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Expectations Investing: Reading Stock Prices for Better Returns
Expectations Investing offers a unique and powerful alternative for identifying value-price gaps. Rappaport and Mauboussin provide everything the reader needs to utilize the discounted cash flow model successfully. And they add an important they suggest that rather than forecasting cash flows, investors should begin by estimating the expectations embedded in a company's stock price. An investor who has a fix on the market's expectations can then assess the likelihood of expectations revisions. To help investors anticipate such revisions, Rappaport and Mauboussin introduce an "expectations infrastructure" framework for tracing the process of value creation from the basic economic forces that shape a company's performance to the resulting impact on sales, costs, and investment. Investors who use Expectations Investing will have a fundamentally new way to evaluate all stocks, setting them on the path to success. Managers will be able to use the book to devise, adjust, and communicate their company's strategy in light of shareholder expectations.
256 pages, Paperback
First published September 1, 2001
About the author
Alfred Rappaport
14 books15 followersMichael J. Mauboussin is Chief Investment Strategist at Legg Mason Capital Management. Prior to joining LMCM in 2004, Michael was a Managing Director and Chief U.S. Investment Strategist at Credit Suisse. Michael joined CS in 1992 as a packaged food industry analyst. He is a former president of the Consumer Analyst Group of New York and was repeatedly named to Institutional Investors All-America Research Team and The Wall Street Journal All-Star survey in the food industry group.
Michael is the author of Think Twice: Harnessing the Power of Counterintuition (Harvard Business Press, 2009) and More Than You Know: Finding Financial Wisdom in Unconventional PlacesUpdated and Expanded (New York: Columbia Business School Publishing, 2008). More Than You Know was named one of The 100 Best Business Books of All Time by 800-CEO-READ, one of the best business books by BusinessWeek (2006) and best economics book by Strategy+Business (2006). He is also co-author, with Alfred Rappaport, of Expectations Investing: Reading Stock Prices for Better Returns (Harvard Business School Press, 2001).
Michael has been an adjunct professor of finance at Columbia Business School since 1993 and is on the faculty of the Heilbrunn Center for Graham and Dodd Investing. In 2009, Michael received the Deans Award for Teaching Excellence. BusinessWeeks Guide to the Best Business Schools (2001) highlighted Michael as one of the schools Outstanding Faculty, a distinction received by only seven professors.
Michael earned an A.B. from Georgetown University. He is also affiliated with the Santa Fe Institute, a leading center for multi-disciplinary research in complex systems theory, and is on the board of directors of Sermo, an online community for physicians."
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Displaying 1 - 19 of 19 reviews
April 6, 2020
Un framework excelente para plantearse qué nos cuenta el precio actual de una empresa sobre los drives que mueven la valoración, conjugando puntos de vista cuantitativo y cualitativo. Merece la pena leerse y reestudiarse.
May 2, 2022
کتاب های Michael J. Mauboussin مجموعی از مطالب کتابهای دیگه است مطلبی جدیدی نداره ولی خیلی دقیق هستند. همه ی نکات قدیمی در یک جا جمع میشن
October 13, 2019
A great value investor needs to be a business analyst who grasps the competitive dynamics of businesses, who knows accounting - the language of business, who can value companies and also understand the psychology of others and himself. An excellent investor needs to be a contrarian. Reading value investing books is often a rehearsal on these key themes. Expectations Investing by Alfred Rappaport and Michael Mauboussin is no different. What is yet distinctive is that they endorse starting the analysis with the most reliable signal of all - the price of the stock.
The reason I picked up this book was that I wanted to improve on how to filter out interesting stocks. Screening may be a quick and easy tool but it's just the first step. Multiples don't tell enough about whether a stock is cheap or not. Research shows that the market takes the long-term view and value companies based on discounted cash flows. In a recent podcast episode featuring Mauboussin, he mentioned that "you have to earn the right to use a multiple" and it ticked my interest. When I found out that he had co-written a book with Rappaport named Expectations Investing I decided to read it.
The book is structured in three parts where the first introduces the reader to the activities needed to grasp the price implied expectations (PIE) - the key theme of the book. The second, which is the most important part of the author's view (on which I agree), deals with how to implement the method. The last part focuses on corporate signals and when they should lead the investor to update the outlook. The authors recommend beginning with an analysis of what the market consensus is about future sales, margins, taxes, and investments. Knowing that leads to a free cash flow estimate. Discounted to today, it tells the investor how many years the company is expected to earn a return above the cost of capital. Believing the market is misjudging what the company should reasonably produce in the future, based on a historical analysis or through having special insights about the company and industry, it may be an interesting prospect.
This is where the hard works starts. Will the break from consensus come from unexpected volume growth, a better price and mix, cost efficiencies, barriers to entry or something else? Chapter nine of the book is great for the researcher as it describes the key drivers for physical-, service- and knowledge businesses. Another aid is the concept of the "turbo trigger". If growth in sales is most likely to impact the value of the company, the focus should be on the factors leading to higher sales. What if management is fraudulent? Well, to study its past actions and if the management incentives are aligned with the shareholders are always important. Lastly, and maybe most crucially, beware of psychological biases.
