Advanced Value Investing Workshop
About the Author
Errata and updates
Errata and updates
Since the book was first published in 2017, surprisingly few errors have been found. For that I credit the eagle-eyed proofreaders named in the acknowledgements section.
The mistakes that did sneak into print are entirely my fault. They're corrected below, along with a greater number of updates occasioned both by new accounting rules and the clearer thinking that comes with time.
Sincerely,
Kenneth Jeffrey Marshall
Chapter 4: Calculating the compound annual growth rate using the geometric mean function in spreadsheets
Chapter 4 states that the geometric mean function can be used to approximate a compound annual growth rate. And often it can. But sometimes a data set is sufficiently spread out that the geometric mean function gives a materially different answer than would a longhand calculation of of CAGR. One such data set is given in the fourth paragraph of page 23.
The example states that the geometric mean of 2.1%, 16.0% and 32.4% is 10.3%. And it is. But the CAGR is 16.2%. The following spreadsheet shows the difference, as well as the longhand CAGR formula:
http://www.goodstockscheap.com/erratacagr.xlsx
Chapter 5: Wrong word
On page 36, the phrase "A investment idea" should be "An investment idea" .
Chapter 6: Equity and noncontrolling interest
The case study at the end of chapter 6 notes that a noncontrolling interest can create two measures of equity: one that includes the noncontrolling interest, and a smaller one that doesn't. The book recommends using the latter. But using the former may be more illuminating, provided that noncontrolling interest is included in market capitalization when gauging inexpensiveness. Please see the related note on chapter 14 below.
Chapter 7: Capital employed and goodwill
Page 54 notes that goodwill is commonly subtracted from assets in the calculation of capital employed. The book questions that practice, particularly with a company that routinely acquires younger firms whose better products threaten to obsolesce its own. But there are cases where subtracting goodwill makes sense. The clearest example is with a company in a stable industry that put goodwill on its balance sheet just once due to some long-ago transaction.
Chapter 7: Capitalizing operating leases
The approach to capitalizing operating leases that starts on page 56 remains valid. But around 2019 new accounting rules required many companies to start capitalizing their own leases. So the approach's utility may be limited to earlier years.
Chapter 9: Calculating unlevered free cash flow from levered free cash flow
Chapter 9 mistakenly mixes together two different ways to calculate the increase in tax payments when converting levered free cash flow into unlevered free cash flow. Both work, but not when blended.
The first way is the long way. Add back interest payments, and then subtract the foregone tax deduction. The foregone tax deduction is calculated by multiplying added-back interest payments by the tax rate.
The second way is the shortcut. Subtract the tax rate from 100 percent, multiply the result by interest payments, and add that back.
The problem was that the long way was showcased, but the shortcut's percentage was used. This error pops up in two places.
The first is on page 74. To correct it, change paragraph 5 to read:
It's simple to calculate how much tax payments should go up. Start by finding the company's income tax rate. Search the 10-K for the term effective tax rate or, failing that, just tax rate. Then, multiply that percentage by the interest payments that were added back. That's how much tax payments should increase.
The second place the error pops up is on page 77. It's in the Gap case study. Fix it by replacing the last two paragraphs with:
Next, increase tax payments to capture the loss of the tax deduction from interest. A search for the term effective tax rate leads to page 23, which shows it was 37.5 percent in 2015. Total interest added back of $286,729,781 times 37.5 percent equals $107,523,668. That's the tax to subtract.
Therefore, Gap's 2015 unlevered free cash flow equals $2,132,476,332. That's levered free cash flow of $1,953,270,219, plus total interest payments of $286,729,781, minus additional tax payments of $107,523,668.
The related online spreadsheet has been corrected.
Chapter 11: Operating metric benchmarks and inflation
The benchmarks presented for ROCE, FCFROCE, ΔOI/FDS, ΔFCF/FDS, ΔBV/FDS, and ΔTBV/FDS remain valid. But they best apply in countries like the US where inflation has been around 2%. In countries where inflation has been much higher, the benchmarks should be adjusted upwards. Where inflation has been much lower, they should be adjusted downwards.
Chapter 11: Sizing the prominence of a company's obligations
The liabilities-to-equity ratio remains a solid metric for assessing the manageability of a company's burdens. But the two other metrics mentioned on page 88 - - the interest coverage ratio and the debt-to-equity ratio - - are also worth calculating.
Chapter 12: Summary list out of order
The summary list of the six potential sources of moat on page 107 is inconsistent with the order in which those sources are presented in the chapter. The correctly ordered list is:
1. Government
2. Network
3. Cost
4. Brand
5. Switching costs
6. Ingrainedness
Chapter 14: Noncontrolling interest and market capitalization
As stated in the note on chapter 6 above, it's useful to include noncontrolling interest in the measure of equity. Relatedly, it's recommended to include noncontrolling interest in market cap when assessing inexpensiveness. Admittedly, that's unconventional. But it leads to market cap and enterprise value figures that are more compatible with the measures of operating income, free cash flow, book value, and tangible book value.
Chapter 14: Inexpensiveness and interest rates
Page 135 and 136 put forth benchmarks for MCAP/FCF, EV/OI, MCAP/BV, and MCAP/TBV. They were written when the U.S. federal funds rate - - the rate at which big American banks lend money to each other - - was around half a percent. In a lower interest rate environment, the benchmarks might notch up. In a higher interest rate environment, they might notch down.
Chapter 15: Wrong word
At the top of page 150, the word "prominence" should be "provenance" .