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Author: TMFGebinr Big gold star, 5000 posts Old School Fool Supernova Phoenix 1
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Subject: BMW FAQ Date: 3/24/2006 7:51 AM
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BMW Method FAQ

Welcome to the BMW Method board, a place to hang out, discuss the mechanics of this method, talk about potential “BMW” stocks, and follow a portfolio based upon this method.

1. What is the BMW Method?
This is a method for picking under-valued stocks developed by BuildMWell several years ago after noting the exponential type growth of the market overall and many stocks in particular. It is based on reviewing the exponential growth of a company's stock price from some point in the past (usually 20 – 30 years) and comparing today's price to ranges of growth rates (CAGR) that have defined that company. A stock that is at or below its lowest historical CAGR rate is considered a good buy.

The method was first described on the Foolish Collective board, and then was moved to this board, created specifically for the BMW method. So don't be surprised if some of these links take you elsewhere within Fooldom.

<http://boards.fool.com/Message.asp?mid=20281104&sort=whole> The description for it as described by BuildMWell.
<http://boards.fool.com/Message.asp?mid=20284814> Discussion of CSCO as an example of a BMW stock by BuildMWell.
<http://boards.fool.com/Message.asp?mid=20287940> Discussion of JNJ as an example of a BMW stock by BuildMWell
<http://boards.fool.com/Message.asp?mid=20976803> Look at the DJIA which started it all


2. What is the basic principle of the BMW Method? Is there any real logic to it?
As answered by BuildMWell:
In my opinion, anyone entering the world of investments should understand why they are investing in the first place. Obviously, it is to increase their net worth through appreciation of value, but why would one invest in equities? Why not just put money into a savings account? A savings account guarantees you a compound annual growth rate (CAGR). The basic premise of the BMW Method is that a stock can do that too. But, most people never look at it like we do here. We actually look at a stock just as if it were a savings account.

Many people will tell you that the stock market is "risky" and that you might lose money in the markets. And, that is true. But, on average, it is totally false. In the past 100 years, the market has yielded a compound annual growth rate of 5% (not including dividends). That includes the Depression, the "Crash of 1987" and the recent "Bubble." Even with those set-backs, the market, as a whole, has done quite well.

During that time, we have had numerous recessions and booms. But, the Dow Jones Industrial Average has still yielded 5% over the whole time. Please look at the linked charts below. You will see the entire past century displayed for you on one set of charts. That one CAGR curve shows that from 1900 to the present, the Dow Jones average has grown at almost exactly 5%. On top of that, the Dow Jones Average includes stocks that pay a decent dividend, thus the total return is much better than 5% . . . more like 7% to 8%. That surely beats any savings account that I know of. And, that is just the average! We should be able to do far better than "just average".

<http://personal.palouse.net/muellerj/FCExcel/BMW-DJIA.html> Several views of the DJIA

If you will take some time and review the figures in the link above, the overall picture should start to emerge for you. In fact, you might consider printing it out and studying it in detail. There is much to absorb. The real question is, "What is the compounded return on the Dow?" The graph answers that question. The good news is that the growth rate is increasing. The 100 year CAGR is 5%, the 60 year is about 7.5% and the last 24 year's CAGR is 13.3%. I do not believe that we can expect 13% growth forever, but 24 years at that rate says this country of ours has great potential to continue growing.

First, ask yourself if the BMW Theory makes any real sense? Why should the market cycle around the present DJIA average? Is the market static or is it dynamic? I say it is absolutely dynamic! So, by charting lines of constant CAGR, the past history begins to make much more sense. The effects of the "Great Society", runaway inflation, and uncontrolled government spending, begin to look very clear as to how they affect the market. Likewise, the 1981 tax reductions, the 1994 balancing of the budget and other market friendly actions also spring out as the market tells us what it likes and what it dislikes.

The past 24 years is exposed as not so much of a bubble but as a revolt against bad decision making in the past. Surely it was overdone, but by how much? The DJIA 30 is the broadest index and represents the largest business influences in America. In my opinion, the DOW has actually come through the bubble remarkably well. In fact, I might ask, "What bubble?"

