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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 10

The Predictability of Finance Valuation Models

Let's leave the numbers and ratios once again and give our minds a much-needed rest. So on the lighter side, I think it would be a good time to discuss the differences between the fields of accounting, finance, and investments.

The intention of this book is to negotiate the complicated worlds of accounting and finance using a bit of common sense. Common sense is especially useful when it comes to superior stock selection for our own personal portfolios. Accounting has its ratios, and finance has its valuation models. Neither discipline works nearly as well as Clean Surplus when it comes to analyzing and comparing the operating efficiency of one company relative to the operating efficiency of another company. The word “compare” is the holy grail of the investment world and is only able to be calculated through the implementation of Clean Surplus.

You see, accounting is just as the word implies. It is a system that accounts for almost everything that happens to and/or within a company. And we need accounting. I am not saying that accounting should be changed, nor am I criticizing accounting. I need it and you need it. It's just that we need something a bit more understandable and easier to work with when trying to determine the operating efficiency of a company. And the accounting profession understands that. After all, it was the accounting profession that developed Clean Surplus in order to solve this problem. So yes, accountants, ...

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