Expectations Investing: Reading Stock Prices for Better Returns

The authors provide a thorough examination of the fundamental analysis process. The first part of the book goes through the steps in creating a discounted cash flow model:Sales growth combined with operating profit margin = Operating ProfitOperating profit - cash taxes = NOPATNOPAT - investments in working/fixed capital = Free Cash FlowFCF discounted at cost of capital = Corporate ValueCorporate Value + non-operating less market value of debt = Shareholder ValueCost of Capital calculation weights debt from equity based on a companies financing mix:CC of Debt = yield to maturity of your debt * (1 - tax rate)CC of Equity = Risk free rate + Beta * (Expected market rate of return - risk free rate of return)Expected rate of return would be backed into by a market index.While this sounds confusing, the book gives easy examples to illustrate their points. From this, the authors speak to other considerations such as Porter's Five Forces and competitive analyses that can be used to tweak a DCF model. Other issues are then extrapolated out of this foundation:- When to take on new investments? (when they yield more than the cost of capital)- How do you add in stock options? (add issued options as debt and future options as expenses)- How do you look at a merger? (Use Shareholder Value at Risk which uses the premium paid / the market value of the acquiror).This all makes the book well worth reading. I admire the focus on first understanding the basics and then seeing how you can tweak the market's expectations to get better returns. I would caution that I do not think this book, nor any other, will lead to superior alpha but this book does a great showing how many considerations must be made for proper valuation.

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 importantly to follow in my decision makings.Armed with this process, and the blackjack winning strategy (you bet big when you have favorable odds), it becomes evdient to me that in the long run, small ivestors can achieve excessive returns. "More than you know" is another book you MUST read. The favorable odds likely happen when investors' indenpendence break down as a result of some legitimate big events.I have read all of the articles written by Michael Mauboussin that can be found on the internet. It is one of the best gifts I give to myself.

I love the sense that its was a thin book. But I never really read a entire paragragh. Haha.. I like finance!

An observation by Peter L. Bernstein that the "fundamental law of investing is the uncertainty of the future" sets up the dilemma undertood by all investors grappling with risk in pursuit of gain. This book starts with the assumption that stock prices represent the market's expectations about a company's future performance. There are "price implied expectations" (PIE) embodied in the price of a stock. Defining the "value drivers" of these expectations, understanding how they contribute to a company's success, and anticipating revisions in their assessed effectiveness for a particular company are critical steps in this investment approach. Determining the PIE for a particular stock from publicly available information involves a range of estimates and a need to understand the industry sector. What we have here is an artful process for estimating value not fail safe equations. This is a challenging book on a number of fronts: Stock prices, we are told, only "tenuously" relate to earnings growth. Rather "changes in expectations about future cash flows" are the key, and earnings and shareholder value may not move together. On the other hand, the notion that a stock price can be deconstructed to establish the expectations investors have for its future seems intuitively clear. This reader would have been more persuaded of the usefulness of this analytical approach with more case studies where the ideas are comprehensively applied. Separate chapters dealing with acquisitions, stock buybacks, and employee stock options - each of which when properly interpreted can modify an investor's expectations - are especially insightful.

Very useful book for people learning about investing and fundamental analysis. I used this book during business school for an investing class - I still find myself referring to it. It breaks down the key drivers of a business and teaches you how to forecast and adjust to estimate the value of a company. I highly recommend the book to those looking to get a unique way to look at investing and some simple guidelines for equity valuation.

There are thousands of books on investing today. Most are not worth the paper they are printed on. We should all be so fortunate that Mauboussin and Rappaport took the time to share their wisdom with us. Simply put, Expectations Investing is one of the finest books on investing you will come across. The essence of the author's approach to investing is deceptively simple--figure out what expectations are embedded in stock prices and cast a judgment on whether the price is too high, too low, or reasonable. This is, of course, easier said then done. However, the authors provide cogent and lucid discussions of all important concepts investors need to navigate today's markets. This is a book that would make John Burr Williams smile.

Very useful book, intelligent

A mi parecer es un libro muy bien explicado para aquellas personas que no tienen una formación en el área de inversión. Tiene ejemplos sobre las herramientas que presentan los autores que son muy útiles para entender el tema.Hay que tomar en cuenta que este libro es solo un acercamiento de varios que existen para analizar el desempeño de empresas.

So much information. Not yet completed the book. Simply amazing. Simply buy this book and you will never regret it. Worth its weight in gold and even beyond. Wish I had read it much earlier. Thanks Ramdeo Agarwal for recommending this.

Having been a reasonably regular reader of Maboussin's thought pieces and papers, I was looking forward to this book. Having read it I was deeply unimpressed. Acknowledging that the book sets out to provide the reader/investor with a framework, the authors base the framework on a set of assumptions that are at the very least debatable and, in hindsight, are questionable. It is the work of economists, academic and theoretical, and is quite high-handed in its dismissal of ideas which do not accord with their own not-so-subtle promotion of the EMH. For example, the idea that securities prices are always calibrated to long term expectations of future cash flows is one that actual money managers would be very surprised to hear. In their dismissal of earnings as irrelevant and misleading, they construct an overly neat and teleological argument which even a causal glance at the price of a share over a single year would be sufficient to puzzle anyone.I could go on but unless you are prepared to accept the Fama-esque arguments made in here that markets are always rational, that prices do not react to the short term but to long-term expectations, that DFC models are robust and the only way to value companies (they don't even really deal with any critiques of DCF models), that earnings are useless mirages and that overly complicated capital modelling (why on earth bother to analyse firms as if they are funded 100% by equity????) combined with DCF models is the best approach to investing then this book really isn't for you.(I always smile when I see analysts or economists advocate retail investors carry out detailed overly-complicated modelling of a firm's financial statements. It is a coin toss that THEY get it right and it just unnecessarily confuses things. Having worked for several banks I can tell you that outside agencies have only the most general idea and understanding of the numbers that the business produces. Quants are quants. They are not right simply because they are quants).The list of people who would not accept the a number of the basic tenets of this book include Buffett, Peter Lynch, Joel Greenblatt (check out his Columbia lectures on just why the above is a load of cr*p), Li Lu, Anthony Bolton, David Dreman...among others. I could go on but the point is that you could listen to actual investors or you could listen to this book.Considering how good his notes can be, Maboussin missed the mark badly with this one.PS check out James Montier and his GMO notes on why a DCF approach is cr*ppy mess and a waste of time

Must read

Excellent book on stock picking and must read for professional money managers.