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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 12

What Buffett Looks for in a Company, or How Clean Surplus Accounting Recognizes the Quality of a Company

I personally believe the numbers eventually tell us almost all we need to know about a company. My research work and my continual model portfolio results demonstrate the usage of numbers in valuation. It is my belief that most money managers think too much. They feel they must know everything there is to know about a company. I, on the other hand, believe you don't have to know whom the CEO plays golf with. I don't believe you must know if the company has a day care center for the workers, or if they have special parking spaces, or if the company has a politically correct working atmosphere.

The reason I don't worry about all of this is because if a company is doing everything right, then it will eventually show itself in the bottom line numbers. It will show up in the return on equity (ROE) as configured by Clean Surplus Accounting.

However, for now, let's leave the numbers behind while we delve into the qualitative aspects of a company that Warren Buffett looks for in a “good” company.

Qualitative simply translates into those aspects (qualities) of a company that in many instances cannot be measured with specific numbers on the income statement or balance sheet. I just want you to remember as we go over this area that the ROE as configured by Clean Surplus Accounting “accounts” for almost everything we are about to discuss. In other words, I believe that all the ...

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