As I understand it, this board is aimed at discussing various methods for evaluating investments and sharing ideas. I often refer to my analysis which includes the compound growth graphing of a stock. I thought I should take the time to explain precisely what I do and how I use the information to advantage.First, please pull up the following chart and print a copy to use for an example. This happens to be Pepsi Cola but there are hundreds of others that would work equally well. http://quotes.fool.com/custom/fool/html-chart.asp?osymb=ko&osymbols=abt&symbols=pep&GetBtn=Get+Chart&currticker=ABT&time=all&uf=0&compidx=aaaaa%7E0&ma=0&symb=abt&freq=1mo&lf=1&comp=&type=2&sid=334&print=trueThe first step is to get some historical data to use for comparison. I use "Big Charts" for my data but it is readily available from many places on the web. Just to be consistent, I always go back 25 to 30 years. Thus, when I look up PEP for 02/06/74 I find that the shares were selling for $64 each ($1.18/share split adjusted). Today, PEP closed at $50.21/share. So, what does this tell us?It tells us that the compound growth rate from this exact time in 1974 to the present was 13.62%. Several months ago when I did the same type analysis, PEP was showing a compound growth rate of 12.97%. Thus, the curves will change slightly over time but the overall results still outline a very real growth pattern and percentage growth rate over time.If it weren't for the stupid old stock market, PEP could be graphed as a 13.6% compound yield and get to the exact same point from $1.09/share in February 1974 to $50.21/share today. Remember, this is the stock price yield...it includes no dividends. Thus, I will first graph the 13% constant compound growth curve onto the PEP historical data. See how nicely that fits inside the data? By the way, I do this with a french curve by hand. I have not figured out how to do this with the computer even though I know it can be done. I am just not that good.Next, I look at the lowest prices that fall below the 13% curve. I see that back in March 2003, PEP hit a low at about $35/share. At that point, the compound growth since 1974 was about 12%. So, I lay in a 12% curve and find that this encompasses all of the low prices since 1974. The highest prices are similarly figured. Look at 1998. There the stock peaked at $44/share for a compound growth of 16%. That curve successfully encompasses the highest historical price levels. Thus, we can go back and quickly plot in the 14% and 15% curves to complete the entire picture of PEP's historical price. Plus, we can see that the 14% curve neatly bisects all of the data and becomes the "average compound growth" that PEP has experienced for the past 30 years. On top of that you get a decent dividend.Immediately I am interested in PEP as an investment...but not necessarily at $50/share. I was a buyer last year at $36/share. If you look at the 12% compound growth curve you can see why. Historically, $36/share was a good as it gets with PEP. This year, PEP would need to drop in price to about $40/share to meet the deal of March 2003. $39/share would beat the deal in 2003. Thus, low price is not the measure...best historical value is the measure. Now, many people will say that none of this matters at all...it is just history. However, I have used this method to buy and sell my stocks for ten years and in that time I have never lost a dime on any purchase. Great companies always come back from their historical lows and fall from their highs. I look at the chart like a road map on a vacation. It shows me where we are going. I can suddenly see where the company is going long-term. The only question that has to be answered is, "Is there anything really different this time around. Is this time special?" That is where some due diligence is necessary. I look at various parameters to determine if something is really going on behind the scenes or if this is just another normal price correction. Maybe the overall market has turned down or maybe the stock missed an earnings estimate. Those things are expected. Maybe there has been a change in the technology...that is not expected but is devastating to some businesses. The charts cannot predict that sort of change. You have to know what is happening and you get that by researching the business. However, with a business like Pepsi Cola, I do not think that is going to be a problem. This is really a pretty simple business.Let's look at what happened to PEP in 1994. The price turned down and was available at $14/share. 