The best piece of the book in my view is a case study of the computer company Gateway which summarizes much of the ideas in the book and that can be used as a template for your security analysis. I have already incorporated some of it in my work as I used the example on a company I was interested in while reading the book. To test concepts of a practical book while reading, is arguably the best way to learn. There is also a website for the book with case studies and free material (www.expectationsinvesting.com).
If I were to mention something negative about Expectations Investing it is that the authors use a lot of technical terms that are hard for the beginner to grasp. That is no issue for the more experienced investor though. The authors’ main idea is that it's better to start with the price, which is a contrarian view as most value investors highlight the risk of anchoring on the price. On the other hand, time is a scarce resource and putting a lot of effort into researching stocks that are priced for perfection seems like a waste. Both methods have their drawbacks and are both hard but having read the book, I have tilted my process a bit in favor of Rappaport and Mauboussin's approach.
Niklas Sävås, October 13, 2019
The reason I picked up this book was that I wanted to improve on how to filter out interesting stocks. Screening may be a quick and easy tool but it's just the first step. Multiples don't tell enough about whether a stock is cheap or not. Research shows that the market takes the long-term view and value companies based on discounted cash flows. In a recent podcast episode featuring Mauboussin, he mentioned that "you have to earn the right to use a multiple" and it ticked my interest. When I found out that he had co-written a book with Rappaport named Expectations Investing I decided to read it.
The book is structured in three parts where the first introduces the reader to the activities needed to grasp the price implied expectations (PIE) - the key theme of the book. The second, which is the most important part of the author's view (on which I agree), deals with how to implement the method. The last part focuses on corporate signals and when they should lead the investor to update the outlook. The authors recommend beginning with an analysis of what the market consensus is about future sales, margins, taxes, and investments. Knowing that leads to a free cash flow estimate. Discounted to today, it tells the investor how many years the company is expected to earn a return above the cost of capital. Believing the market is misjudging what the company should reasonably produce in the future, based on a historical analysis or through having special insights about the company and industry, it may be an interesting prospect.
This is where the hard works starts. Will the break from consensus come from unexpected volume growth, a better price and mix, cost efficiencies, barriers to entry or something else? Chapter nine of the book is great for the researcher as it describes the key drivers for physical-, service- and knowledge businesses. Another aid is the concept of the "turbo trigger". If growth in sales is most likely to impact the value of the company, the focus should be on the factors leading to higher sales. What if management is fraudulent? Well, to study its past actions and if the management incentives are aligned with the shareholders are always important. Lastly, and maybe most crucially, beware of psychological biases.
The best piece of the book in my view is a case study of the computer company Gateway which summarizes much of the ideas in the book and that can be used as a template for your security analysis. I have already incorporated some of it in my work as I used the example on a company I was interested in while reading the book. To test concepts of a practical book while reading, is arguably the best way to learn. There is also a website for the book with case studies and free material (www.expectationsinvesting.com).
If I were to mention something negative about Expectations Investing it is that the authors use a lot of technical terms that are hard for the beginner to grasp. That is no issue for the more experienced investor though. The authors’ main idea is that it's better to start with the price, which is a contrarian view as most value investors highlight the risk of anchoring on the price. On the other hand, time is a scarce resource and putting a lot of effort into researching stocks that are priced for perfection seems like a waste. Both methods have their drawbacks and are both hard but having read the book, I have tilted my process a bit in favor of Rappaport and Mauboussin's approach.
Niklas Sävås, October 13, 2019
March 20, 2016
Avoid this book. The title is very misleading!
The title makes us think that we will be able to reverse-engineer the DCF assumptions, which the market is pricing-in for a particular stock. That's not what the authors actually tell us here.
They are asking us to look at consensus analyst estimates from some data providers like Bloomberg. Seriously?
Market prices are not just a reflection of sell-side analyst estimates. More than that, they reflect the opinions of the buy-side.
I got so irritated and put down the book half-way. I regret spending time on this book (forget the money spent).
The title makes us think that we will be able to reverse-engineer the DCF assumptions, which the market is pricing-in for a particular stock. That's not what the authors actually tell us here.
They are asking us to look at consensus analyst estimates from some data providers like Bloomberg. Seriously?
Market prices are not just a reflection of sell-side analyst estimates. More than that, they reflect the opinions of the buy-side.
I got so irritated and put down the book half-way. I regret spending time on this book (forget the money spent).
September 20, 2019
Offers a fundamental framework to evaluate performance based expectations of the company to properly value of a stock in the long term. Her is a key distinction: long term.
Touching several components of classic investing theory like intrinsic value and competitive analysis, the authors expand into modern investing in topics like exploration of behavioral finance bias, share buybacks, performance options and M&A.
Perhaps a one line summary would be: "The key to successful investing is to estimate the level of expected performance embedded in the current stock price and then to assess the likelihood of a revision in expectations.”
A must have.
Touching several components of classic investing theory like intrinsic value and competitive analysis, the authors expand into modern investing in topics like exploration of behavioral finance bias, share buybacks, performance options and M&A.
