I went back to school late in life after having achieved a successful career in Engineering which saw my advancement to the level of Chief Engineer. This career was followed by a successful career in the investment business. In the late 1980s, I was developing systems for portfolio managers and ...more

I went back to school late in life after having achieved a successful career in Engineering which saw my advancement to the level of Chief Engineer. This career was followed by a successful career in the investment business. In the late 1980s, I was developing systems for portfolio managers and the use of my hedging strategy saved many clients during the stock market crash on Black Monday of October 19, 1987. A year later, since we were one of the very few private firms that had any assets left, our founders decided to sell the company and go to the beach. I went back to school with the only thought in mind to begin research and find the very best stock selection system in the world. I learned that being on the Doctorate level gave me the resources necessary to do the kind of research I needed to achieve my goal. While in school, I sat in on a very small finance/investing seminar which was attended by about 6 people. Within five minutes of the beginning of the seminar I knew I was witnessing something special. I asked what the system was called and the presenter said there was no name for it and thus I called it the no name system. Almost two years later, I re-discovered an old accounting system called Clean Surplus Accounting which had generated very, very little academic research. After spending some time on this research article I knew I had found that old "no name" system I saw demonstrated in that finance seminar a year and a half before. Clean Surplus was designed as a predictability model by the accounting profession because they knew that neither the income statement nor the balance sheet had any level of predictability of future earnings. After beginning extensive research on this subject, I happened to be reading material on Warren Buffett. I was reading his 1994 report to shareholders and on page 15, he constructed a spreadsheet of a company called Scott Fetzer which he purchased in its entirety. There it was in black and white. There was the no name system which I found to be Clean Surplus Accounting. Buffett was using this system to determine the operating efficiency of a company.

Luck is when opportunity meets preparation. Fast forward to today we have a Doctoral dissertation with 20 years of research, two books (Buffett and Beyond and Buffett and Beyond 2nd Ed. Wiley Publishing), a research company (Buffett and Beyond Research), a radio program and almost thirteen years of CPA reviewed portfolios. We take Buffett's use of Clean Surplus one step beyond and use it solely as a stock selection method. Portfolios constructed in accordance with Clean Surplus outperform the S&P 500 index by almost two to one on a compounded bases over a nine year time period. The research has proven to be very useful in the real world of portfolio construction.less