1994 was a recession year...lots of things were down. But, PEP was squarely on the 13% line and showed that PEP was near a historical low...but not quite as low as it was just last March at $35/share! In other words, PEP was a stronger opportunity in March 2003 at $35/share than it was in 1994 at $14/share. This is where the charts start to pay for themselves...and they are free to begin with! Look what happened if you bought PEP in 1994 at $14/share. By 1998, it was at $44 for a price triple. That is a compound return of 33% plus the dividend that was maximized buy purchasing PEP at $14/share. Of course, at $44 in 1998, PEP was at the highest levels in history approaching a 16% compound growth rate...that cannot go on forever since PEP's average growth is just 14%. My chart told me it was time to sell at least a good portion of my PEP position. History says so!Sure enough, over the next two years, PEP dropped by over 30% and was again becoming a good buy once more in early 2000. However, without the chart, who would know that? With the chart, as soon as PEP drops below the 14% curve, I start getting interested. At 13% I am a buyer and at 12% I am backing up the truck...unless I see something unusual. I always have to be able to see the reason for the price drop. If there is no rational explanation, then I would not buy. However, I have never failed to find a rational explanation because that is usually what drove the price down in the first place. Thus, the next question is, "When to start buying safely." The chart shows us when to start buying. The rest is simply a matter of picking up the capital gains at the right time in the future.Thus, on the way back up, once PEP passes through the 14% curve, I start to get interested again on the sell side. At the 15% curve I am selling shares. At 16% I am out of the stock except for maybe a hundred shares. I always keep some to make sure it is always there on my screen to watch. Any bad news peaks my interest again.I am not a trader at all. These moves are almost always long term and while I may buy several times in a two or three month period, after that, I am just watching long-term for the stock to approach the higher growth curves. If it takes two or three years, that is just peachy, I am not impatient.OK, there you have it. I think my method is very simple, easy to understand and it has not failed me yet. In an instant, I can spot exactly where I am at any time. If some guru on CNBC is hyping a stock, I can see whether I agree with him or not. It is very interesting to listen to the experts when I have my chart in front of me. I find that many times the gurus are hyping the stock when it is approaching the highest growth curves. Conversely, I have noticed that they are often bashing the stock right when I am backing up the truck. I just have to chuckle to myself and buy more! It is apparent that they have motives that I do not understand. And, I do not need to understand because I have my charts to direct me.Does this make any sense? I hope I have explained it in terms that make sense to you all. By the way, PEP is just an example of one stock that I like. It is very predictable. However, what I really like is a stock that suddenly drops out of its historical range due to what I know is bogus news. TECO was one such stock last year. That was what introduced me to this board back then. PosFCF did some excellent work on TECO which strengthened my belief in the business. Since then, that investment is up 50%...not too bad for a stodgy little utility business.Politics really have a big influence on some stocks. That is where the doubles and triples come into play in under 18 months. I can show you loads of these but their opportunity has already passed. They will come again...I am always looking for another opportunity to take advantage of the market's irrationality. And, in the short haul, the markets is very often irrational because speculators are irrational. So, you can find stocks to buy using this method all the time. In fact, you can build up a portfolio of previously charted stocks and update them every six months or so. You will see in a matter of seconds which stocks are looking like good things to get back into with your gains from a previous sale. Now, you do not need me to show them to you. You now know how to find them for yourself. Try it, this method might work for you too. I would love to hear some comments concerning the BMW charting method. I have never seen it used anywhere else.
interesting post, bmw. I will definitely test your method on some of my stalwart type of holdings (MRK immediately comes to mind).Just some thoughts off the top of my head. As a company matures, the growth rate inevitably decreases. Even considering the company may pay out a higher dividend, the total return (growth + dividend) should follow suit and gradually decline. What do you think?Of course, your method seems to have plenty of margin of safety built in. You are essentially buying great companies when they are out of favor, but this charting method is definitely very interesting and intuitive. Thanks for the idea.
"I will definitely test your method on some of my stalwart type of holdings (MRK immediately comes to mind)." - gocanucksAbsolutely do that! You are going to be very pleased with what you will find. I have been following MRK for many years. Back in late 2000 it was way, way over bought, exceeding the historical growth curves. Last year it was at historical lows and a screaming buy. I, of course was buying and still would be except I own too much already.MRK is a perfect example of the method at work.
