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Buffett and Beyond: Uncovering the Secret Ratio for Superior Stock Selection, + Website, 2nd Edition by Joseph Belmonte

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Chapter 9

How to Determine an Equitable Equity Number

The last several pages were pretty heavy in one way, but on the other hand, the concept is very much just plain common sense. Look at it this way: You are just one step away from being able to develop a portfolio that will outperform most of those professional money managers out there in investment land: just one step away. Once you are finished with this book, the adoption of Clean Surplus to your stock portfolio will indeed seem second nature. And as I said to myself when I first learned the system, “This is so easy, why didn't I think of this method myself?”

Let's Review Just a Bit

Previously we learned that we could not use earnings as a comparable number between different companies. This was because the earnings number becomes distorted as a comparable number due to unique, non-recurring items on the income statement (Figure 9.1). These non-recurring items certainly must be accounted for, but in no way do they allow for the predictability that the investment community so dearly seeks.

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Figure 9.1 Earnings and Book Value Distorted by Non-Recurring Items on Income Statement Insert Graphic

We also learned that if the earnings number is distorted as a comparable number due to the non-recurring items, then book value (owners’ equity) also becomes distorted as a comparable number between companies. The earnings number from the ...

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