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Excerpts from the Book > Chapter 6

Chapter 6 : Identifying Expectations Opportunities

Excerpt from Chapter 6

We now turn to the second step of the expectations investing process, identifying expectations opportunities. All expectations revisions do not carry the same weight. Some are inevitably more important than others. When you can focus on what matters, you can more efficiently allocate your time in order to increase your odds of finding high potential payoffs.

The most effective way to accomplish this objective is to isolate the value trigger most likely to have the greatest impact on shareholder value. We call this value trigger the turbo trigger. The goal is to increase the odds of finding expectations mismatches—meaningful differences between the currently price-implied expectations (PIE) and future revisions.

Questions and Answers in Chapter 6

To understand where investors are most likely to find expectations mismatches, Chapter 6 answers the following questions:

  • How do we calculate the effect of a value trigger on shareholder value?
  • How do we determine which value trigger is the turbo trigger?
  • How do we establish the leading indicators of value for the turbo trigger?
  • What are the behavioral traps that arise when we use rules-of-thumb to simplify analysis?
  • How do we avoid overconfidence and anchoring when establishing the range of potential expectations revisions?

Essential Ideas in Chapter 6

  • If you know which expectations revisions are most important, you improve your odds of finding high potential payoffs.
  • Four building blocks constitute the foundation for identifying expectations opportunities. Historical results and PIE give us the data, and our analytical tools are competitive strategy analysis, and the expectations infrastructure.
  • Identifying expectations opportunities embodies three steps:
    • Step 1: Estimate high and low values for the sales trigger and calculate the shareholder values that result.
    • Step 2: Select the turbo trigger.
    • Step 3: Refine the high and low turbo trigger estimates and calculate the shareholder values that result.
  • Beware of behavioral traps as you estimate ranges.



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