Expectations Investing: Reading Stock Prices for Better Returns Paperback – February 18, 2003

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!

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.

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.

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