This is the "Big Picture" that we, as investors, need to have in the back of our minds as we approach the "art" of investing. If we can see the big picture, we know what to expect in the long run. Also, knowing that the DJIA is just an index that includes 30 stocks, we can then begin to see that most stocks have definite trends that repeat over time. Just like the overall markets, the individual stocks inside of an index seek new highs and new lows over time. If we merely spot the lows and buy then, we optimize our returns. We can "beat the averages." That, in a nutshell, is the BMW Theory. The BMW Method is the implementation of that theory. But, first, you must make sure that the Theory makes sense to you. If it does, just keep on reading. There is much here to help an investor.

< http://boards.fool.com/Message.asp?mid=20990782> Further discussion of the approach including diversification.


3. How does it work?
Once you have a company's historical prices going back for up to 30 years or so, an exponential growth curve, called a CAGR line, is calculated and plotted onto the plot of historical prices. The idea is to compare the current CAGR line to other CAGR lines and therefore compare today's price to what the stock has done historically.

CAGR stands for Compounded Annual Growth Rate and is calculated by the following expression:
          CAGR = ([Today's price] / [Starting price] ) ^ (1 / # years) - 1
This gives a percentage that the starting price would have to grow at each and every year to reach today's price. For example, if today's price is $60 and the price 3 years ago was $30, then the CAGR would be
          CAGR = (60 / 30)^(1/3) – 1
CAGR = 0.259921 or 26%
In other words, today's price is what you would get if you increased the price at the end of each year by 26%.
          30.00 x 1.26 = 37.80  end of 1st year
37.80 x 1.26 = 47.62 end of 2nd year
47.62 x 1.26 = 60.00 end of 3rd year

The same equation can be used to assign a particular CAGR and see where the stock price would be today given a particular starting price. By choosing different CAGR values, the investor can see how a company's stock price history has behaved compared to a smoothly growing exponential curve (any of the CAGR curves).

The idea behind selecting a stock to buy is for the current price to be at or below the historically low CAGR line. Start off with buying a few shares and put in a limit order to buy more at a lower price. Rinse and repeat. For example 100 sh at $14, 200 sh at $13, 400 sh at $12. Then when the price climbs back up and approaches the historically high CAGR line, sell the stock. Hopefully in this manner, one can buy when a stock is low and sell when it is high.

For those who wish to run a quick calculation, here is an on-line CAGR calculator:
< http://www.moneychimp.com/calculator/discount_rate_calculator.htm>


4. Sounds pretty straight forward, but what's the point?
The point is to bracket the majority of the company's stock price history within a set of CAGR lines. Start off with 20-30 years' worth of price history. Then draw the current CAGR line through the actual stock price data, starting at the beginning of the price history and ending at today's price. Is this above or below what appears to be the average? Select some different CAGR rates and draw a series of rate lines which are representative of the areas where the stock price has actually wandered. At a minimum, draw one that passes through or near the stock price that would represent the lowest growth rate the company has seen, one near or through the stock price for the highest growth rate, and one that seems to be about average. It is helpful to have several intermediate lines that split the difference.

Some judgment comes into play here. For instance, if there was a stock market crash, maybe that data should not define the Low CAGR line. The Low CAGR line defines what a historically good price is and is a signal in the BMW Method to start considering a buy. Unless you intend to hold out for stock market crashes and only buy then, you might be better off selecting a Low CAGR line that passes through the lowest low in a normal business environment. Just annotate your chart "Stock crash", and plot right on through.

The High CAGR line defines the highest price which you expect the company to reach by showing the highest CAGR the stock has visited in the past. Just as a crash should not be used to define the Low CAGR, a stock market bubble is probably not what one should set one's hopes on for a sell price. So, we should define a High CAGR that lops off any bubbles somewhat.

All of this refining and plotting is doable by hand (ask BMW!), but is probably easier using an automated spreadsheet like zach's or gebin's (see links below) that will allow you to try with actual values. Give yourself a bit of practice using different lines to see how they lay across the data. (Up-to-date versions of Microsoft Excel work the best for these spreadsheets.)

