From Publishers Weekly
Instead of focusing on the short term--earnings per share, price-earnings multiples--Rappaport (Creating Shareholder Value), formerly a professor at Northwestern's Kellogg School of Management, and Mauboussin, chief investment strategist at Credit Suisse First Boston, recommend "expectations investing," which "starts with the current stock price and uses the discounted cash-flow model to `read' what the market implies about a company's future performance." They discuss sample companies (Gateway), historical patterns, competitive strategies and share value. Though they expertly simplify a complex topic, beginners may find the book overly technical. However, the authors' credentials, a national interview campaign and author appearances should attract deserved attention. Tables. Copyright 2001 Cahners Business Information, Inc.

FROM THE PUBLISHER

There are plenty of mispriced stocks in the market, but the key to successfully finding them is knowing what to look for. When scouting for mispriced stocks, investors realize that they should be valuing assets according to their discounted future cash flows-but they avoid doing it because of the difficulty of forecasting long-term cash flows. Instead, investors deal with the uncertainty of the future largely by ignoring it, choosing to emphasize suboptimal measures such as current earnings and price-earnings multiples as benchmarks to select stocks.

Expectations Investing offers a unique and powerful alternative for identifying value-price gaps. Rappaport and Mauboussin provide everything the reader needs to utilize the discounted cash flow model successfully. And they add an important twist: they suggest that rather than forecasting cash flows, investors should begin by estimating the expectations embedded in a company's stock price. An investor who has a fix on the market's expectations can then assess the likelihood of expectations revisions. To help investors anticipate such revisions, Rappaport and Mauboussin introduce an "expectations infrastructure" framework for tracing the process of value creation from the basic economic forces that shape a company's performance to the resulting impact on sales, costs, and investment.

Investors who use Expectations Investing will have a fundamentally new way to evaluate all stocks, setting them on the path to success. Managers will be able to use the book to devise, adjust, and communicate their company's strategy in light of shareholder expectations.

Author Biographies: Alfred Rappaport is the Leonard Spacek Professor Emeritus at the J. L. Kellogg Graduate School of Management at Northwestern University and directs shareholder value research for L.E.K. Consulting. He originated the Shareholder Scoreboard for the Wall Street Journal. Michael J. Mauboussin is Credit Suisse First Boston's Chief U.S. Investment Strategist and an Adjunct Professor at the Columbia Business School.

SYNOPSIS

About 75 percent of active investors consistently deliver returns below those of passive index funds. Why? In part, it's because proven methods for valuing assets are too complex to apply-causing investors to rely on commonly used benchmarks such as current earnings and price-earnings multiples that simply don't reflect how the market prices stocks.

Now, leading valuation experts Alfred Rappaport and Michael J. Mauboussin argue that the secret to beating the market stands in plain sight. Embedded in the stock price-the most accessible piece of information in the investment arena-lies all investors need to know about how the market expects a company to perform. By correctly decoding that information, say the authors, investors are on the way to anticipating changes in a company's competitive position that the current stock price doesn't reflect-and making informed buy, hold, or sell decisions before the rest of the crowd. This proven approach, Expectations Investing, holds the potential to change the rules and improve the odds of the stock selection game forever.

The beauty of expectations investing is that it harnesses the power of the market's own tried-and-true pricing model-discounted cash flow-without requiring difficult and often dubious long-term forecasting. Highly practical, the book provides a strategic framework and corresponding tools for using price-implied expectations (PIE) to:

Interpret current prices and anticipate revisions in expectations. Monitor signals from managerial actions such as mergers and acquisitions and share buybacks and estimate their impact on shareholder value. Devise, adjust, and communicate management strategy in light of shareholder expectations.

In addition, a unique expectations infrastructure helps track value creation from the initial triggers that shape performance to the resulting impact on sales, operating profit margins, and investment efficiency.

Universally applicable to public companies across the economic landscape, Expectations Investing will enable professional investors, analysts, and executives to translate heightened uncertainty into lucrative opportunity.

FROM THE CRITICS

Business Week

A fresh approach is promised by a Harvard Business School Press book due in October. Expectations Investing, by Northwestern University emeritus professor Alfred Rappaport and Credit Suisse First Boston strategist Michael J. Mauboussin, suggests investors first gauge the expectations of future cash flow already built into a stock's price instead of forecasting future profits. Judging by an early version of this book, my autumn reading list is already filling up.

Publishers Weekly