Expectations Investing: Reading Stock Prices for Better Returns by Alfred Rappaport, Michael J. Mauboussin (2001)

This surely must be an excellent book, as it is endorsed by Jeff Skilling of Enron "fame", and throws in a good word for Enron as the reinventor company. But joke aside, the book starts out with an interesting idea, instead of the usual calculations (read pulling it out of a hat, or maybe from a body part a bit lower) trying to determine a correct valuation of the company, could we go backward from the stock price, as established by the market, to the expected valuation, and make judgement calls on the validity of those expectation. The trouble is that there are a whole lot of assumptions need to be made on the current and future state of the company, and knowing those facts can be very hard even for insiders (if one believes the "they all just did this behind my back" defenses in cases like Enron), and it is definitely even harder for an investor learning this information from annual reports and other observations. One should also assume, that similar approaches are already used with all those mutual funds there, who can throw a whole lot of analyst time and processing power trying to figure out these numbers, and still arrive to mediocre investment returns when compared to market averages. Case in point is the Gateway case study as presented in the book, which, after a whole lot of pages of calculations and assumptions, arrives to three prices for the company, from which one would be expected to select the right one to use, based on your expectations of the expectations of the market, which does not take us very far from acting on the perceived random behavior of the market. Gateway itself was purchased by Acer for $1.90, which is well below of any of the expectation price ranges as calculated in this book. There are also some chapters offering generic discussions on how mergers and acqusitions, share buyback and executive compensation influences the perceptive and real outlook of companies. Do not expect much reading this book.

No comments: