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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 41627  
Subject: Re: FAQ ver 0.2 Date: 7/7/2004 1:15 PM
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10. Cradle to Grave? Is the BMW Method for everyone?

The BMW Method is the compilation of the knowledge that has come to me through the school of "Hard Knocks" in my 35 years of investing." This is the best that I can do with an investing plan that I know works well. I call this post "Cradle to Grave" because that is how I see this. It should work almost as well in the first days of investing as it does in retirement.

I am retired and I use the BMW Method all of the time, but let me start with a young investor just beginning an investment career. I would like to talk about starting out using the BMW Method with just a small amount of cash.

It is not possible to Back-Up-The-Truck (BUTT) with too little cash. For instance, if we start out buying a $15/share stock at 100 shares, then buy 200 at $14 and 400 at $13, we are into that one stock to the tune of $9500. If it goes to $12/share, we need another $9600 to invest! We are doubling down on each drop. This is not gambling because we know the company. This is merely smart buying.

Meanwhile, the market gurus will be crying the blues. They will be predicting total collapse, bankruptcy, blood in the streets...you know the story. Fear tactics. The average investor won't touch the stock for anything. But, that is why the price can go that low in the first place. The scare tactics will be working very well. If we know the stock and love the stock, we will never do anything but buy more and laugh a whole bunch. It actually is rather humorous to listen to the naysayers when you understand the business that you own.

But, back to the "new" investor. He might start with say, $5000. He can buy some of our hypothetical stock at $15 and 200 at $14. He is done. He is not diversified in any way...but he is young. The fact that he bought close to the 30 year low will still protect him in the next few years. He will not make as much profit as an older investor might on that $9600 at $12/share...but he should still earn close to the same percentage on his money. If we have all done our due diligence correctly, the stock will produce a very nice CAGR for us...beating the company's own CAGR! Not only do we beat the CAGR of the markets in general, we beat the CAGR of the companies that we own!

Once the stock price gets up to the 30 year average or above, the young investor can still hold 100 shares, reclaim most of his original cash and start looking to buy another stock. This time, he can go deeper if the stock cooperates. Or, he may just get 100 shares of that one because the stock never goes well below the 30 year low CAGR. He then buys something else. All along, he is diversifying automatically. By the way, this works particularly well in an IRA...the gain is all yours. You pay no tax until you withdraw some of the money at a later date. That improves the CAGR for the younger investor.

This is how we can diversify our portfolio over time. We are always buying at a historical low price and then, if the stock will cooperate, we buy way too much of it at an even lower price. But, we never buy a stock to make money. We buy stocks that we want to own...because we love them and we know them well. We become very familiar with each one through due diligence and the "familiarity" of ownership. Each business becomes one that we want to own. The "making money" is a by-product of what we do. Just like any other business, we plow our earnings back into the business to "grow it" but we might also pay ourselves a dividend each year. We can take a small amount of our earnings and spend them on ourselves. Life is not just about making money. With an IRA, you cannot pay yourself yearly...that will come later. Thus, I like having both a taxable account for some money and an IRA for retirement savings.

The problem that we are faced with here is that the new investor is starting from scratch. I already have a full portfolio and I am just waiting for the right time to buy more of the things that I love. I may add a stock once in a while when I find one that really attracts me. I recently added Nokia and Sara Lee. I have lusted over them for years. They finally came through for me with a low price.

However, I normally find myself buying more of stocks that I already own. They just keep returning through their natural economic cycles to the 30 year low CAGR. Then, I buy more. If they go well below that price, I buy even more. But, my plan is to always be invested in that company to some extent. I get the annual reports and the 10-k. I read them and file them away. Anytime I have a question, I can refer back to my personal history of that stock. If you take the time to study most of the stocks that we talk about here, you will see their business cycle at work. The stock price goes up and it goes down over time...again and again.

So, I am in love with about 60 stocks and the number is growing. Thank God that stocks are not women. I would be in jail.

Over time, the portfolio grows. It always has great companies in it and some are going up and some are going down in price. However, the ones that are going up are over bought and the ones going down are under-bought. You are making money all of the time and saving it as you go along. And, this brings me to retirement.

Nothing has to change in retirement except that you now have even more time to study, to read and to concentrate on stocks. My investing acumen improved immensely in retirement. But, my ability to invest and to make money with my investments brought me to retirement much faster.

As you build a nice portfolio of solid, well run businesses, you find that you only continue working for "earned income" if you love what you are doing. Otherwise, you can easily just open a sole proprietorship and run your own business using the BMW Method. Your business makes money buying and selling other businesses. That is what I do in retirement, anyway. You can do what you want to do with your retirement when you get here.

I have said this before, but I will say it again...the BMW Method is boring. It reminds me of fishing but you do not need a $25,000 Bass boat, a $35,000 SUV to pull it and $3000 in tackle and lures. I fish from this old computer of mine...and I love it. This is great sport for me. You never know what you might catch. Plus, I do not care...I love everything that I catch. But, I only catch the things I love.

The BMW Method is definitely a cradle to grave approach. I just wish that I had figured this thing out sooner. I wasted over 20 years listening to what other people said, and buying the stocks they wanted me to buy. That was not smart.

Then again, it wasn't dumb either. At least I was saving money and investing. But, I now know there was a better way. I am sharing it with anyone who is interested. Maybe it will help someone else to retire a little sooner. I am not giving any of my fish away, but I am teaching people how to fish...I call it the BMW Method.
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