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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: of 41629  
Subject: Re: Convergence of BMW and Value Investing Date: 7/6/2004 10:14 AM
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Hi Mike et al,

Is the BMW method a form of Chartism, or MI? Hmmmm … Well, isn't it sorta like beauty? I mean .. isn't anything, including BMW's methodology, sorta dependent upon how others see / use it?

Now before I continue, please note that I become most critical of those things I find myself favoring the most. So please don't read my following comments and queries as being negative, because to me, that isn't the case <smile>. Hahahaha ... what a caveat <g>.

Let's see … pick any of your recommended charts … maybe WMT? Would you buy because of the chart alone? Do you know what WMT does? What is it that WMT does to give it an advantage over its competitors? Does it have a sustainable advantage (moat)? Has its past price appreciation been marked by organic growth or acquisitions – do you know its basic business model? What makes you think the current 5 years of stagnation in price is the current market perception being wrong and more likely to revert to its past mean vs continued stagnation or even continued decreases to a NEW lower CAGR, just the chart? What is the CAGR you believe it will revert to and why – especially if the past show periods of different avg CAGRs? Have the price peaks and valleys that define the Hi and Lo CAGRs occurred at times when things were happening with the company, its business environment, etc. that may warrant discounting them? What is the total market for WMT products and how might its size / market share going forward (vs in the past) be expected to effect it's CAGR (ie. While a company might not significantly change, if its operating environment does that alone may reasonably alter expectations going forward? More directly, have you bothered check the math as to whether a company can realistically grow faster than its market for any significant period of time?) Is/has the company been experimenting with new revenue streams and is it straying too far from its core (responsible for its past CAGR) or does it need new revenue streams in order to maintain its past CAGR and are the new revenue streams in markets sufficient to meet or exceed past CAGRs, etc. etc.? Disclaimer, I don't own WMT and my personal DD leads me to suggest its not a reasonable BMW candidate, so maybe I am unfairly biased in addition to being flat out wrong about it <smile>?

Regardless of how good or poor my questions are, ask yourself how much you are depending on a “chart” vs knowledge of a company's business model, economic performance, overall market conditions (past, present and going forward). Etc.? Me thinks that just here in BMW land where we are all more or less true believers, there exists a rather wider range of whether the BMW method is being used as more an MI / TA approach vs a value approach vs a deep value/Graham type approach. Then again me thinks fleas and ticks and mites are the only truly evil things <smile>.

I agree with your definition of value investing, and I LOVE BMW's core notion of the price being maybe the best value marker. But because I think we all can acknowledge that the price represents a composite of buyers/sellers views and styles and systems with regard to the “value” of a company, and they don't usually agree with much less employ BMW principles, what exactly is the price telling us again <smile>? Might the basic definition of “value” (a company's price) by the “market” itself change over time? What if a company we are investigating hasn't changed its business model, has stable management, is in a market that itself is growing at least as well as the company's avg CAGR, but the nature and distribution of its institutional investors has radically changed over the past X years? If the newer institutional investors have a very different paradigm than those in the past (momentum vs value, short vs long term, etc. etc.), would you expect that to affect the forward CAGR or not? Or do you trust that it all average out over time <smile>?

I do think the BMW methodology is potentially much more fundamental than TA or MI investing .. but only if the people employing it are much more fundamental in their assessment of what I'll call the deep value for a particular candidate company, it's business model, it's competitors, it's market, etc. etc. both in the past and going forward. How much do we talk about charts and their details around here vs interpretation of the charts and the actual factors that have driven/are likely to drive, the charts? Where are the discussions on the factors driving the price charts (the value charts)?

We very rightly discuss possibly ignoring the more recent techie bubble in setting HiCAGRs, and or dropping out the recent readings in setting LoCAGRs, IN GENERAL, but how much company specific DD do we discuss in terms of dropping previous peaks or valleys? Or do we really expect rules to exist to cover all companies? I agree with BMW that the LoCAGR is probably the more important one to mark as it more directly defines our range of buying interest. And if we are truly value investors, why haven't we been discussing the price valleys of the past that wind up setting the LoCAGR for specific companies and whether they should be trusted or discounted for going forward (setting the LoCAGR line)?

“Combined with analysis to determine if the company's value is likely to continue along its past long-term trends, it seems that the BMW Method is a good example of a Value Investing philosophy.” Not bad! I like the styatement but can't help but offer the following potential edit …

To me the pillars of strength of BMW's method are as follows …

1) enough price history (ie if ya need 30-100 yrs of data to see the true nature of the DOW, why do you want to trust less for a specific company?) I'm NOT saying we always need 30 years of data, but I am suggesting one may need to more clearly define exactly what is needed on an individual chart/company to make it dependably usable.

2) an established trustable trend for going forward (how do we each define an exploitable trend? Just a generally upward price appreciation? How about a classically defined and tested trading range where a company has displayed a wave like behavior between 2 CAGRs having tested the bracketing CAGRs 3 times each? 2 times each?

3) In depth DD of the company for the whole period of the graphical representation of value (historical price), because unless your DD covers the same and whole period of your pricing graph, how can you be certain of the past's ability to extrapolate into the future? This might be especially true of the periods where price defines the Hi and Lo CAGRS.

4) In depth analysis of the company's past and present competitive environment – Even if a company is remarkably consistent within itself, isn't it's market environment rather important in terms of its value, especially going forward, it's definition of Hi and Lo CAGRs?

5) reasons for believing the company and its market is consistent in terms of its past business model, management effectiveness, etc,. going forward. There be dragons to the right hand side of ALL charts, so do we need evidence of a steady hand being on and staying on the tiller as we sally forth into the uncharted territories <wolven grin>?

Anyways, I've probably typed way way too much, but I do so because I am on the cusp of increasing my own personal commitment ($) to the BMW methodology, and so I am increasing my own personal examinations of it. I would appreciate your thoughts, even if they are that I am so far off the beam that I should just crawl back into my den and leave you sensible folks alone <smile>.

Take care,
IcyWolf
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