shape performance to the resulting impact on sales, operating profit margins, and investment efficiency.

Universally applicable to public companies across the economic landscape, Expectations Investing will enable professional investors, analysts, and executives to translate heightened uncertainty into lucrative opportunity.

    1. The Case for Expectations Investing
      • Active Management: Challenge and Opportunity
      • The Expectations Investing Process
      • The Twilight of Traditional Analysis
      • Essential Ideas
      • Appendix: Earnings Growth and Value Creation
  • Part I: Gathering the Tools
    1. How the Market Values Stocks
      • The Right Expectations
      • Shareholder-Value Road Map
      • Free Cash Flow
      • Cost of Capital
      • Forecast Period
      • From Corporate Value to Shareholder Value
      • Summary Illustration
      • Essential Ideas
      • Appendix: Estimating Residual Value
      • The Perpetuity Method
      • The Perpetuity-with-Inflation Method
    2. Expectations Infrastructure
      • The Expectations Infrastructure
      • Not All Expectations Revisions Are Equal
      • Essential Ideas
    3. Analyzing Competitive Strategy
      • The Dual Uses of Competitive Strategy Analysis
      • Historical Analysis
      • Competitive Strategy Frameworks
      • Essential Ideas
  • Part II: Implementing the Process
    1. How to Estimate price-Implied Expectations
      • Reading Expectations
      • Gateway Case Study
      • Why Revisit Expectations?
      • Essential Ideas
      • Appendix: Employee Stock Options and Expectations Investing
      • Valuing ESOs
    2. Identifying Expectations Opportunities
      • Searching for Expectations Opportunities
      • Pitfalls to Avoid
      • Gateway Case Study
      • Essential Ideas
    3. Buy, Sell, or Hold?
      • Expected-Value Analysis
      • Gateway Case Study
      • The Buy Decision
      • The Sell Decision
      • The Role of Taxes
      • Essential Ideas
    4. Beyond Discounted Cash Flow
      • Real Options
      • When to Use Real-Options Analysis in Expectations Investing
      • The Value of Real Options in Amazon.com
      • Reflexivity
      • Essential Ideas
    5. Across the Economic Landscape
      • Business Categories
      • Business Categories and the Value Factors
      • Essential Ideas
  • Part III: Reading Corporate Signals
    1. Mergers and Acquisitions
      • How Acquiring Companies Add Value
      • Evaluating Synergies
      • What to Do When a Deal Is Announced
      • Essential Ideas
    2. Share Buybacks
      • The Golden Rule of Share Buybacks
      • Four Popular Motivations for Share Buybacks
      • Essential Ideas
    3. Incentive Compensation
      • CEO and Other Corporate-Level Executives
      • Operating-Unit Executives
      • Middle Managers and Frontline Employees
      • Essential Ideas


Expectations Investing

Reviewed by Roland Buresund

OK ***** (5 out of 10)

Last modified: May 21, 2007, 3:04 a.m.

Latest investment fad. Should be easy to overlook, if it weren't for the authors.


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