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Expectations Investing [Hardcover]

Alfred Rappaport , Michael J Mauboussin
4.0 out of 5 stars  See all reviews (20 customer reviews)

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Book Description

Sept. 24 2001
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.

Alfred Rappaport is the Leonard Spacek Professor Emeritus at Northwestern's Kellogg School and is Shareholder Value Adviser to L.E.K. Consulting. He originated the Shareholder Scoreboard for the Wall Street Journal. He can be contacted at al.rappaport@expectationsinvesting.com. Michael J. Mauboussin is a Managing Director and Chief U.S. Investment Strategist at Credit Suisse First Boston. He is also an Adjunct Professor at Columbia Business School. He can be contacted at michael.mauboussin@expectationsinvesting.com.

Visit the book's dedicated Web site at: www.expectationsinvesting.com

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Product Description

From Publishers Weekly

Instead of focusing on the short term--earnings per share, price-earnings multiples--Rappaport (Creating Shareholder Value), formerly a professor at Northwestern's Kellogg School of Management, and Mauboussin, chief investment strategist at Credit Suisse First Boston, recommend "expectations investing," which "starts with the current stock price and uses the discounted cash-flow model to `read' what the market implies about a company's future performance." They discuss sample companies (Gateway), historical patterns, competitive strategies and share value. Though they expertly simplify a complex topic, beginners may find the book overly technical. However, the authors' credentials, a national interview campaign and author appearances should attract deserved attention. Tables.

Copyright 2001 Cahners Business Information, Inc.

From the Publisher

 Offers a more practical and effective alternative for identifying value-price gaps--the key to superior returns.
 Teaches how to value stocks in the new economy, interpret current prices, and determine whether the company's managers are on track.
 Practical and teachable, like The Balanced Scorecard.
 Introduces a unique Shareholder Value Added (SVA) roadmap for tracing the process of value creation from the basic economic forces that affect a company's resulting value drivers.

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Customer Reviews

4.0 out of 5 stars
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Most helpful customer reviews
1 of 1 people found the following review helpful
2.0 out of 5 stars A Different Approach Nov. 29 2003
Stock market investing books usually come in two flavors.
The first group of authors tell you to look for certain price and volume patterns; that the stock price depends on those patterns because those patterns are a reflection on human behavior.
The second group of authors tell you to look for certain ratios in the financial statements; that the stock price depends on those ratios.
Then there's this book, which tells you that the price could depend on a lot of things, like mergers and acquisitions and the synergy they generate, executive compensation, competitive strategies, stock buybacks, etc. But they don't tell you how to calculate those factors into the stock price. The book is a good book which certainly provokes thought. And it's probably good for finding stocks for the long term investor. But for me, it's a little too impractical. And a little too academic intellectual guru voodoo. When I have money at risk, and I have to make quick decisions (which can affect my net worth), I like to keep things simple and easily measurable which technical and fundamental analysis allows me to do.
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3.0 out of 5 stars Embedded Risks July 8 2002
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.
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5.0 out of 5 stars The Investing Bible April 5 2002
By A Customer
When I started working on Wall Street ten years ago, I thought my colleagues would be fantastic stockpickers who used intelligence, foresight, and brilliant paradigms to pick great stocks.
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.
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5.0 out of 5 stars Strongly Recommend! April 1 2002
By Satya
"Expectations Investing" presents a powerful idea - From a company's stock price, derive what the market is expecting of the company's performance. Then, based on your own expectations, decide if the stock is a worthy investment. One might say, isn't this what investors do all the time, using multiples like P/E? The book talks about the drawback of such multiples. Then it presents a clear and elegant framework to identify the true drivers of a company's value. You need to perform a strategic analysis of the company and industry to identify the plausible ranges for these value drivers. You can see where your assumptions stand with respect to market expectations (which you reverse engineer from the stock price and consensus estimates for future performance). You assign probabilities to various outcomes based on your convictions, and decide to buy/sell.
In 195 pages, this book presents a bunch of insights. The presentation on valuing a company's stock options, as well as discussion of value capture by buyers/sellers in mergers and acquisitions, are the clearest I've seen in any finance/valuation book. The discussions on incentive compensation, as well as management signals in share buybacks, are also quite impressive and accessible to the general reader. The accompanying website for this book is highly complementary, and presents excel models for all topics covered. I adapted them for a sample company and was quite delighted! While DCF valuations are not every investor's cup of tea, this book goes the farthest in trying to make its DCF-based framework manageable by the average person.
Now for the caveats which I hope are minor - A couple of earlier chapters pack the gist of several MBA classes (corporate finance, strategy, behavioral finance).
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Most recent customer reviews
3.0 out of 5 stars Recommended by Enron!
I haven't read the book but I saw an unintentionally funny quote on the book jacket. Amongst other people praising the book and urging you to buy it, there is a quote from one... Read more
Published on Sept. 2 2002
5.0 out of 5 stars Expectations Investing: Reading Stock Prices for Better Retu
I used to always wonder how do investment analysts evaluate stocks.Buffett never beleived in P/E nor P/S or P/CF. Read more
Published on July 9 2002
2.0 out of 5 stars can't really see the difference
totally agree with one of the reviewers that this book hasn't made valuation any easier, or more accurate, it's good in its review of the various value drivers and competitive... Read more
Published on April 3 2002 by Seeker
2.0 out of 5 stars This is *not* a quant/behavioral finance book....
This book starts off on the premise that 1) companies can manipulate eps but not cashflow and 2) rather than engage in all sorts of scenario analysis, look at the securities price... Read more
Published on Feb. 19 2002
5.0 out of 5 stars heard the stuff, read the stuff, and lived the stuff
Mauboussin was far and away the best professor I had at Columbia Business School. His security analysis course is consistently rated tops by second year students at CBS and I... Read more
Published on Feb. 4 2002 by Michael Benevento
5.0 out of 5 stars An investor's guide on how to approach the investing process
This book is a must read for anyone that invests in the market and wants to make consistent gains in his/her portfolio. Read more
Published on Jan. 23 2002 by Sam
5.0 out of 5 stars Excellent read
Rappaport and Mauboussin expertly utilize the often misapplied DCF model to identify and analyze market assumptions that determine stock price. Read more
Published on Jan. 20 2002 by Elizabeth Spiers
3.0 out of 5 stars overpromising, underdelivering
The book looks very much like Rappaports earlier book Creating Shareholder Value, but from a different angle. The bottom line remains the same. Read more
Published on Jan. 13 2002 by D. Simons
2.0 out of 5 stars does not bring much to the party
I read this book with great expectations, but it does not add much value. It is a compilation of ideas that are better explored in other books. Read more
Published on Dec 8 2001
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