Buffett and Beyond: Uncovering the Secret Ratio for Superior Stock Selection

Buffett and Beyond: Uncovering the Secret Ratio for Superior Stock Selection

Posted by jack_miller | Published a year ago

With 38 ratings

By: Joseph Belmonte

Purchased At: $7.46 (28 used & new offers)

Construct a portfolio that is sure to outperform market averages

Warren Buffett had it right all along. Now it's your turn to learn how to construct a portfolio that is sure to outperform the market averages, as well as almost every professional money manager in the world. Warren Buffett's method of predictability can determine a future target price, which in turn determines his all-important purchase price. However, Buffett doesn't draw conclusions of his predictability method relative to the future total returns of portfolios. That's where Buffett and Beyond comes in, taking Buffett's method one giant step beyond, proving that if you select a portfolio of stocks using the predictability method in this book, you will outperform 96% of professional money managers over the long term.

In addition to the information in the book, readers will have access to a password-protected website that includes tutorial videos, PowerPoint slides, free trial access to a video newsletter, and a trial subscription to the author's computer program, which follows the research presented in the book.

  • Explains Clean Surplus Accounting (CSA) to determine Return on Owners' Equity (ROE)
  • Uses CSA to determine ROE in a unique way to verify Buffett's all-important purchase price
  • Draws conclusions between Clean Surplus Return on Equity and future total returns
  • Shows that every portfolio selected from the S&P 500 index with above-average Clean Surplus ROEs outperformed the S&P average during the test periods from 1987 to the present

If you're an investor, this book will impact your financial life forever.

This book is pretty good in addressing what ROE means from the perspective of a value investor (specifically, from what the author thinks Warren Buffett is talking about in one of his shareholder letters), and how to calculate it. However, later on in the book, the author mentions that his data/studies are not adjusted for survivorship bias, which casts severe suspicion on the validity of his results (aka is there alpha being generated?). Also, the author makes the assertion that professionals do not conduct adjustments while calculating ROE. This is highly doubtful and is an unwarranted claim. Just because professional investors under-perform does not mean that they do not make adjustments when calculating ROE. They could also under-perform for other reasons (forced diversification, cannot own small stocks, behavioral reasons, etc.) Also, what the author doesn't tell you is that it is critical to adjust net income for non-recurring events or accounting items not relevant for equity investors before calculating ROE. That is the hardest part.

- leonard_johnson

Dr. Belmonte made a compelling case for his investment thesis that High Clean Surplus ROE companies generally outperform the market. What is Clean Surplus ROE or Clean Surplus Accounting? Read the book to find out-I don't want to spoil the learning process. I read Buffettology and this book sheds more light on how & why Warren Buffett probably looks at companies. Dr. Belmonte was able to defend his thesis and earn a PhD using this topic and this book brings his knowledge to the general investing public. Though some parts may sound repetitive it's really Dr. Belmonte emphasizing finer points to drill in the important lesson-High Clean Surplus ROE companies are likely to outperform the benchmarks (S&P 500 or Dow Jones Industrial Averages). If you think this is financial voodoo, I believe the author is on to something considering the Residual Income Valuation Model taught by the CFA Institute uses Clean Surplus Accounting along with the fact that high ROE companies general have Economic Profit and/or an Economic Moat. Overall, I believe you're likely to outperform the market with this strategy. Is this a guarantee? No, just high probability educated guess based on the content of the book and other investment theories.

- ben_lewis

Based on back testing, which is detailed in the book, this approach appears to be a powerful concept. The book is an easy read, and provides an actionable approach to sound investing.

- isabel_hall

Can never learn enough from Warren Buffett.

- shiloh_brooks

Excellent instructional book. The author tend to repeat himself but you understand that it is because conventional financial theory has to be overcome. An excellent guide for any type of investor

- phoenix_ortiz

Showed you how to find good companies in a relative sense based on a modified ROE. Similar to Joel Greenblatt's "Little Book that Still Beats the Market, but didn't touch on getting the best company at a good price - maybe a metric like (modified ROE / (P/S).

- willie_brown

Probably the best investing system I've come across.

- alayna_ramirez

It works.

- destiny_clark

A lot of the free financial websites only supply people with 5 Years of History for Book Value, Net Income, Share Count and Dividend. The Morningstar website can supply 10 years.

