★★★★★
Review
"Expectations investing is based on two simple ideas: First, you can read stock prices and estimate the expectations that they imply. Second, you will earn superior returns only if you correctly anticipate (or actively generate) revisions in those price-implied expectations.”
If you extrapolate the above principle out, it applies to all forms of investing (not just stocks). That’s why I found this book to be a fundamental read (yet still underappreciated / not acted upon by investors?). Similar to how modern-day philosophers dismiss the old stoic books as “too simple”, without acting upon them… Investors treat this book as “too simple”, despite forgetting the basic principles, time and time again.
Key Takeaways
- Value triggers (fundamental blocks, the culminating effect, not the fundamental cause of expectations revisions): sales, operating costs, and investments.
- Value factors: Revenue driven by price, volume and mix. Operating leverage and economies of scale. Cost efficiencies. Investment efficiencies.
- Remember growth at higher cost (than cost of capital) is actually bad news.
- Management’s objective is to create value by making investments that earn a return in excess of the cost of capital. Investors play a different game. They generate superior returns when they correctly anticipate revisions in the market’s expectations for a company’s performance.
- To read expectations properly, you must think in the market’s terms.
- The search for expectations opportunities should primarily focus on the value triggers and the value driver projections they spawn, not the cost of capital or the market-implied forecast period.
- You want to have a variant perception to justify the purchase or sale of a stock. A variant perception is a well-grounded view that is different from what the market reflects.
- If value variability is high, which means that the range of payoffs is wide, then a stock can be attractive or unattractive even if the consensus outcome is the scenario with the highest probability.
Key Notes and Highlights