BuildMWellThank you for sharing your winning approach! If you're anything like me, there was more than a little trepidation in doing so! So, in plotting your % return line, what do you do, take it a year at a time and then connect the dots freehand?Doesn't Excel have a charting function? If so, couldn't one use a Future Value (FV) formula and plot the results?Thanks again for sharing this approach, I'll be watching with interest the discussion that develops.PosFCF
Hey Jim (or should I call you BMW?),Very interesting post. It seems too "simple" to actually work! You mentioned that you've never seen it used anywhere else, but I've seen something very similar. Perhaps you're famaliar with the NAIC's stock selection guide (SSG)? It basically does the same thing, but with numbers instead of a graph. It does include a graph so that you can get get a visual picture, which in my opinion (and obviously yours!) is very important.Basically, with the SSG you calculate potential high and low prices based on the past 5 year averages of high and low P/E, dividend yield, recent extreme prices, etc. Then, you divide the area between the high and low prices into buy, hold, and sell zones (your equivalent of under 13% CAGR, between 13 and 15, and over 15%). With each earnings release you update your buy hold and sell zones, just like you review your 'bargains' - $36 a bit ago being a better bargain than 14 a long time ago...the NAIC takes it one step further with PERT (can't remember what it stands for right now, portfolio evaluation and review technique or something like that), where you monitor things like ROE to determine the unusual circumstances that you mention.IN any regard, your method seems much 'simpler'. Very interesting. Thanks for the post!Cameron
It sounds like a killer strategy. Please add my email to your list so that (after) you make a decision to buy you can email me and I'll send you a little treat in the mail ;)The possible flaw, as mentioned, is that if the company actually HAS reduced its growth rate then you may not be getting such a good deal. However, I think your due diligence would reveal if the growth rate had suddenly trickled to much lower than any historical low period would indicate. I am curious to know- were the dips often do to perceived lack of growth which actually rebounded, or merely to other random fluctuations (like some negative hype about the company). This would make a big difference in how you approach future dips- for you may be able to classify them and then rank them in terms of safety. For example:- company gets lambasted in the news for a 1 time event= perfectly safe- actual 1 year decline in earnings by 1% = fairly safe- multi year decline in growth in earnings = not very safeHowever, those safety categories I just threw out there are guesses.. it may well be that Pepsi did suffer real declines in earnings. I guess I should get off my lazy bum and check. I am trying to ask: are the dips caused by actual declines in earnings growth which the company then remedies, or are they caused by something else?It is interesting to me how -it seems- apparent declines in growth in earnings translates into substantial stock price drop- as if those who were observing the decline in earnings actually believed the earnings were really falling off. For example, JCOM is now going to pay taxes on its earnings. The threat of this caused the stock to decline a lot. Yet clearly this is not an actual decline in growth in earnings- that is to say- it is not indicative of its future growth curve at all. Yet investors seem to be saying- gee- I see a lapse in the apparent growth in earnings, so I am bailing. As if they are not looking at all into what is happening, and are buying and selling merely on mathematical functions which are confused by these one time events. I don't know if this is true or not, I haven't been watching that many stocks for that long, but it appears it may be the case on occasion. If this is the case- this is the buying opportunity. Note JCOM has other factors which may be factored into its stock price (I am long on it by the way).. such as the declining usage of FAX machines worldwide. That was just an example which I picked off the top of my head.But more seriously, I would be very interested in looking at some more graphs. Where do you buy a french curve?
Some more annoying questions for you:How many stocks do you attempt to follow with your graphing method? 10? 100?How often do you sample these same companies? All of them once a month? Or do you rotate through them on a quarterly basis and try to hit each one a quarter. It seems like sampling too often would be tedious and rather pointless, but if you wait for a full year you may miss out on a good deal.It does seem to me that the point of these boards is to get people together so that we could parallel process- that is- split up a bunch of stocks and look at them all with our french curves, then communicate to each other which look like good prospects. Maybe you can make your own board and convince some people to start watching stocks and we could expand our vision.And for fun- try using your trick on Apple.. if you read the latest fool articles Apple is expected to have a big earnings bump soon due to i-pods.. and it the stock may rebound upwards nicely for 8-24 months..but it would be a lot more comforting to buy in if it were near the low end of your french curve growth curve.
For anyone who doesn't know how to compute the Compound Annual Growth Rate here is a Fool article on the subject.http://www.fool.com/workshop/2000/workshop000302.htm?source=EDSTRBI created a simple spreadsheet to compute the CAGR. Here is the main formula:=((B1/B3)-1)^(1/B5)B1 is the most recent priceB3 is the starting priceB5 is the number of yearsTo compute the number of years I used the YEARFRAC function.That info should be enough for anyone to recreate the sheet. However if you wish I can e-mail you a sheet.bj
Just one question. How did you arrive at the information that the shares were selling for $64 each?