Remember that since the stock market as a whole grows exponentially, what may be an average price today becomes a low price - a good buy - a couple of years in the future. When you chart the historical performance of the stock and provide an "envelope" of CAGR lines that it has been bouncing about in, you have a chart that defines what buy low - sell high means in the ongoing march of history, not just a static set of prices for today.

<http://boards.fool.com/Message.asp?mid=20927198> zach's spreadsheet
<http://boards.fool.com/Message.asp?mid=21463640> gebin's spreadsheet
<http://boards.fool.com/Message.asp?mid=21012433> spreadsheet help in general


5. Do I have to draw them all myself, or is there a central repository of some that others have done?
Several people make available “pre-drawn” CAGR curves for various stocks. You only need to go to the websites linked below and look up the stock which interests you. If yours is not there, you could do it yourself or ask for it to be added.

<http://www.filespace.org/cocomurph2/> Cocomurph1's work
<http://boards.fool.com/Message.asp?mid=20667866> zrpurser's work
<http://f2.pg.briefcase.yahoo.com/tildetoo> hildy's work
<http://boards.fool.com/Message.asp?mid=21457989> mklein9's work through a slightly different lens along with an explanation of what is being done


6. Is this just mechanical stock picking?
No. Once a company's price has dropped to meet the criteria of being a possible BMW stock, due diligence on the company must be done. Without doing this, you will not know the difference between a good company in temporary trouble (which is why the stock price is down) compared to a company that is on its way to the junk heap. Don't be fooled into thinking that every company with a low historical price is a good one to invest in.

<http://boards.fool.com/Message.asp?mid=20984919> IcyWolf discusses DD and the BMW Method.
<http://boards.fool.com/Message.asp?mid=20649641> Example of DD on Goodyear Tire (GT)


7. OK, so it's not Mechanical Investing, because some DD is added in. Is this like Day Trading? What ever happened to Long Term Buy & Hold?

The BMW Method is NOT Day Trading! This is a long-term strategy, and could be classed as LTBH. It is not, however, Buy & Hold Forever. The strategy picks out what a good stock price is so the investor can buy low. The strategy further informs the investor when the stock is at fire-sale prices, so the investor can buy more at a lower price. It is possible that a very skilled value investor could do approximately the same, but none of us are channeling Ben Graham.

The unique thing that the BMW Method does next is to indicate a sell price. Value investors do the same, but it is a sell price for today's situation. Day Traders set a sell price, but it is, again, for today's situation. They may sell next week, or next hour. The BMW Method charts a sell price that is continually adjusted for exponential growth with time. In other words, if the stock has grown exponentially with time at the average CAGR we have charted, and it is currently at the low CAGR, and if our DD leads us to believe that it is a great company that will continue to do the same, then expectations are for the stock price to rise back up to the high CAGR we have charted with time. How much time? Who knows? We must be patient. It is easier to be patient when you have the past charted and have reasonable expectations for the future. BMW would probably say that many of his buys have returned to the high CAGR in one to four years.


8. Isn't this just a variation of reversion to the mean?
Possibly. Recent research into the BMW method has led to another way of looking at it. This involves fitting the data with an average CAGR line, then plotting lines for one and two standard deviations off of that average (within which 95% of the prices should fall). When a stock price is at or outside the minus 2 standard deviations, buy. When it reaches the average (or even goes above it), sell.

<http://boards.fool.com/Message.asp?mid=21457989> mklein9's look at this with various stocks and the DJIA


9. Is there a portfolio that uses this method so I can judge the results?
Yes. As a group, we decide which stocks to buy and at what prices. If they execute, we might buy more at a lower price. The last entry in this thread should have the most currently posted portfolio results.

<http://boards.fool.com/Message.asp?mid=20976573> Port results and comparison to index funds


10. What about taxes?
Pay them as you go after each run up is probably the best way to lock in your gains without having to pay a huge chunk 10, 20, 30 or more years down the road.

<http://boards.fool.com/Message.asp?mid=20929840> BuildMWell on cashing out when it has run up.
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Author: IMRichdad Big gold star, 5000 posts Old School Fool Coverage Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12372 of 41627
Subject: Re: BMW FAQ Date: 4/8/2006 9:46 AM
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Hi Jim,

A very interesting post. Some questions and thoughts for you:

Are there any criteria or limitations imposed regarding the "quality" of the company? You mention due diligence, but does the BMW have any formal criteria applied to eliminate companies from further consideration associated with it?

