stocks

This book should be required reading for every active investor today. Too often pundits throw out terms like market leader,growth stock, value stock, recession resistant as reasons to buy a stock, and try to predict where the "market" will go for the next six months. Expectations Investing will help you learn to throw away these lazy investor labels and instead provides a framework for evaluating a particular stock in terms of what the current price is saying about how good or bad the future for the company may be and whether it merits your purchase or sale. You will learn that every stock, market leader or not, has a whole set of assumptions embedded in the current valuation- this book will help you learn to think in these terms and evaluate whether those assumptions embedded in the current price are reasonable. The book debunks some popular myths and provides highly illustrative examples that make some technical issues easy to understand. For the pro, coverage of executive compensation, option analysis as well as key chapters on competitive strategy and other operating issues will definitely stimulate the thought process. At the same time the basics of valuation are covered in an easy to read fashion. Finally, the Notes section itself can lead the intellectually curious to a "pot of gold" of information. Turn off the business TV and put your popular financial magazine on the coffee table and read this book instead !

"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). If you are not an MBA, the profoundness of the ideas might be lost on you in the rat-a-tat-a-tat rapid fire presentation. Also, you will appreciate this book better if you have some conceptual understanding of corporate finance, such as cost of capital issues.

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.