Perhaps a one line summary would be: "The key to successful investing is to estimate the level of expected performance embedded in the current stock price and then to assess the likelihood of a revision in expectations.”
A must have.
January 17, 2020
First line of chapter 3 summarizes the book: “expectations investing rests on two simple ideas: First, you can read stock prices and estimate the expectations that they imply. Second, you will earn superior returns only if you correctly anticipate revisions in those price-implied expectations.”
Ok so fundamentally this is true. Prices reflect the expectations the market has for future cash flows. But investing the way outlined in this book, even with all the explanations given, seems sub optimal. I prefer the munger approach: buy a great biz at a fair price and don’t sell it as long as its great.
I didn’t love this book, but I still love Mauboussin.
Ok so fundamentally this is true. Prices reflect the expectations the market has for future cash flows. But investing the way outlined in this book, even with all the explanations given, seems sub optimal. I prefer the munger approach: buy a great biz at a fair price and don’t sell it as long as its great.
I didn’t love this book, but I still love Mauboussin.
February 23, 2021
This was a surprisingly weak book from Mauboussin. Although I must admit that I'm not sure about the division of the chapters between the two authors. The repetition of self-coined words was very annoying, and the argument that market does not care about e.g. P/E and values every company with a DCF was just laughable. In the part on M&A things were also made unnecessarily complicated, perhaps to pat the egos of the authors. Reverse DCF, while not novel and with some unclear parts, and particularly the sections on real options and ESOs were useful, however.
June 29, 2017
Greatest gripe is that expectations decomposition only accounts for 3-4 chapters of the book. I found the middle 1/3 of the book to be worthwhile. The first third is quick summaries of basic investment concepts. The last third takes a brief look at employee stock options, buybacks (good chapter), and m&a. Huge fan of Mauboussin, but was hoping for more on decomposing expectations.
September 6, 2017
Bit of a letdown actually. The framework for reverse engineering the stock price was not very new. However where the book actually contributed was in details of incorporating ESOP, deferred taxes, M&A analysis, buybacks etc. I learned things on those segments which has not been covered in any other book.
January 20, 2020
I found this to be a challenging read. Implementing to techniques covered in the book would be a lot of work, and there would still be a lot left to guesswork. I did find a few useful points which could come in handy in company analysis.
An updated edition, (without the reference to Enron and the testimonial from Enron CEO Jeff Skilling) might be in order.
An updated edition, (without the reference to Enron and the testimonial from Enron CEO Jeff Skilling) might be in order.
July 27, 2017
It gives a different dimension about investing , the author is good and that's what makes the book tick. Worth the penny and is a long term reference book you can read and re read it each time you get a different perspective.
September 13, 2020
The concepts explained in the book are evergreen and apply to all sectors. I was able to use some of these concepts in making some investment decisions in the recent past.
The concepts have been explained with appropriate use of mathematics and most of the concepts have been touched in detail.
The concepts have been explained with appropriate use of mathematics and most of the concepts have been touched in detail.
June 21, 2017
Nothing new in this book.
May 22, 2020
Couple of ideas are different from other investing books.
December 1, 2016
This book was required reading in my graduate program. Not sure how I feel about it, except that it has a preachy vibe to it. It reminds me of the time I picked up The Paleo Diet, hoping to learn about the science behind a processed-food-free diet. Instead I got a gimmicky fad diet book telling me that I could lose weight fast. The weird vibe is in odd juxtaposition to some quality ideas regarding company analysis.
There are some things I don't understand in the book, and I'll probably need to hash through some analysis before it begins to make sense. However, the most confusion stems from the following: the book claims that market expectations can be reversed engineered just by analyzing the current stock price of a company. However, there are so many variables that go into the valuation, I haven't figured out which variables to set at consensus levels, and which variable to float as the market-price-derived expectation. Do I hold sales growth & required return steady and float drive the time horizon? Or, do I set the time horizon & rate of return and float sales growth?
There are some things I don't understand in the book, and I'll probably need to hash through some analysis before it begins to make sense. However, the most confusion stems from the following: the book claims that market expectations can be reversed engineered just by analyzing the current stock price of a company. However, there are so many variables that go into the valuation, I haven't figured out which variables to set at consensus levels, and which variable to float as the market-price-derived expectation. Do I hold sales growth & required return steady and float drive the time horizon? Or, do I set the time horizon & rate of return and float sales growth?
November 16, 2016
Be aware of price implied expectations, and based on price implied expectations which are the value drivers for a company. Finding the drives if the share price will tell you where to focus your research efforts for finding potential expectations revisions.
December 14, 2013
good one
February 24, 2016
Successful investors understand what is implied (e.g., high or low expectations) in a stock price. Worth reading
Want to read
July 25, 2018This book gives framework to figure out expectations built into prices and identify if stock is overvalued, undervalued or reasonable.
URL to buy book (from Amazon.in): Expectations Investing: Reading Stock Prices for Better Returns (Amazon.in)
URL to buy book (from Amazon.in): Expectations Investing: Reading Stock Prices for Better Returns (Amazon.in)
Displaying 1 - 19 of 19 reviews