Obviously, since the BMW method requires about 30-years of price data, IPO's are out and all companies with less than 30-years of existance as a public company are out.

I would think that the BMW method would work well only with a sub-set of the "market" which includes high quality blue-chips. So, I might suggest the following additional quality criteria:

1. Interest Coverage Ratio greater than say 4 to 6 (higher the better): Interest expenses (+ other "fixed" costs) should be adjusted, if necessary, to include off-balance sheet items such as operating leases.

2. A limitation or check to guard against the possibility of buying a mature company entering the final stages of it's growth curve (plateu or decline) is needed. Perhaps, examination of the 30-yr, 15-yr, and 5-yr CAGRs with a limitation that the 5-yr and 15-yr are greater than or equal to, say, the 0.95*30yr CAGR.

Perhaps a better way to achieve the same thing would be to require Net Profit Margins, ROE, ROA, and/or ROIC to all be increasing or flat over the last 1, 3 and 5-year periods.

3. A dominant position in it's industry should be required. A number of criteria come to mind that could be left to an individuals preference. Personally, I would lean towards Net Profit Margin greater than the industry average and/or ROE greater than the industry average. A more restrictive critera would be that it be the "leader" and "low cost producer" in it's field (i.e. Dell would be in, HPQ would be out - IMHO).

4. The company should pay some dividend and ideally the dividend yield should exceed the S&P 500 average yield at the time of purchase.

5. Being from the IV camp, I naturally wish to impose some indication of true value other than that the price has just gone down. Perhaps, a criteria might be that at the time of purchase the P/E (or EV/EBITDA, etc.) is within 5 or 10-percent of the historic (last 5 or 10 years) low P/E (or whatever multiple you prefer). However, I would make an exception for true "cyclical" companies, where high P/E (or other) ratios would be required, not low.

The above criteria can all be screened for relatively easily, I believe, with free net based financial sites.

6. Finally, before a purchase, I think I would want some assurance that current management is capable, trustworthy, and has the best interest of shareholders in mind. This is a crap-shoot and I have no simple criteria for assessing. This will need to be left up to the judgement of the individual.

BMW would be greatly facilitated if appropriate price data could be downloaded into Excel from the internet from a free internet site. Daily data would be too cumbersome to deal with. Monthly or quaterly data should be sufficiently detailed, I would think. Do you know of any?

I have played with "curve-fitting" a little bit in Excel. I think it would be a simple matter to develop a spreadsheet that would allow the "charts" to be made by the user - the key would be getting the historic price data. Has someone already come up with a spreadsheet? Could I get a copy? (I'll send you an e-mail along with this post just in case there is and your willing to share.)

My final thought is that I think the method, supplemented with some or all of the "qualtity" requirements above (or similar) would pass Ben Graham's criteria for a "rational" and "disciplined" approach not practiced by everyone and therefore having a high probability for satisfactory results - read much better than the market average (Ben was never one to get too enthusiastic). :)

I look forward to your reply.

Regards,

Rich

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Author: TMFGebinr Big gold star, 5000 posts Old School Fool Supernova Phoenix 1
Mission Team Member CAPS All Star SC1 Red Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12384 of 41627
Subject: Re: BMW FAQ Date: 4/8/2006 2:57 PM
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Hi Rich,

Most of what you wrote would fall into #6, Due Diligence (thought that's not its title). Each person has their own criteria for figuring out if a company is "good" or not. Some of it can be fundamental analysis which is a lot of what you wrote. Some of it can be more qualitative, such as looking at management, such as the work done elsewhere (first on the Foolish Collective and then on the IV boards) by TMFRozany.

As for a spreadsheet which automates this, look at #4 for some different spreadsheets. I'm aware of at least one other spreadsheet, but I don't think it's been linked into the FAQ. As for running them, most of them are a "use at own risk, nothing guaranteed" type of thing.

Also look at #5 for repositories of already drawn charts. Cocomurph (now TMFMurph) and mklein have done a lot of work in the latter area.

