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Expectations Investing: Reading Stock Prices for Better Returns Paperback – February 18, 2003
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From Publishers Weekly
Copyright 2001 Cahners Business Information, Inc.--This text refers to an out of print or unavailable edition of this title.
About the Author
Michael J. Mauboussin is chief investment strategist at Legg Mason Capital Management and an adjunct professor at Columbia Business School. He is the author (with Alfred Rappaport) of "Expectations Investing: Reading Stock Prices for Better Returns,"
Peter L. Bernstein, the financial historian, wrote nine books, including the worldwide bestseller Against the Gods: The Remarkable Story of Risk.
Top Customer Reviews
The last decade has taught me that most Wall Street analysts are very intelligent. However, I must report that as a whole, they have *no idea* what they're doing. I'm not sure how it happened, but most investors have come to believe in a hodge-podge of rules-of-thumb that "everyone knows" but nobody can explain. Arbitarily, "growth" investors tell us to "Buy stocks that grow their earnings faster than their P/E multiples!" Just as randomly, "value" investors tell us to "Only buy stocks with low P/E's with lots of book value!" If you try to integrate all these rules of thumbs into a single mental model, you have to make so many exceptions to every rule that your mind feels like Swiss cheese.
In contrast, this book offers a clean, intelligent FRAMEWORK for thinking about investing in anything that produces a stream of future cash flows (including stocks, of course). It's the investing Bible I wish I had when I started my career. It would have shaved years from my investing education, and saved me from numerous migraines.
The book starts with the same first principles you read in your Corporate Finance textbook, makes relevant the practical arcana you learned in Accounting class, and incorporates Porter's and other strategy frameworks into valuation. The book presents a CLEAN and FLEXIBLE way of thinking about stocks. For example, you can apply their approach to Dell from its IPO to today -- and get useful data that would help with a Buy/Sell decision.Read more ›
1. TAKE JUST WHAT YOU NEED. Even though I'm a valuation expert, I thought some chapters of this book stood out as just plain useful. Chapters with great standalone value include: (A) Chapter 8 on Real Options, which develops the only framework for applying real options that I've seen that's intuitive; (B) Chapter 10 on M&A analysis which gives a solid treatment of all deals including often-ignored fixed-value stock deals; and (C) Chapter 5 Appendix on Employee Stock Options which explains how ESOs affect valuation (this is ignored by every other book on valuation). Moreover, I found the tutorials and spreadsheets at the expectationsinvesting.com web site made it easy to apply these ideas without hours of tedious spreadsheet work.
Some chapters may be more or less applicable to various readers. For example, investors may find Chapter 11 on incentive compensation to be more applicable to managers. Also, Chapter 4 is most beneficial to those who haven't read the strategy frameworks of Michael Porter, Clayton Christensen of INNOVATOR'S DILEMMA, and Varian/Shapiro of INFORMATION RULES.
2. USE "EI" TO PICK STOCKS. Chapters 5, 6, and 7 lay out the "EI approach" to investing. Namely, the authors suggest that investors use a DCF approach to reverse engineer consensus expectations from a company's current stock price. Then, the authors suggest you compare YOUR expectations to CONSENSUS/MARKET expectations. If you think market expectations are low, buy the stock. If you think market expectations are too high, sell or short the stock.
At first glance, it might seem that this material has already been covered in McKinsey's VALUATION or Damodaran's valuation library.Read more ›
"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.Read more ›
Most Recent Customer Reviews
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... Read morePublished 23 months ago by dmd
I got a great deal of insight out of another book Mauboussin was involved in: "More Than You Know", and thought this book would be similarly helpful. Read morePublished on January 20, 2014 by polymath
I was looking for a more granular nuts and bolts guide to implementation as opposed to general explanation and theoreticl underpinning which I already understood. Read morePublished on July 4, 2013 by Andrew Cunningham
I love the sense that its was a thin book. But I never really read a entire paragragh. Haha.. I like finance!Published on February 3, 2013 by Chenyang Feng
Why don't average investors use discounted cash flow analyses? Typically, they don't use them for several reasons. Read morePublished on January 23, 2010 by David Merkel
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. Read morePublished on August 14, 2009 by Mariusz Skonieczny
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... Read morePublished on January 29, 2007 by joylands
There is no question stock prices climb and fall based on investors' current perceptions of their future performance. Read morePublished on July 11, 2006 by Craig L. Howe
Seeing the other 5-star reviews makes me wonder, eihter those reviewers are clueless or I might have missed something big. Read morePublished on June 2, 2006 by Shobo