Stop Forecasting, Start Questioning: A Guide to Expectations Investing
What’s the first thing you do when you get interested in a stock?
If you’re like most people, you start forecasting. You read analyst reports, listen to talking heads on TV, and try to predict how much the company will grow, what its next big product will be, and what its earnings will look like next year. You’re trying to build a story about the future and then decide if the stock is a good buy based on that story.
But what if you’re doing it backward?
What if, instead of trying to predict the future, you started with the present? What if you looked at the stock price today and asked a simple, powerful question: "What does the market believe this company has to do to be worth this price?"
This is the core idea behind Expectations Investing, a brilliant framework developed by author and investor Michael Mauboussin. It flips the traditional investment process on its head. Instead of forecasting, you work backward from the stock price to figure out the performance the market is already expecting. Then, your only job is to decide if those expectations are brilliant or bonkers.
It’s a game-changer because it shifts your focus from the impossible (predicting the future) to the manageable (analyzing the present). Let's walk through how you can use this process right now, using a company we all know: Google (Alphabet).
The Big Idea: The Price is the Starting Line
Think of a company's stock price not as a score, but as a set of instructions. That price—say, $180 per share for Google—is the market's collective wisdom (or madness) boiled down to a single number. It contains a specific set of expectations for future growth, profitability, and cash flow.
Your job isn't to create a new story from scratch. It's to be a detective, uncover the story the market is already telling, and then use your research to poke holes in it or confirm its logic.
The process can be broken down into four straightforward steps.
Step 1: Find the Market's "Expectations Hurdle"
The first step is to translate the stock price into a concrete performance target. We need to figure out what growth rate in future cash flow is "baked into" the current price. This is the hurdle the company has to clear to justify its valuation.
To do this, we use a tool called a Reverse Discounted Cash Flow (DCF) model.
Don't let the name scare you. A normal DCF tries to guess all of a company's future cash flows to arrive at a "fair" price today. It's filled with assumptions. A reverse DCF is much simpler. It takes today's stock price as a given and solves for just one variable: the implied growth rate.
You can find free reverse DCF calculators online, or build a simple one in a spreadsheet. You just need a few key inputs:
Current Stock Price: The starting point.
Free Cash Flow (FCF) per Share: This is the real cash the business generates after all expenses and investments. You can find this in a company's financial statements.
A Discount Rate: This is simply the return investors expect for taking the risk of owning the stock. A number between 8-10% is a common starting point for a stable, large company like Google.
Step 2: Let's Run the Numbers for Google (Alphabet)
Let's make this real. As of mid-2025, Alphabet (GOOGL) has a massive market capitalization. To justify this valuation, the market must be expecting some serious future growth.
Let's imagine we plug Google's numbers into our reverse DCF calculator. The model does its work and spits out a single, crucial number. For the sake of our example, let's say the calculator tells us:
"To justify its current price, the market expects Google's free cash flow to grow by 11% per year for the next ten years."
There it is. That’s our "Expectations Hurdle." The game is no longer about abstract forecasting. It's about answering one focused question: Is 11% annual growth for a decade a reasonable expectation for a company of Google's size and maturity?
Step 3: Analyze the Expectations (This is Where You Win)
Now we put on our business analyst hat. We need to break down that 11% growth target and see where it could possibly come from. We do this by looking at the company's fundamental "value drivers."
For Google, we might ask:
Sales Growth: Can Google grow its revenue fast enough to support 11% FCF growth?
Search: This is their cash cow. Can it continue to grow, or is it reaching saturation? How will competition from AI-powered search engines from competitors affect its dominance?
YouTube: It's a giant, but how much more can they monetize it through ads and subscriptions?
Google Cloud: This is a huge growth engine, but it's a brutal market. They are competing head-to-head with Amazon's AWS and Microsoft's Azure. Can they win enough market share to move the needle for a trillion-dollar company?
Other Bets (Waymo, etc.): These are exciting moonshots, but they are currently burning cash. Can any of them become the next Google-sized business within the next decade?
Profitability: Can Google maintain its high operating margins?
Costs: The race for AI supremacy is incredibly expensive, requiring massive investments in chips and data centers. Will these costs eat into profits?
Regulation: Governments around the world are scrutinizing Big Tech. Could fines or new rules limit their profitability?
By researching these areas, you're not trying to find a precise growth number. You're trying to build a qualitative case. You're developing a feel for whether the 11% hurdle seems laughably high, cautiously low, or somewhere in between.
Step 4: Form Your View and Make a Decision
This is the final step where everything comes together. You compare your analysis from Step 3 with the market's expectations from Step 2.
The Bull Case (A Potential Buy): After your research, you might conclude, "The market is underestimating the Cloud business and the monetization potential of AI in Search. I think they can grow FCF much faster than 11%. The hurdle is too low." If there's a wide gap between what you think is possible and what the market expects, you may have found a great investment.
The Bear Case (A Potential Sell or Avoid): Conversely, you might think, "Between regulatory pressure and the massive costs of the AI arms race, there's no way they can sustain 11% growth for ten years. The market is being way too optimistic." In this case, the stock is likely overvalued, and you'd be wise to stay away.
The beauty of this is that you don't have to be right about the exact future. You just have to be right that the market's expectations are wrong. Finding a large gap between the price-implied expectations and the likely reality is your true source of alpha.
By anchoring your process in the market's current price, you ground your decisions in reality, not fantasy. You force yourself to think critically about the business and what it needs to achieve, turning you from a passive speculator into a disciplined, rational investor.