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Expectations Investing: Reading Stock Prices for Better Returns Kindle Edition
- LanguageEnglish
- PublisherHarvard Business Review Press
- Publication dateFebruary 18, 2003
- File size2813 KB
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Editorial Reviews
From Publishers Weekly
Copyright 2001 Cahners Business Information, Inc.
About the Author
Product details
- ASIN : B01J0FP7JE
- Publisher : Harvard Business Review Press (February 18, 2003)
- Publication date : February 18, 2003
- Language : English
- File size : 2813 KB
- Text-to-Speech : Enabled
- Screen Reader : Supported
- Enhanced typesetting : Enabled
- X-Ray : Not Enabled
- Word Wise : Enabled
- Sticky notes : On Kindle Scribe
- Print length : 250 pages
- Best Sellers Rank: #629,921 in Kindle Store (See Top 100 in Kindle Store)
- #1,015 in Finance (Kindle Store)
- #1,527 in Investing (Kindle Store)
- #2,047 in Business Economics (Kindle Store)
- Customer Reviews:
About the authors
Michael J. Mauboussin is Head of Consilient Research at Counterpoint Global in New York. He is also an adjunct professor of finance at Columbia Business School.
Learn more at www.michaelmauboussin.com.
Photo by Andrew Kist.
Discover more of the author’s books, see similar authors, read author blogs and more
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Sales growth combined with operating profit margin = Operating Profit
Operating profit - cash taxes = NOPAT
NOPAT - investments in working/fixed capital = Free Cash Flow
FCF discounted at cost of capital = Corporate Value
Corporate Value + non-operating less market value of debt = Shareholder Value
Cost 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.
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.
Top reviews from other countries
Hay que tomar en cuenta que este libro es solo un acercamiento de varios que existen para analizar el desempeño de empresas.
For example, the idea that securities prices are always calibrated to long term expectations of future cash flows is one that actual money managers would be very surprised to hear. In their dismissal of earnings as irrelevant and misleading, they construct an overly neat and teleological argument which even a causal glance at the price of a share over a single year would be sufficient to puzzle anyone.
I could go on but unless you are prepared to accept the Fama-esque arguments made in here that markets are always rational, that prices do not react to the short term but to long-term expectations, that DFC models are robust and the only way to value companies (they don't even really deal with any critiques of DCF models), that earnings are useless mirages and that overly complicated capital modelling (why on earth bother to analyse firms as if they are funded 100% by equity????) combined with DCF models is the best approach to investing then this book really isn't for you.
(I always smile when I see analysts or economists advocate retail investors carry out detailed overly-complicated modelling of a firm's financial statements. It is a coin toss that THEY get it right and it just unnecessarily confuses things. Having worked for several banks I can tell you that outside agencies have only the most general idea and understanding of the numbers that the business produces. Quants are quants. They are not right simply because they are quants).
The list of people who would not accept the a number of the basic tenets of this book include Buffett, Peter Lynch, Joel Greenblatt (check out his Columbia lectures on just why the above is a load of cr*p), Li Lu, Anthony Bolton, David Dreman...among others. I could go on but the point is that you could listen to actual investors or you could listen to this book.
Considering how good his notes can be, Maboussin missed the mark badly with this one.
PS check out James Montier and his GMO notes on why a DCF approach is cr*ppy mess and a waste of time