Hope this helps. This method is an interesting way to look at company price movements and the stock discussion on this board is pretty good.

gebin


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Author: danthony Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12441 of 41627
Subject: Re: BMW FAQ Date: 4/10/2006 1:16 PM
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With the CAGR of the DOW at 13% for the last 24 years, what gives any indication that this will continue, or accelerate (if the growth is exponential, as stated). We are certainly getting into the limitations of "large numbers" to see the DOW growing at anything approaching that rate for any significant amount of time.

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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: 12444 of 41627
Subject: Re: BMW FAQ Date: 4/10/2006 2:12 PM
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"With the CAGR of the DOW at 13% for the last 24 years, what gives any indication that this will continue, or accelerate (if the growth is exponential, as stated). We are certainly getting into the limitations of "large numbers" to see the DOW growing at anything approaching that rate for any significant amount of time." - danthony

Starting the count 24 years ago puts the DOW in a very favorable light. In 1982, the stock markets were at a super low CAGR. This skews the perspective in the short term. For that matter, in 2000, the CAGR was at 16.9%. Thus, a correction was surely to be expected. The question is, "How much of a correction was needed?" This requires a better perspective.

For instance, if we were to go back an additional 24 years, the DOW was at 450 to 550 in 1958. Thus, from 1958 to 1982, the DOW rose at a CAGR of about 2.2%. Is that reasonable? It happened, but should it happen again? We need to understand why the CAGR was a measly 2.2% for those 24 years.

If we take the DOW for the total of 48 years from 1958 to 2006, the CAGR is 6.9%. Now, to me, that makes pretty good sense. But, what about the previous 24 years? In 1934 the DOW was between 70 and 80. The CAGR to 2006 is 7.2%. But, was the DOW over or under priced in 1934? We can take the CAGR from 1934 to the present and get 7.2%. From 1934 to 1958 we find a CAGR of 8.2%.

It looks to me as if the CAGR from 1958 to 1982 is the real problem. And, that entire period saw the interest rates on government notes rise to over 15%. If an investor could get 15% on his money from Uncle Sam, why would he waste time and money investing in a stock market that is going down? The government notes paid a respectable 3.3% in 1958 but rose steadily such that by 1982 they were approaching 16%. That was a very scary time here in America.

Obviously we cannot ignore those 24 years, but we need to learn from the things that created the underlying problems. One lesson is that double digit inflation is bad and causes workers to demand higher wages while higher wages create more inflation. Hopefully, we have learned from our errors. That bodes well for the future. At least, I think so.


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Author: foolthatsME Old School Fool CAPS All Star Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12960 of 41627
Subject: Re: BMW FAQ Date: 5/1/2006 4:01 PM
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You asked: BMW would be greatly facilitated if appropriate price data could be downloaded into Excel from the internet from a free internet site. Daily data would be too cumbersome to deal with. Monthly or quaterly data should be sufficiently detailed, I would think. Do you know of any?

Yahoo finance has a link to download CSV files for historical prices. This link will give you the last 30yrs of weekly priceses for WMT:
http://ichart.finance.yahoo.com/table.csv?s=WMT&a=07&b=25&c=1976&d=04&e=1&f=2006&g=w&ignore=.csv

I have a little shell script that pulls historical prices for a list of stocks in a text file. For each ticker, it downloads daily and weekly prices from a start date to "today" and creates a daily and weekly file with all the stock tickers and another pair of files for index tickers.

As a result, you get a stock file that looks like:

ticker, date, open, high, low, close, volume, adj. close

let me know if you're interested and I'll post it (runs on Mac OSX and other unixes).

-stone

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Author: JJMSpartan Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16750 of 41627
Subject: Re: BMW FAQ Date: 10/26/2006 4:50 PM
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Just curious as to any other opinions out there... is it time for an update to the FAQ? There are a few links out there that I think deserve a prominent spot in it (MKlein's web site, Divebombers spreadsheet, etc).

We've also discussed a few rule changes to the portfolio that it wouldn't hurt to mention.

And how about a mention of the skunks? As of COB 10/26/2006, they are up 20.2% from the date of portfolio creation (7/17/2006) for a 96.3% CAGR...

Just thinking out loud...

