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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 15

The Beginning: The Initial Research

The Dow Jones Industrials

This book wouldn’t be even half complete if I didn’t go over the initial research that eventually led to my published doctoral dissertation research, which we will discuss in Chapter 16. We will test the Dow Jones Industrial Average in this chapter and then test the S&P 500, which was the research for the doctoral dissertation. Let’s see if we can use Clean Surplus as was originally intended by the founding fathers of Clean Surplus Accounting.

I mentioned in the Introduction that I once attended a lecture (1995) in which a form of Clean Surplus was used as a stock selection method. I ran home and sat in front of my computer for the next four-and-a-half months formulating spreadsheets on the Dow 30 stocks. Of course, at the time I didn’t know this method was called Clean Surplus Accounting and neither did the lecturer. I gathered the necessary data from the Dow 30 stocks for the period 1982 to 1995. The questions I wanted answered were very simple:

  1. Do stocks with a high ROE as configured by Clean Surplus Accounting outperform stocks with low ROEs?
  2. Could I construct a portfolio of stocks from the Dow 30 Industrials, which would outperform the Dow 30 Industrial Average?

Why Work with the Dow 30?

You are all asking why I chose the Dow Jones 30 Industrials from which to select stocks when most money managers use the S&P 500 as a benchmark for performance. The reason is very simple. The Dow 30 is comprised of ...

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