Luck: When Opportunity Meets Preparation
A sea story is a tale or a yarn. Something like one of those “fish that got away” stories. However, our tale actually does begin with a story about the sea.
This introduction is a short story in itself. It is the story of how I came into contact with a little-known type of accounting, which was developed for the sole purpose of determining the predictability (or not) of the future performance of a company.
Predictability of future performance is the Holy Grail of investing. After all, if we could predict future earnings reasonably well, we would be able to determine which stocks should grace our portfolio in order to outperform the market averages on a consistent basis over any multiple-year time period.
One try at predictability was developed by the accounting community, and it was called Clean Surplus Accounting. My doctoral dissertation (2002) was the very first attempt by anyone to statistically test this method as to predictability. To everyone's surprise in the academic community, the tests came out exceptionally well: well enough, in fact, to be put into practical use in which actual results mimicked the very positive test results.
With much coercion by several folks close to me, the first edition of this book was written shortly after the publication of the doctoral dissertation. During the ensuing ten years, the track record for the method I was testing showed a doubling of the returns of the S&P. With ...