Expectations Investing: Reading Stock Prices for Better Returns

Authors Alfred Rappaport and Michael J. Mauboussin say that a traditional focus on current earnings and price-earnings multiples does not correspond with how the market ultimately prices stocks. Expectations Investing introduces a new method for valuing stocks: The stock price itself contains the most relevant information about how the market expects a company to fare. Their price-implied-expectations (PIE) method focuses on the "discounted cash-flow model but starts with the price and then solves for expectations." As an example of how the PIE method works, the authors provide a detailed case study of PC maker Gateway. A companion Web site, Expectations Investing, contains many useful resources such as tutorials, chapter excerpts, and an interview with the authors.