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Author: TMFGebinr Big gold star, 5000 posts Old School Fool Supernova Phoenix 1
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Subject: Re: BMW FAQ Date: 10/26/2006 11:26 PM
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is it time for an update to the FAQ?

If this goes forward, making the change happen on the discussion board website is easy. Just email RichardD@fool.com and provide a link to the new post you would like to make the new FAQ in the request.

Jim
(gebin)


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Author: jeffreyvan1 One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18343 of 41627
Subject: Re: BMW FAQ Date: 12/9/2006 6:57 PM
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stone,

let me know if you're interested and I'll post it (runs on Mac OSX and other unixes)

I just came across your post and am interested in your shell script. Have you posted it or are you still willing to do so? I am fairly new to macs and haven't done much with scripts but would really like to learn. Is this something you wrote? I have had mine for about a year and am still getting familiar with all the cool capabilities like Automator and the unix window (Terminal I think it's called?). What a great purchase. I'll never go back! Thanks.

jeff


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Author: mklein9 Big gold star, 5000 posts Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18347 of 41627
Subject: Re: BMW FAQ Date: 12/9/2006 8:05 PM
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and the unix window

Unix rules. Linux too (same thing).

-Mike

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Author: BordLyron Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26796 of 41627
Subject: Re: BMW FAQ Date: 9/5/2007 11:21 PM
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Fascinating. I'll have to read more about this to come to a definite conclusion, but it all sounds rather "voodooish" to me. I've tried a few times to read up on the "technical" foolish ideas, & I also realize that this is different, but there are similarities. To be frank, despite how large & well-run a company was in the past, I can't believe that charting recent results will lead me anywhere.

I know, you also mentioned that DD is important & that BMW is simply a way of finding companies on which to pursue DD (correct me if I'm wrong!), but I think that now there are more efficient ways of screening. And no, I don't mean the on-line or other computer screeners.

Byron

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26797 of 41627
Subject: Re: BMW FAQ Date: 9/5/2007 11:58 PM
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Hello Byron!

Welcome to the BMW Method board.


To be frank, despite how large & well-run a company was in the past, I can't believe that charting recent results will lead me anywhere.

There are no reports about the future other than speculation. What is one to do? What can you use besides history and experience (a kind of personal history) as a guide to the future?

There are two schools, those who think that prices don't tell you anything and those who think that prices tell you everything. The first set will trust in fundamental analysis (FA) while the second will trust in charting. While the BMW Method falls in the second group, our way of looking at charts is very different from the more traditional charting methods that are generally more short term oriented. The BMW Method could be described as medium term charting. Our main statistical tool is regression toward the mean. This is a time tested statistical tool.


I know, you also mentioned that DD is important & that BMW is simply a way of finding companies on which to pursue DD (correct me if I'm wrong!),

This is true as far as it goes but the emphasis is wrong. The way you put it, the screening is of secondary importance while the DD is of primary importance but I think it is the other way around. If a stock passes the BMW screening test, it is a buy unless the DD tells you otherwise. (Of course, IcyWolf is growling at me, but so be it).


but I think that now there are more efficient ways of screening. And no, I don't mean the on-line or other computer screeners.

We would love to hear about them.

Denny Schlesinger

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Author: Sand105 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26798 of 41627
Subject: Re: BMW FAQ Date: 9/6/2007 12:46 AM
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There are two schools, those who think that prices don't tell you anything and those who think that prices tell you everything. The first set will trust in fundamental analysis (FA) while the second will trust in charting. While the BMW Method falls in the second group, our way of looking at charts is very different from the more traditional charting methods that are generally more short term oriented. The BMW Method could be described as medium term charting. Our main statistical tool is regression toward the mean. This is a time tested statistical tool.

I actually disagree with this a bit. I view the long term charting as an indicator. Most of my work goes into company story, moat, financials, management, and valuation.

For instance, by average CAGR and RMS standards PFE, HOG, and SO are pretty near each other. However, I view PFE as a no brainer buy, HOG as an "I have no idea", and SO as the quintessential anti-BMW stock.


