Expectations Investing.

• Author: Seely, Michael
• Position: Director Library

By Alfred Rappaport and Michael J. Mauboussin

Published by Harvard Business School Press, Boston, Mass., 226 pages, $29.95

AL RAPPAPORT has written a new book, Expectations Investing: Reading Stock Prices for Better Returns, with Credit Suisse First Boston's equally accomplished (though in somewhat different realms) Michael J. Mauboussin. It belongs on your bookshelf.

Expectations Investing (El) builds on two ideas: first, that one can read investor expectations into stock prices; and second, that one can only beat the market by correctly anticipating changes to those price-implied expectations. While this sounds like, and is, an investing book, it has great power for the corporate executive and board member.

The authors point the reader at precisely where to look for -- and how to assay -- the relative significance of different revisions to expectations and thereby demystify the price-setting process. That they do so by breaking down the silos that typically gird finance, competitive analysis, investor relations, and behavioral science is unique; that they do it so well is truly distinctive.

Everyone on Wall Street (Mr. Mauboussin, for example) wants to find cheap stocks; every company wants to avoid being one. An incredibly large sum is spent to do both -- by Wall Street on the billions of dollars spent for investment research, trading and the like, and by companies to court Wall Street favor. A large body of knowledge suggests that markets are rather adept (in part due to that spending) at setting individual valuations where they belong, given the available information. But many of us sometimes have trouble hearing what the market is telling us, perhaps because we lack an objective way to decode those expectations and to challenge them in a constructive manner. Hence, strategic investor relations/value enhancement efforts can be impaired by subjectivity and false assumptions.

Shareholder value is about doing the things that investors esteem; remarkably, much confusion seems to yet prevail about precisely what investors revere. Just look at the quixotic fixation on quarterly earnings per share and on meeting or surpassing the "whisper" number, at the growing volume of market commentary by telegenic broadcasters consumed by anecdote, at the cumbersome and distracting practice of grouping companies within "growth," "income" or other investment "styles," and at the awkward and stilted prose that emerges when corporate communication becomes...