Expectations Investing: Reading Stock Prices for Better Returns

Abstract

Investing relies on expectations, and revisions in expectations trigger changes in stock prices. Accurately measuring expectations, therefore, is the key to improving stock selection. Expectations investing requires (1) the development of a conceptual framework, (2) a clear understanding of valuation, including cash flow, the cost of capital, and the forecast horizon, and (3) accurate estimations of price-implied expectations and expectations gaps.