Expectations Investing - Missing Timing
I'm reading Expectations Investing and really like the framework. The one thing that the book doesn't seem cover is timing, which is a huge part of execution. It just assumes it takes x amount of years for the stock to reach the expected value. They assume two years in one example and one year in another where then they continue to hold for returns equivalent to the cost of capital (also doesn't make sense to me - why would you hold a stock that you forecast has no outperformance?).
I'm assuming the missing piece here is a catalyst path to make analysts/market realize they need to make revisions. My issue with this is that these catalyst paths are often much faster than the 1 year+ assumptions in the book, and the market seems to revise estimates based on new information fairly quickly.
Does that mean this is really only a good framework for shorter term investing style like the pods and not going to work as much with LOs or some SM with longer holding periods?
Bumping because I have been thinking about the same thing - I am struggling to imagine a thesis which would take 1+ year(s) to price in, as markets appear to price most things in within a couple quarters
It is veeeeery hard to come up with a variant view on anything 2-3 years out. If you're capable of say calling the AI mania in 2022 you will mint money, but it's so very hard.
And then of course, stocks often don't move on specific catalysts. AAPL's multiple went from 20x to 10x to 35x for no big reason. You gotta be ready to accept there is A LOT of randomness in financial markets, even efficient ones.
I read it a few years ago. The premise of the book isn’t to cover all things on how one should invest. He’s focussed on expectations gap specifics.
Now, I love what Michael Mauboussin writes, I usually come away feeling like I’ve learned something, but he’s taken a concept of what could’ve been a 10 page document (and he’s released the short version as well) and monetized the concept and turned it to a book which repeats the same thing in different ways (like most business books).
I discussed this book with a Citadel PM a few years ago. He complained saying “I hire these IBD analysts but it takes them a long time to grasp the concept of a good company ≠ a good stock”. As such this book fills a useful purpose.
I do believe there are secular longer-term alpha pockets in the markets if you have duration edge and don’t need to manage drawdowns. But the timing element of that type of investing is irrelevant in isolation, it needs to be mixed with price. If it reaches your return hurdle in 3 days, 3 months or 3 years your thesis has played out. Market dynamics doesn’t care about someones specific investment horizons.
Investing is a “meta-science” and applying one mental model (timing, expectations, etc) or whatever concept alone rarely works. It’s best applied when we apply rolling forward views that are constantly refreshed and updated to market realities, not stale views we formed in 2022 on 2025E. Especially in this day and age where business lifecycles are shorter and more rapid then ever before due to technological advancements quicker product roll-outs / route-to-market strategies.
Thanks for the response! I agree with your points around the market dynamics not caring about investment horizons and that thesis play out based on achieving return hurdles/expected value and not timing. However, this leads back to my initial question. If we consider beyond the concepts of the book, most PMs will want to know the time period when your thesis will play out and I guess this is where I struggle. I thought that the upcoming catalyst path for a stock provided that information because investors would incorporate seemingly new information into their estimates. However, when you phrase it like you did in your response, it seems like it is much less certain. Obviously I am not going to complain if the thesis plays out sooner than expected, leading to good returns. It may raise a few red flags if you were expecting a longer holding period though. I guess my question is how do you pitch a thesis and investment timeline with any sort of confidence if it is random whether it plays out in a few months vs a few years?
Firstly, I think this is the art part of the job and not a science, so no right or wrong answers on this.
Now to your question: Imo most (not all) mispriced opportunities don't suddenly reprice on a single time defined catalyst - they follow some type of S-curve where early positioning captures the gradual market recognition phase, and depending on prior moves either a steep gain around key catalysts or px exhaustion as take profit weighs on the shares, followed by flattening as the narrative gets fully priced.
So, with that in mind, what’s a good framework for timing considerations? Consider framing the timing element of your thesis as a series of probability weighted checkpoints that validate/enhance the thesis rather than hard deadlines + confidence in said deadline.
Think of it like building evidence in a court case - each data point strengthens conviction and drives incremental position sizing adjustments, not just waiting for the verdict. You're constantly updating your Bayesian priors as new information comes in - every earnings call, every competitor data point, every market structure shift. This dynamic probability weighting drives both conviction and sizing decisions.
E.g.: “Here's our entry point where expectations are mispriced, these are the 3-4 key milestones over next 6-12 months that drive recognition leading up to the catalyst. This is how we'd dynamically size around these points." The key is demonstrating you understand both the fundamental story AND how the market will eventually come to recognize it.
When you're managing real money, you need rolling 3-9 month views that capture what's being priced in over time without major drawdowns. The path dependency matters as much as the end thesis - you can be right on the destination but get killed on the journey if you're not thoughtful about position construction (which is a derivative of timing).
After you’ve read Expectations Investing, consider reading ‘Thinking in Bets’ by Annie Duke. It’s not about ‘Investing’ per se, but I found it a good read on decision making under uncertainty.
Wow, I'll be honest. I was not expecting a useful answer because like you mentioned, it is more art than science here. But this is probably as clear as an answer as anyone could give on the subject. I can essentially implement a step-by-step process based on your response. Thank you!
Also, thanks for the recommendation. I finished Expectations Investing, so I'll look for that now.
Glad it's useful.
At the analyst level, timing is the volatility and path of street estimates. Can you time that? If so, you’re golden.
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