Price-implied Expectations aka The Importance of Reverse DCFs
After my interview with James Montier, I received several emails asking for additional information on reverse dcfs. Luckily we have wonderful readers, one of them named Kevin, who has emailed me a paper on the use of reverse dcfs. I recommend reading this as it follows the Mauboussin Rappaport model from the book Expectations Investing.
Excerpt (Via Down Jones)
Rappaport and Mauboussin (2001) introduce the idea of price-implied expectations. They argue that the approach of deriving intrinsic value of the firm ignores important information embedded in current stock prices. They, therefore, propose to compute the implied parameters from current market value. This section next briefly summarizes what other information might be reflected in current market prices and then outlines how one can impute parameters from market prices. Finally, Required Business Performance is introduced.
Whatever the view on efficient markets, most agree that prices reflect, albeit imperfectly, publicly available information as well as private information. While individual investors can differ in their views on the firm value, they can be more or less bullish on any given stock, the market price observed at any point in time reflects the views of many different
investors. The source of individuals’ disagreement in assessment of value is their interpretation of public information and possibly any private information that they may have.