expectations
Expectations, not forecasts
The rule
Do not try to predict the future. Read what today's price already assumes, then ask if that is too hard or too easy.
Where it flips
But reading expectations still rests on a model to work them out backwards. So the same guessing risks apply in reverse. It frames the question well, but it does not remove the need for judgement about the business.
Rappaport flipped the usual task. Instead of guessing sales and margins to find a value, start from the price and work out the performance it already builds in. The reader's job is then smaller and fairer. Just decide whether those built-in expectations are believable for this business.
A worked example
A retailer's price assumes sales must grow at eighteen percent for a decade with margins holding. The reader need not predict anything. Just ask whether an eighteen percent, decade-long run is easy or almost impossible for a chain this size. [illustrative]
How to spot it
- ·a valuation that starts from a forecast rather than the price
- ·no statement of what today's price already assumes
- ·expectations never checked against the company's history or size
Alfred Rappaport · Expectations Investing