One Idea Worth Compounding — quit predicting and start expecting (expectations investing)

Hey friends — Joe here.

💡 One Idea Worth Compounding lands every Thursday. One framework, one book, one conversation — explained plainly enough to act on this weekend.

Nothing here is advice. Just how I think about it.

Most people analyse a stock by asking: is this a good company?

It's an important question, but it doesn't answer the valuation part of the equation.

Here's the method I use instead. It's called expectations investing — from the book of the same name by Alfred Rappaport and Michael Mauboussin — and switching to it changed how I look at every position I hold.

The problem with the normal way of valuation

Ordinary research runs forwards. You forecast the company's future — revenue growth, margins, how much it reinvests — add up what that future is worth, and compare it to the price.

Notice what comes first: your prediction.

And that's exactly where the wishful thinking hides. You like the company, so growth stays high a year or two longer. You nudge the margin. Each assumption is defensible on its own, and the answer comes out roughly where you wanted it. You've built a spreadsheet that agrees with you.

The flip

Expectations investing runs the other way.

You start with the price — the one number in the whole exercise that isn't your opinion — and you ask: what would have to happen for this price to be exactly right?

Then you judge whether that is believable.

Think of a betting market. A horse's odds don't tell you whether it'll win. They tell you what the crowd believes. A sharp bettor never asks "is this a good horse?" They ask "are the odds wrong?" A brilliant horse at short odds is a bad bet. A decent horse at long odds is a good one.

A share price is the odds board. The question was never whether the company is good.

How to actually run it

Three steps, and you can do a rough version in an afternoon.

1. Read the forecast in the price. Work backwards until you can state the market's assumption in a sentence — this price assumes growth falls to 3% within five years and stays there.

2. Check it against reality. Not against your hopes — against what the business is actually doing right now. A price assuming growth stops in eighteen months, attached to a company that has grown double digits for a decade, is a claim that needs evidence.

3. Model three futures. A low case, a base case, a high case. Put rough odds on each and weigh them. Now you have an expected value to set against the price — and, more usefully, you can see how much of your answer depends on one judgment call.

You don't have to predict the future. You only have to decide whether the market's prediction is reasonable.

That's a far smaller, far more honest question.

On Saturday you saw me run exactly this on Adobe: the price assumed growth collapsing within five years, which didn't match a company posting 13% growth. That mismatch was the entire trade.

Keep growing!

Joe

The Income Stack runs three times a week — 📊 Trades on Saturday, 💡 One Idea on Tuesday, 🛠️ The Solopreneur Stack on Thursday.