Buy and sell on expectations revisions
Returns come from correctly anticipating revisions to embedded expectations. A stock being nominally cheap or dear matters less than where expectations move.
Expectations Investing
4 ideas
Market-implied forecast period as competitive advantage
The market-implied forecast period is the number of years of value-creating cash flows, earning above the cost of capital, needed to justify today's price. It measures how long investors expect the company's competitive advantage to last.
Expectations infrastructure: find the turbo trigger
Returns above the market's required rate come only from revisions to expectations, and revisions start with a few value triggers: sales, costs and investment. These flow through operating value factors such as volume, price and mix, operating leverage, economies of scale and cost efficiencies into cash-flow drivers. Find the single trigger with the largest and most uncertain effect on value, and test its range of outcomes against the implied expectation, rather than modeling every line item with equal effort.
Reverse-engineering price into implied expectations
Instead of forecasting cash flows to get a value and comparing it with the price, treat the current stock price as the known output of a discounted cash flow model. Solve backward for the sales growth, operating margins, investment needs and duration of value-creating growth that would justify it. The investment question then becomes whether those embedded assumptions are too high or too low, not what the company is 'worth'.