Since the technique uses as much history as possible to adjust the book from an initial accounting book value, people using this technique will end up with very different clean surplus ROE ration if they have 10 years of history versus 5 years.

The author claims that the clean surplus ROE produces better results for stock picking than the Accounting ROE. The tables in the book showed the clean surplus ROE for his stock examples, but it would have been nice to show the traditional accounting ROE in the table as well as the Dupont ROE ratio which uses a different formula which is the profit margin multiplied by asset turnover multiplied by the financial leverage..

The example portfolios were 8 stocks versus the DOW. I would have liked to have seen the results of four 8 stock portfolios selected thus:
- 8 Best Clean Surplus ROE (using 10 years of data)
- 8 Best Clean Surplus ROE (using 5 years of data)
- 8 Best Accounting ROE (using 5 years of data)
- 8 Best Dupont ROE (using 5 years of Data).

The Author said the 8 stocks with the Clean Surplus ROE outperformed the DOW, certainly, but would a selection of the top accounting ROE or Dupont ROE resulted in a similar portfolio of stocks ? Stocks with a high clean surplus ROE also tend to have a high accounting ROE so someone can easily end up with the same stocks using the accounting ROE. It's hard to know without a comparison of the 4 different ROE

One other aspect which I wonder about is buybacks. The author adjusts the oldest book value with retained earnings but buybacks is an outflow of money from the enterprise. So following buybacks, remaining share holders have a bigger piece of a poorer company. Is there an adjustment which must be made with buybacks or alternative with share dilution via the emission of new stocks ? There was very little said about buybacks.

- gracie_long

Good read for value.investing students

- amy_kelly

The Clean Surplus ROE is an excellent comparison of one company to another. It helps you to make money.

- owen_ramirez

good book

- clay_long

I am slightly wary of an author trumpeting an investment model that has outperformed Warren Buffett 2:1 over 12 years. It may be true but I prefer to see a thesis prefaced with the caveat of humility. Investment soothsayers seem to take extreme positions as if there is one way, their way. If Belmonte has the golden formula and everyone adopts his model, everybody will outperform everybody else, which is clearly impossible.

To this extent the first sections of the book put me off because there was a hint of evangelism and ego. I am also wary of books that tell me how I can profit from a ‘secret’ because if I had identified ‘Buffett 1.1’ as a strategy I would keep it to myself and profit from it rather than tell everyone. I think of the adage ‘How to be a millionaire’ (by writing a book called …).

Having said that, this was a readable book that set out certain common sense but perhaps not immediately obvious extended thinking about value investing. I could have done without the ‘Of course, you know what I’m going to ask you’, ‘You see folks’ and ‘Let’s look once again’ style of writing, which was too chummy for me and some of the hype (‘the one fantastic thing about our index options’). What I like about Warren Buffett is that he writes in a very down to earth way without any pretention – and if anyone deserves to adopt a superior tone it is surely WB.

Overall, Belmonte offers some good ideas for the investor who has the patience to explore the fundamentals of companies, the time to research stock selection and enjoys the process. His ideas remain only part of the story for those who believe the market is irrational. However, for all my slight carping it was a relatively digestible book but convinced me that I am better off leaving the process to fund managers.

- jeremiah_morales

This book explores the concept of clean surplus accounting. It is not an accounting book, but the author takes great pains to ensure that the reader will understand the secret which he claims lies at the heart of Warren Buffet's success. Briefly, this is to adjust earnings to exclude non recurring items and use this to derive a Return on Equity number, having adjusted the equity part of the equation because it will differ from what is in statutory statements because of the exclusion of the non-recurring charges. If you do not understand this, have no fear because the author takes time and pages to explain this.

Thats good, but it is always I think, a weakness in the book. He takes 11 chapters and 80 pages to get this over to you. Really, one chapter imho would have been sufficient.

