'"Expectations Investing" is well worth picking up' - "Financial Executive". "Expectations Investing" offers a fundamentally new alternative for identifying value-price gaps, built around a deceptively simple and obvious tool: a company's stock price. The authors walk readers step-by-step through their breakthrough method, revealing how portfolio managers, security analysts, investment advisors, and individual investors can more accurately evaluate established and "new economy" stocks alike - and translate shareholder value from theory to reality. Alfred Rappaport directs Shareholder Value Research for L.E.K. Consulting and is a Professor Emeritus at Northwestern's Kellogg School. Michael J. Mauboussin is Credit Suisse First Boston's Chief U.S. Investment Strategist and an adjunct professor at Columbia University.

Customer Rating:
Summary: Must read for investors who invest in individual companies
Comment: 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.

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Customer Rating:
Summary: An interesting read
Comment: An interesting read for the serious investor. The central tenet of the book might be stated as "investors do not earn superior rates of return on stocks that are priced fully to reflect future performance - even for the best value-creating companies - which is why great companies are not great stocks." This book posits that investors can read market expectations contained in a stock's price and anticipate revisions in those expectations to achieve superior returns. It book provides a detailed, step-by-step way to accomplish this process.

"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." Moreover, the chapters on specific corporate events were interesting insofar as they explain, in greater detail than I had read before, the quantitative analysis that underlies decisions related to mergers, share buybacks, and incentive compensation.

Potential readers should be aware that the authors of this book, like many stock analysts, adhere to the so-called "Capital Asset Pricing Model" school of thought (that the value of a security equals the rate on a risk-free security plus a premium, beta, which is determined based upon the volatility of the security in question). This model is just one of many that investors may use. Moreover, although stock analysts may have access to customers, creditors, competitors, and company insiders, many individual investors will lack those contacts, and thus face some difficulty in determining possible expectations revisions. Even if an investor had access to such information, the developing field of behavioral finance (see Belsky and Gilovich, "Why Smart People Make Big Money Mistakes" as but one example) would caution that investors seeking to implement the methods set forth in this book need to be careful of confirmation bias (tending to view information in a way that supports their pre-determined preferences) and information cascade (too much information), among others.

Lastly, readers should be aware that modeling out the process described by this book requires some math, and the ability to create spreadsheets of middling-level complexity. This is not a "buy low P/E" book - readers will have to do their homework to use these methods. Anyone who isn't looking to put several hours into investigating each stock they are interested in should look elsewhere.

In all, this is a well-written book that makes a very complicated process relatively simple. It is not designed for the casual reader, and implementing the expectations investing process certainly takes considerable work. However, the book provides valuable insights into how analysts function and how stocks are priced by public markets.

However, if forced to pick a well-written, fairly sophisticated book on investing, I'd recommend a few other books ahead of this one, including "Security Analysis" by Benjamin Graham and either of Martin Whitman's books ("The Aggressive Conservative Investor" or "Value Investing").

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Customer Rating:
Summary: A Refreshing Look at Market Performance
Comment: There is no question stock prices climb and fall based on investors' current perceptions of their future performance.

Identify an error in those perceptions; you, as an investor, have uncovered a catapult to superior performance. In Expectations Investing, Alfred Rappaport and Michael J. Mauboussin argue current stock prices express investors' collective expectations. A change in those expectations lies at the heart of investment success.

This is a tall task. Approximately 75 per cent of all active investors deliver returns below those posted by passive index funds. The authors argue poor performance is built on a foundation of poor tool selection, high costs, and short-term vision and style limitations.

They argue investment performance can be improved by following three simple steps:

1. Estimate Price-Implied Expectations. Forget earnings and cash-flow estimates. Long-term discounted cash-flow models market performance.
2. Identify Opportunities. Expectation changes lead to changes in market evaluations. Whether you are looking at innovative technology or value, developed or developing markets, new or old economies, these principles are universal.
3. Develop a Disciplined Buy, Hold or Sell Strategy.

The ramifications of this discipline are they remove three misconceptions from investment thinking:

1. The market is short-term.
2. Earning per share dictate value.
3. Price-earning rations determine value.

This well-written and thought provoking book harnesses the market power of discounted cash flow without requiring difficult and dubious long-term forecasts. It helps the serious investor develop a theory of where he or she is headed, why and more important, the courage to ignore advice that has nothing to do with underlying value.

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Customer Rating:
Summary: Is it just me
Comment: Seeing the other 5-star reviews makes me wonder, eihter those reviewers are clueless or I might have missed something big.
The main idea of the book is that if you can figure out the expectations incorporated in a market price and then evaluate the likelihood that (the more important of) those expectations may be wrong, you may actually find mispriced stocks and thus uncover good investment opportunities. Which I think is a nice idea, but is much easier said than done. The way the authors propose to proceed can be summarized as follows: (i) figure out from publicly available info and analyst reports the main consensus drivers such as sales growth, operating margin, cost of capital, etc., (ii) figure out what forecast period you need for a DCF model based on the consensus assumptions to produce the current market price of the stock, (iii)evaluate if any/which of the assumptions used in the DCF model are likely to be wrong, and based on that, (iv)make a buy/sell/hold decision. The reason this approach doesn't seem to add a lot of value to me is that it essentially consists of evaluating the assumptions used by other analysts (or other "consensus" numbers) to see if they make sense. This is what a lot of investors are already doing, except that it's a notoriously difficult task, and once you've gone through the pain of evaluating the main driving assumptions behind the consensus DCF, you are just a half-step away from building your own DCF anyway.
I'm giving the book 2 stars though for the pretty useful frameworks for thinking about drivers in a DCF model, and for being written in a fairly concise and articulate style.

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Customer Rating:
Summary: Somewhat Basic
Comment: This is a good book for those new to investing or those who feel that they need a more fundamental grounding to their trading activity. If you are a regular reader of multiple business news sources and utilize that information to guide your trading activities, then I would pass on this book.

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