value
The Expectations Infrastructure
The rule
In the end, a company's worth rests on just three things: how fast sales grow, how much profit each sale leaves, and how much cash it must pour back in to grow.
Where it flips
Boiling a business down to three numbers can fool you into false certainty, treating a rough map like an exact GPS. The fix is to use the three drivers to find the one question that matters. Then argue about the business in plain terms before trusting any figure.
Behind every share price sits a chain. Events in the business change small factors like volume, price, cost and cash needed. Those roll up into three big drivers: sales growth, profit per sale (operating margin), and how much cash it must reinvest. If you learn to trace a story down to these three, you stop being dazzled by headlines. You can see exactly which lever a piece of news actually pulls. The smart move is not to model everything. Find the one driver the market has most likely got wrong, and put your homework there.
A worked example
Aarvi studies a paints maker priced for 18% sales growth forever. She decides the market is wrong only on the profit margin, not on volume. So she spends her effort testing whether a raw-material squeeze will hold margins down. [illustrative]
How to spot it
- ·news that moves only one of the three drivers
- ·a case resting on a single mispriced lever
- ·everything else left at the price the market already assumes
Michael Mauboussin & Alfred Rappaport · Expectations Investing