What Is Clean Surplus

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WHAT IS CLEAN SURPLUS? Clean Surplus is a little known accounting method designed to provide predictability for the investor. It is an extremely accurate method that allows us to compare the operating efficiency of each and every company in the exact same manner. The traditional accounting statements do not develop the book value (Owners’ Equity) in the same manner for any two companies. Clean Surplus does indeed allow the exact, identical development of book value (Owners’ Equity) for each and every company. Thus, the efficiency ratio, Return on Equity developed by Clean Surplus and only Clean Surplus can be used as a true, comparable equivalent. The accounting profession was aware that the traditional income statement didn’t provide for predictability and neither did the balance sheet. This is why Clean Surplus was developed. The problem is Clean Surplus has never been tested until now, and thus has not been used except by a very few, extremely successful people such as Warren Buffett. The diminutive amount of research work on Clean Surplus prior to Dr. Farwell's research attempts to use Clean Surplus as a discounting valuation model. However, as with all discounting valuation models, we know by the failure of 96% of money managers (public mutual funds) to consistently outperform the averages over a 10-year time period, that these models just don’t work very well. Buffett uses Clean Surplus to develop a Clean Surplus Return on Equity (ROE) rather than using the traditional accounting ROE as a comparison ratio in order to assess the consistency of the operating efficiency of a company and also the level of that operating efficiency. Dr. Farwell uses the Clean Surplus ROE to construct portfolios “predicted” to consistently outperform the market averages. Dr. Farwell statistically measures the effectiveness of predictability using Clean Surplus over

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