Expectations investing : reading stock prices for better returns

269 Pages·2021·1.005 MB·English

by  Michael J. Mauboussin, Alfred Rappaport

“...a graduate-level course in intelligent investing.”
—HOWARD MARKS
EXPECTATIONS
INVESTING
Reading
Stock Prices
for Better
Returns
MICHAEL J. MAUBOUSSIN
and ALFRED RAPPAPORT
REVISED and UPDATED
Expectations Investing

Columbia University Press
Publishers Since 1893
New York Chichester, West Sussex
cup.columbia.edu
Revised and updated edition © 2021 Michael J. Mauboussin and Alfred Rappaport
First edition © 2001 Harvard Business School Publishing
Paperback edition © 2003 Harvard Business Review Press
All rights reserved
Library of Congress Cataloging-in-Publication Data
Names: Mauboussin, Michael J., 1964– author. | Rappaport, Alfred, author.
Title: Expectations investing : reading stock prices for better returns /
Michael J. Mauboussin and Alfred Rappaport.
Description: Revised and Updated Edition. | New York City : Columbia University Press,
2021. | Revised edition of the authors’ Expectations investing, c2001.
Identifiers: LCCN 2021015960 (print) | LCCN 2021015961 (ebook) |
ISBN 9780231203043 (hardback) | ISBN 9780231554848 (ebook)
Subjects: LCSH: Investment analysis. | Portfolio management. |
Stocks—Prices.
Classification: LCC HG4529 .R37 2021 (print) | LCC HG4529 (ebook) |
DDC 332.63/2042—dc23
LC record available at https://lccn.loc.gov/2021015960
LC ebook record available at https://lccn.loc.gov/2021015961
Columbia University Press books are printed on permanent
and durable acid-free paper.
Printed in the United States of America
Cover design: Noah Arlow
To Michelle
To Sharon

Contents
Foreword ix
Preface xi
Acknowledgments xv
1
The Case for Expectations Investing 1
PART I
Gathering the Tools
2
How the Market Values Stocks 21
3
The Expectations Infrastructure 44
4
Analyzing Competitive Strategy 57
Contents
PART II
Implementing the Process
5
How to Estimate Price-Implied Expectations 87
6
Identifying Expectations Opportunities 97
7
Buy, Sell, or Hold? 118
8
Beyond Discounted Cash Flow 132
9
Across the Economic Landscape 152
PART III
Reading Corporate Signals and Sources of Opportunities
10
Mergers and Acquisitions 171
11
Share Buybacks 190
12
Sources of Expectations Opportunities 207
Notes 221
Index 241
viii
Foreword
aswath damodaran
Some ideas are so powerful, and yet so obvious, that when you
hear them or read about them for the first time, your inclination
is to whack your head and ask yourself why you did not think
of them first. That was my reaction when I first read Expecta-
tions Investing, almost twenty years ago. I was familiar with the
authors, having read Al’s writings on shareholder value, bridging
accounting and value, as well as Michael’s research reports that
blended psychology, statistics, and common sense to deliver new
insights.
As someone who has worked in the valuation trenches for a
long time, the book reframed the question of what a company is
worth, from estimating value, given fundamentals, to backing out
the fundamentals that are embedded in the market price. While
there may be little difference mathematically between the two
approaches, that reframing accomplishes two missions. The first
is that it cements the link between fundamentals and value by
linking what the market is paying for a company to what has to
happen, in terms of operating success, for that price to be justified,
ix