This is true as far as it goes but the emphasis is wrong. The way you put it, the screening is of secondary importance while the DD is of primary importance but I think it is the other way around. If a stock passes the BMW screening test, it is a buy unless the DD tells you otherwise. (Of course, IcyWolf is growling at me, but so be it).


I'm with Icywolf. Not a great place for a Gator to be (a bit cold and dry), but so be it. I think the screening is of primary importance, though, in the sense that it is an amazing tool to limit my universe. I always felt lost in the bottomless depths of the stock universe. I have found my strainer.

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Author: IcyWolf Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26799 of 41627
Subject: Re: BMW FAQ Date: 9/6/2007 1:23 AM
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Hahaha ... howdy there Denny (from a Phila bound wolf this evening) ...

I wouldn't growl at Captain Denny ... heck ... One of the constant wonders to me is the tunability of the BMWm ... I choose to tune a tad more heavily in favor of not just DD, but my very own Icyfied version of DD. That you choose to use DD as a sort of failsafe test with respect to the BMWm CAGR charts ... fine ...

My most fervant wish is that ... well ... Hmmmm ... Can't say that hereabouts .. .you furless critters are a tad too thin-skinned ... but in terms of investing ... I really do HOPE you Denny (and others like you hereabouts) have even better profits than I might scrimp outa the market ... That would make me truly happy ... well .. OK ... so I would also always know where to go to scrounge up a bit of coin for the fine sippin stuff ... so what's wrong with such a secondary benefit <wink>? Terminal sobriety is a terrible thing don't ya know?

Take care,
IcyWolf

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Author: Sand105 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26806 of 41627
Subject: Re: BMW FAQ Date: 9/6/2007 10:03 AM
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I wouldn't growl at Captain Denny

Nah, not growling at all - just offering a differing point of view. I read every post he writes, and for good reason. He, among many others, has and continues to teach me lots.

This is a very polite, intellectual board and I wrote that message in that spirit. The tone of messages is very hard to express sometimes on a board - so if it sounded harsh it was in no way meant to be so.

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26807 of 41627
Subject: Re: BMW FAQ Date: 9/6/2007 10:14 AM
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I wouldn't growl at Captain Denny ... heck ... One of the constant wonders to me is the tunability of the BMWm ... I choose to tune a tad more heavily in favor of not just DD, but my very own Icyfied version of DD. That you choose to use DD as a sort of failsafe test with respect to the BMWm CAGR charts ... fine ...

IcyWolf


What was that throaty sound coming from the North then? :-))

Investors come from all walks of life and they bring their various experiences to bear on their new pursuit of wealth via the market. On several occasions Jim BuildMWell has commented on his engineer's point of view of the world. Others have applied their specific knowledge in building, automobiles and so on. My own background is in information systems and management consulting. One of the most fun things about this combination of job backgrounds was that it allowed me to have a look at the innards of a lot of businesses from baking soda crackers to mining iron ore and dredging shipping canals. Although most of my customers were local Venezuelan companies, I did have the opportunity to have GM and US Steel as customers while at IBM. Of course, I also got to know the three American companies that employed me before I struck out on my own.

I suppose this experience gives me some advantage to diagnose (triage?) companies with a less detailed look at their innards. It reminds me of my medical doctor cousin who was able to diagnose my coronary condition from my telling him about it, something that apprentice doctors at the clinic where I was treated were not able to do even with all the tests available to them.

The one missing ingredient, which has since been supplied by the BMW Method, was a way to discover unloved or under-loved companies on which to lavish TLC. It is no use to buy a company at the top of the chart but looking at the company does not tell you where it happens to be on the chart. For that information you have to look at the chart! We are dealing with a duality while investing, the companies on the one hand and the market on the other. It would have been folly to invest in the Nifty Fifty at the top of that rage even if those fifty companies were the best in the whole universe, the market simply had marked them up too high. More recent examples, amply kicked around these parts, are Home Depot and Wal-Mart. Nardelli simply made the mistake to take the top job at Home Depot at the top of the chart. He should have read Julius Caesar: "There is a tide in the affairs of men which, taken at the flood, leads on to fortune; Omitted, all the voyage of their life is bound in shallows and in miseries."

