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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: of 41629  
Subject: Re: The BMW Screen...er, Method Date: 12/15/2006 2:22 PM
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Hi Ears!

2. Do your due diligence.

...

Of these three steps, number two requires the heavy lifting. There are few people on the planet who are skilled at assessing the likelihood, magnitude, and longevity of future cash flows.


As BMW and Denny have said, I think one of the really good principles behind the BMW Method is that the DD is greatly simplified. You start with companies you are pretty sure are going to be doing the same thing they've been doing, have already proven themselves over many years, and can be reasonably expected to continue growing.

Here's the big advantage with the BMW Method: the whole DCF calculation and everything that goes into it has already been done for you over the last 20-30 years. The price paid for the stock over the long term already reflects all those people doing all those calculations... and the occasional mania or depression thrown in. By taking a long enough view of this market activity, I think the Average CAGR is a better valuation than all the DCFs you can throw at a company.

Now you just need to make a reasonable judgment that nothing fundamentally different is happening to the company in the next few years. That is a whole ton easier than trying to estimate earnings, backing out depreciation and one-time events, estimating CapEx and discount rates and terminal growth rates and all that other stuff.

-Mike
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