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Author: TwinDeltaTandem Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 41594  
Subject: Dr Strangestock Date: 11/23/2008 6:33 PM
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...or how I learned to stop worrying and love the BMW Method.

Way back in the day I used to be a somewhat respected poster around here. In fact, not to toot my own horn or anything (well, OK, yes, to toot my own horn), I've written seven of the top 99 rec'd posts on this board, including the number 7 overall post. Nearly all of those posts are actually about investing.

But then I started posting "negative" posts and the love stopped flowing.

Actually, I don't post much these days mostly because there's really not much to talk about. It's not like it's difficult to find BMW stocks out there. Besides, I'm not exactly flush with cash. So my portfolio is sitting there waiting for the recovery.

But another reason I don't post that much is because I got a bit filleted over being negative several months back as to how low I see this market potentially headed. When I suggested we might see Dow 4000-7000 I was brushed away as a raving lunatic. Which though perhaps true is beside the point.

I only wish I had been more convinced of my own words...

The truth is, the market today is pretty typical, and is behaving pretty much the way my century-long wall chart says it should. There've been many on this board, including the architect, who've argued the market can't behave the way it did during early and mid decades of the 20th century because of fundamental changes in the way the universe is constructed. After all, now we have ipods. So everything has changed.

Maybe, but I'm not so sure.

It seems to me, as clearly evidenced by the before mentioned wall chart, the market is ultimately limited by GDP. As GDP grows, so grows the Dow--at least over the long haul. Since around 2000, the Dow has run away from GDP. Since 1933, GDP has grown at around 6.8% CAGR. Since 1933 the Dow has grown at around 6.8% CAGR.

Both are related to the value of money and the size of the market (population). Frankly, I'm much more concerned that we don't seem to be having as much productive sex in the western world as is necessary to sustain our culture than I am over the horrors of bank liquidity. We need more healthy American and European babies to keep the BMW Method working over the next century. So get busy, people, there's only so much I can do.

Looking at the big picture, we're well into a normal correction. And that's simply based on my BMW Method eyeball. Jim and others seem to see something different, but I don't understand how. It's all pretty normal looking to me.

If that's true, I still say the bottom could be as much as another 30% lower than where we currently are. Or not. We could stall, we could recover. Maybe the government will buy everyone a pony and they'll be so happy that they'll go to the mall and run up their charge cards again. It's impossible to say. But the end of the world only happens once, and as a keen observer on CNBC remarked this past week, "this isn't it." (Of course, if it is then nothing else matters anyway. So eschatological anxiety is not a valid basis for investment decision making.)

So the point is, I find quite a bit of comfort looking at the current "crisis" through the BMW Method.

Fundamentally, I see other reasons to feel confident. For example, if we go back to Benjamin Graham's "The Intelligent Investor," this is really the first time in my investing life in which I've seen a variety truly high quality companies selling for what Graham would have considered to be value prices. P/Es are low, yields are high. Look at companies like PFE and JNJ: it was little more than a year ago I was discussing the importance of waiting for stocks to drop below a 15 P/E, which was considered to be an absurdly unrealistic number by, I would guess, the majority on this board. Now you can pick up PFE for about 10 and JNJ for 13 and change! Unbelievable. (I wish I had waited until they were below 15..."do as I say, not as I do.")

If history is to serve as a guide, we could be looking at a full decade of crappy bear market conditions. However, given the ferocity with which the market has crashed (and continues to crash), perhaps the recovery will be similarly rapid. Maybe this is related to and symptomatic of the "information age." Again, I don't know.

One thing I do believe very strongly is this...we are in a normal market cycle. This is perhaps the best time to be a buyer/holder of stocks in my lifetime. But it's very likely to require an iron gut, patience and a willingness to work and save hard. Personally, I don't even find it that hard to be relaxed...as I said, I've learned to stop worrying and love the BMW Method. Kool-Aid...it's what's for dinner. And that's something that Goofy Hoofy and these other lurkers just can't take away.

As far as strategies going forward, I'm leaning toward a concept that has been discussed here recently: the notion of abandoning some, most maybe even all single-stock holdings in favor of targeted index funds. AIG seems to have taught us this lesson with furious anger. Here's the thinking:

In a bull market, such as we've been in since roughly 1982, it's difficult to pick stocks that will outperform the market. We all know the mutual fund manager's challenge. But at the same time, we all seek to best the index funds in order to get more money. And feel smart. So the BMW Method comes along with essentially a timing strategy in which due diligence is used in the hope of distinguishing a company that is on the road to bankruptcy versus a company that has been irrationally cut down by the market. Because the BMW Method identifies one of two situations: irrationally beaten-down stocks and rationally-tagged stocks of companies headed for the trash heap. Like, yes, Westinghouse. (Remember: every bankrupt company in the history of publically traded companies was at its -2 RMS at some point hitting zero. This should be in bright flashing red letters at the top of every BMW Method post.)

The problem today is that the credit crisis is such that it is simply too difficult to determine who's going bankrupt. I heard a talking head today recommending Citibank--the rest of the panel gasped. C might be one of the best stock buys in the world today, or it might be a nearly mature disaster? Who am I to tell which is which? Smarter people than I are of differing opinions. Do I flip a coin? I'd rather go to Vegas--at least I'd get a free scotch and a view while watching my money evaporate.

So rather than purchasing individual stocks, why not apply the BMW Method to picking and choosing sector-based index funds? By doing this, you can place your bet on the idea that the x industry, though beaten down and facing uncertain consolidation, will certainly survive. Even here the choices are difficult--I don't know that I'd buy automobile manufacturing index funds right now. But it seems wise to me to limit exposure to individual companies until the slaughter has concluded. And the slaughter could be far-reaching.

If that's too difficult, then there's probably little wrong with plunking your paycheck down on market index funds. As long as you're willing to keep plunking.

I'll be doing a combination of things. First of all, I'm keeping a close eye on my individual stocks. I keep reassuring myself with detached research that I have solid companies with a future. That's important, and we need to stay flexible of mind these days. There's no room for emotional attachment--no company is immune from disaster.

Secondly, I'm shifting some funds from individual stocks to targeted index funds. I think it's smart to stick with things that even a poor society needs. I'm investing for the worst while hoping for the best...and in this market you don't pay much of a premium in terms of opportunity cost for taking a pretty conservative and defensive position.

Finally, I'm pumping about 30% of my income into broad market small cap index funds. I've never saved so much in my life. I still drink Glenlivet, but not as often. It's the price we must pay. Furthermore, I plan to continue doing this for about the next 10 years. If the recovery preempts my plans, that's great. But I assume I'm stuck in a dollar cost averaging strategy for the next decade.

John
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