Shakespeare got it almost right, the flood is a good time to take the ride but better is to get on board at low tide in the knowledge that the flood will inevitably come. For those of you not conversant with tides:

A tide is a repeated cycle of sea level changes in the following stages:

- Over several hours the water rises or advances up a beach in the flood tide.
- The water reaches its highest level and stops at high tide. Because tidal currents cease this is also called slack water or slack tide. The tide reverses direction and is said to be turning.
- The sea level recedes or falls over several hours during the ebb tide.
- The level stops falling at low tide. This point is also described as slack or turning.


IcyWolf agrees with Shakespeare and takes the ride after the flood has started. I suppose that there are no tides in his part of the woods and that makes him extra cautious about these oceanic phenomena.

The one important difference between oceanic tides and market tides is that in the market slack water can last for years, witness WMT and HD. Just as the Sun and the Moon cause oceanic tides, market tides also need an activator, a motive force, a catalyst. Absent the catalyst you are likely to face boring slack water for a longish time.

My difficulty in the market has not been on the buy side but on the sell side. I need to learn to sell sooner the ones that should be sold sooner and later the ones that should be sold later. Why is there always so much discussion of the buy side and so little on the sell side?

Denny Schlesinger

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26808 of 41627
Subject: Re: BMW FAQ Date: 9/6/2007 10:28 AM
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This is a very polite, intellectual board and I wrote that message in that spirit. The tone of messages is very hard to express sometimes on a board - so if it sounded harsh it was in no way meant to be so.
Sand105


Sand banks are not nearly as dangerous as coral reefs. :-)

Your post was not harsh at all, it was a well expressed commentary of a contrary opinion. I hope my previous post explains in more detail why I tend to dig less deeply while doing DD than most people here do. Clearly we all have our experiences, our strong and our weak points, and we have to make the best off them.

Denny Schlesinger

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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26818 of 41627
Subject: Re: BMW FAQ Date: 9/6/2007 3:02 PM
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IcyWolf agrees with Shakespeare and takes the ride after the flood has started. I suppose that there are no tides in his part of the woods and that makes him extra cautious about these oceanic phenomena.

IcyWolf's profile says he is in South Dakota. That's about as far from noteworthy tides as it's possible to be in North America - 1300 to 1900 kilometers.

;-)

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Author: SirTas Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26821 of 41627
Subject: Re: BMW FAQ Date: 9/6/2007 3:33 PM
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Fascinating. I'll have to read more about this to come to a definite conclusion, but it all sounds rather "voodooish" to me. I've tried a few times to read up on the "technical" foolish ideas, & I also realize that this is different, but there are similarities. To be frank, despite how large & well-run a company was in the past, I can't believe that charting recent results will lead me anywhere.

I don't see the "voodooish" part.

I think the most important word in the quote above is "recent." BMW (Jim) says he uses a 30-year chart (but then slices and dices it down to smaller pieces--not the most recent smaller pieces, and also looks at longer time-frames. (One of the major reasons that DRL was not really BMW Method material was that the price history was too short. We only had "recent" prices.)

There is an interesting juxtaposition of two time-frames in your own statement. You talk about (1) a company that was well-run in the past and (2) recent prices. One thing DD can show is whether the well-run-ness of the company is continuing even now as Mr. Market beats the price down, or whether the company has more serious problems that will push it way down or even lead to bankruptcy. One thing we want to do is investigate whether the company (today) is really the same as the one that established the 30-year record. For example, take Merck. The stock went over a cliff with the withdrawal of VIOXX, but Merck continues to be well-run and has shown some good sense in fighting the lawsuits. The withdrawal of VIOXX wasn't going to keep the company down or drive it into bankruptcy. When we see a sudden fall in a large and well-run company like Merck, we investigate. In Merck case, the investigation is positive. On the other hand, if there were a sudden fall in HPQ, well, it doesn't seem to me that it really is the same company as the one that has existed over 30-years (during most of which time it was HP).

I just don't see where the voodoo comes in.

--SirTas

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Author: BordLyron Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26859 of 41627
Subject: Re: BMW FAQ Date: 9/7/2007 9:01 PM
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I just don't see where the voodoo comes in.

--SirTas


As I prefaced my remarks, "I'll have to read more about this...". Thanks for the feedback.

Byron

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