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Excerpts from the Book > Chapter 9

Chapter 9 : Across the Economic Landscape

Excerpt from Chapter 9

Tectonic shifts in stock market value—especially owing to the gyrations of technology stocks—have prompted some investors to suggest that we need "new rules" to understand value. We emphatically disagree. Fundamental economic principles endure, and they are sufficiently robust to capture the dynamics of value creation across all types of companies and business models. The principles of value creation—which are central to the expectations investing process—are the ties that bind all companies.

Why, then, all the talk about new rules and new paradigms? First and foremost, investors find that traditional yardsticks, like price-earnings multiples, no longer explain what's happening in the market. They then go on to use proxy measures (e.g. market value per subscriber, market value per page view) that they believe better represent how the market values various industries. In reality, it's not that the market "values" companies in myriad ways—the market's fundamentals valuation model is consistent—it's that the characteristics and properties of businesses vary.

To demonstrate this point, we classify businesses into three broad categories—physical, service, and knowledge—and highlight the distinguishing characteristics of each. We then analyze the value factors that help us identify the most likely sources of meaningful expectations revisions for each of the three categories. What emerges is that expectation investing’s flexible structure allows us to implement it across the economic landscape.

Questions Addressed in Chapter 9

To explore the flexibility of the expectations investing process, Chapter 9 answers the following questions:

  • How can we intelligently classify different businesses based on their different sources of competitive advantage?
  • How do physical, service, and knowledge companies compare in the following aspects?
    • source of competitive advantage
    • investment trigger
    • scalability
    • products
    • protecting capital
    • economies of scale
  • · How can we understand the primary characteristics of physical, service, and knowledge companies using the lens of the value factors?

Essential Ideas in Chapter 9

  • You do not need "new rules" to understand the sources of value creation across the economic landscape. The basics of expectations investing are sufficiently robust for all companies.
  • While the economics of value creation do not change, the characteristics of various business categories—physical, service, and knowledge—vary.
  • Understanding the business categories through the prism of the value factors can help you anticipate expectations revisions.


Chapter Errata

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