If you admire Buffett, you admire the ease with which he can draw meaning from financial data. The checklist in this book is designed for the rest of us who need to be guided through the process, but a checklist won't save you if you aren't proficient in simple investment math, especially if you can't recognize your own errors. In this book, I found neither proficiency in calculation, nor the ability to recognize gross errors. Littered throughout the text are more than 20 instances of error in the simple calculations of investing - growth rate, present value of future earnings, rate of return, capital gain and capital gains tax - marring what might have been a good book. These are not "slip of the finger on the calculator" type errors. They are conceptual and more importantly they were not recognized. A beginning investor trying to follow or replicate many of the calculations will be mystified. Beyond the calculations, the editing is very uneven. In places, the thoughts flow smoothly, elsewhere it is like reading an early draft.
The editor's role ultimately, is to make the author look good, but they failed here. This book was not ready for publication. It can best be enjoyed by skimming, because the closer you look the worse it appears. Such a flawed book deserves at most a barely passing grade, in my opinion, even though the checklist, selected chapters and overall scope are good. Two and a half stars, rounded up to a generous three.
A couple of calculation examples:
The calculation of compound annual growth rate is wrong throughout the book. A formula for compound growth rate appears twice (once incorrectly). But even the correct version is not used properly, since the number of years of growth is consistently miscounted. For example, on p124 you find three years of data (2007 - $23,375, 2008 - $24,213, 2009 - $25,398), which yield two years of growth (2007-2008 and 2008-2009). But the calculation uses three years of growth and gets an annual growth rate of 2.80% rather than the correct 4.24%. The vast majority of compound growth calculations in this book are wrong. Using lots of examples is great, but not if they get butchered in the analysis.
In a table on p26 a 15% capital gains tax on a $20,000 gain is calculated to be $18,000. That's a 90% tax rate. The initial cost of the shares was not deducted from the proceeds of sale before applying the tax. The error is repeated in each line of the table and again on the next page. The table shows that $100,000 growing at 20% per year and traded annually will only be worth $121,899 after ten years. That number is off by about $360,000. The results are then discussed as if they are something other than nonsense. How can such a gross error go unnoticed?
On railways:
"I was amazed to see that just one gallon of gas can be used for 35 miles of transportation." (p40)
"Again, you might not believe it, but only one gallon of oil is used for 400 miles of transportation." (p88)
The same thought from a clear thinker, whose facts I trust: "The Burlington Northern last year moved ... a ton of freight 470 miles on a gallon of diesel." (Warren Buffett)
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Some additional examples (updated May 22, 2012):
Following comments received to my original review, I have decided to add another two examples of calculations gone wrong.
Rate of Return: On p68 the author says he bought shares at $6 and sold at $24, for a 400% gain. An $18 gain on a $6 share is a 300% gain, not 400%. The author gets percentage calculations over multiple years consistently wrong (see compound annual growth rate above), but a simple calculation of growth over a single year also causes him problems. For any quoted return of greater than 100% in this book, it is reasonably safe to assume the value is wrong (in addition to p68 see pp 135, 141, 157). I hope the reported percentage returns for his hedge fund have been audited.
Present Value of Future Earnings: On page 196-7 in a sample calculation, leading to an estimate of intrinsic value, the author intends to use a discount rate of 15%, but instead of using a factor of 1.15, he uses 1.5 (which is a 50% discount rate). Predictably, with a 50% discount rate the present value of future earnings shrinks to almost nothing very quickly. Equally predictably this author and his editors fail to recognize that something has gone grossly wrong. His calculations aren't even close to being right and the calculated intrinsic value that follows is ridiculously low. He determines that "the maximum offer price should be $101,355.13 and no more" (p197). This is for the purchase of a store that will earn more than $110,000 in the next 2 years alone.