I have a problem with the tables, because time surely should flow down the page rather than up it? Thus you are presented with table after table which starts with lets say 1988 at the bottom and ends with say 2001 at the top. The tables flow, so a 1989 number is derived from 1988 numbers. I have never presented a spreadsheet like this in my life, but the author is a Phd and maybe he knows best. Its a small point, but kept niggling me.
Once you have got your brain around the key concept, various portfolio construction techniques are suggested by the author, some using options to enhance returns.
There is a website available. www.wiley.com/go/buffettand beyond... the password is in the book.... the page is returned not found, but a google search will get you to the correct place. Here if you want to use the spreadsheet constructed by them, and watch their videos, you will be invited to subscribe.
the book is good, and a clear albeit a bit long winded on the key concept, though for good enough reasons. And there is a clear exposition of how to construct a portfolio and get additional income by options or dividends. but if you want your hand held, you must expect to pay

- alexis_myers

First off you need to understand the basics of investment. You need to know and comprehend things like a P/E Ratio. The general consensus is that if you have bought a book like this because you want to build a better portfolio or even start one then you have probably already made the effort to understand these terms. The book itself is not overly complex and is an interesting read. If this book really does reflect Buffet though (and remember he didn't write this ...) then you have to wonder why the author isn't kicking back with all his knowledge gleaned and making great investments and earning his money that way? So mybe be prudent and take what you read with a pinch of salt. There are some examples in the book for companies like General Motors, but then anyone can find any company behaving in ways that they can use to demostrate any range of financial declines, growth or whatever. Still it does give food for thought.

- jared_james

The question that comes to mind with any of these this is how Warren Buffett does it books is, why aren't you as rich as Warren Buffett and why are you writing economics books? I am sure it was that simple when Warren started out but the act of using that ratio and playing that rule changes the rules of the game as everyone else follows you. Economists are "experts" in finding decision rules and this means that the rules change as there is a constant competition between alternatives. If everyone uses the rule then the landscape changes and you need to have a new rule to make you distinct. So while this is a good accessible examination of the past as a method of forecasting it is fatally flawed. You are better off putting your money in Berkshire Hathaway and letting Warren invest it for you.

- hana_kim

A serious book for those who like their economics delivered as a scientific discipline described with plenty of tables and the occasional equation to give it analytical credibility. Belmonte describes here Warren buffet's portfolio building technique that has of course been tried and tested through the years and it's a detailed but concise work for those serious about share dealing. The narrative is as would be expected, US-centric but a number of the basic principles travel well enough to other markets. There is access to a rather good companion website that features videos and other resources for those who dig that sort of thing. The whole exercise basically of course, boils down on how best to skim value off the assets of others and so accrue wealth through unearned income which is an anti-social activity more people are finally waking up to, but if you are fascinated by the detailed, inner workings of this line of economic activity then this book may well be for you.

- bailey_harris

This is an interesting and considered explanation of a fairly level headed investment strategy, It is thought provoking and stimulating almost to the point of inspiring...


it suffers from the same weakness as every other "system" based investment system.

If there were a sure fire way of beating not just most fund managers but The Buffett himself, so many institutions would be using it that it would distort market. In other words, if it really worked it wouldn't work.

Still, it's worth a read.

- jamie_anderson

Started reading this and find it fascinating that the author believes so strongly in his formula, based and developed from the ideas of successful investor Warren Buffett. The book is written in an easy manner, which means you don’t need a background in finance to understand the key concepts of the method used, Clean Surplus Accounting. Relatively short but concise, the book introduces the essential strategies used to improve the odds of success in building solid growth portfolios. I would highly recommend this book.

- emerald_ward

I've read some of Buffett's essays before and I was seduced by the title of this book. However, I found it to be unhelpful to me as a general consumer - it definitely seems more geared towards financial professionals so perhaps the premise of the book was a little misleading.

- bria_lee

An interesting read for a rather select audience. Recommended for those with an interest in business and in particular investments. But not really for the general reader.

- luca_robinson

Dr. JOSEPH BELMONTE is a renowned investment strategist and market thinker. Dr. Belmonte has taught investments, corporate finance, and advanced managerial finance for many years, and has lectured to numerous professional and investment groups across the country.

The publishers say 'If you're an investor, this book will impact your financial life forever'. There is a linked website: [...]. Look at the website before you buy the book.

Personally, I'd say that this book might be most suitable for professional investment managers. An individual investing a large amount of money, or money that they cannot afford to lose eg savings for retirement, would be well advised to consult an independent financial adviser after reading this book, and BEFORE committing their funds. I am cautious by nature in money matters!

You'd also want to consider very carefully how the advice in this book translates to our side of the pond - what works in the USA may not work quite so well in the UK.

The book is well designed, but a bit overly familiar and conversational in tone for my taste.

- zelda_carter

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