"So, in plotting your % return line, what do you do, take it a year at a time and then connect the dots freehand?" - PosFCFActually, I do the calculations at 5, 10, 15, 20, 25, 30, and 35 years...then I connect the dots freehand using a flexable curve that I found at a drafting supply store. I make sure that I have enough room out to the right side to add more years later. I find it very interesting to redraw the new curves over the old ones after a number of years...they change very slightly but the changes do explain what is actually happening to the business long-term."Doesn't Excel have a charting function? If so, couldn't one use a Future Value (FV) formula and plot the results?" - PosFCFAbsolutely. However, I have not been able to do it myself yet. I have explained the method elsewhere in the past and several other people have used the Excel system and sent me copies of their work. However, I can plot out any stock's data by hand in about ten minutes. I question whether Excel will save me any time since each stock's growth is completely different. Just getting all of the data into the program and setting up the formulas has to take more than ten minutes. But, I would love to see this put into a program that is quick and easy.
"It is interesting to me how -it seems- apparent declines in growth in earnings translates into substantial stock price drop- as if those who were observing the decline in earnings actually believed the earnings were really falling off. For example, JCOM is now going to pay taxes on its earnings. The threat of this caused the stock to decline a lot. Yet clearly this is not an actual decline in growth in earnings- that is to say- it is not indicative of its future growth curve at all. Yet investors seem to be saying- gee- I see a lapse in the apparent growth in earnings, so I am bailing." - yttire Actually, that is precisely what I have observed with many stocks. I am not familiar with JCOM but I just did some quick charting and it is impressive...like 70% growth ($1.00/share in 2001 to $20/share today) with a severe peak back last year. To me, the pullback is just normal activity and further pullbacks will also occur because anyone should be scared by 70% growth. However, that in no way makes JCOM any less desirable as a great investment long-term. This actually raises another good aspect of the BMW method. I see JCOM much like I did CSCO back in 1993 and 1994. There is no 30 year trend. In 1993 CSCO had about two years of data but it was growing at about 70% just like JCOM is right now.Here is what I learned as time passed on Cisco Systems. The compound growth rate steadily declined each year. Based upon my similar evaluations of "new" tech businesses in the past, I theorized for my charting that Cisco would do like others in the past had done...that is to grow at a declining CGR and approach a more reasonable 25%, 30% to 35% rate. Thus, I actually plotted these "super low" growth rates onto my CSCO curves. No company can grow at 70% for very long...it is mathematically impossible.Starting in 1993, here are the compound growth rates for Cisco Systems. 75%, 76%, 65%, 64%, 74%, 63%, 68%, 68%, 78%, 78%, 48%, 41%, and 38% by 2004. However, those high rates in 1997 through 2001 were the internet bubble! That was unrealistic as we all now know. Thus the crash.However, by shifting the staring point for doing the compound growth calculations, the percentages looked much different. For example, Starting in 1995 they were: 30%, 36%, 62%, 48%, 58%, 65%, 40$, 30%, and 30%. I am not sure that I am explaining this well enough, but I was seeing that Cisco was fast approaching a 30% growth rate. I would need to show you all of the data, but that 30% growth rate was embedded into my mind by the charting over time.So, when CSCO stock recently jumped from $23/share to $29/share, I sold it! As far as I am concerned, Cisco is undervalued at $18/share but severely overvalued at $29/share. Sure enough, it almost immediately started down and is now about $24. I am still not a buyer. When I get back into Cisco, it will be at a reasonable growth rate. If it drops below the 30% compound growth curve, I will get interested. It would have to get to $18/share to get to the 25% growth curve. I actually do not expect that great of a deal on Cisco, but I will be hoping for it. I will place buy orders for that level and see what happens. In late 2002, CSCO was a steal at $11/share. (It was just below my 25% return curve) But, the experts were saying to "SELL!" However, at $29/share its price is poking above the 35% curve. I could be wrong but I just do not think Cisco will grow at 35% long-term. I watched the stock steadily track on my 30% curve until November 2003. Suddenly, it spiked upward on some good news and I was a seller! To me, buying at $11/share in November 2002 and selling in January 2004 at $29/share was a no brainer. My charts told me so. By the way, Cisco will be a good deal at $25/share by this time next year. But, if that is true, why pay $24/share today? It pays no dividend, what's in it for us if we buy today? At $20/share today we can make 25% on our investment...at $18/share the return is 39%. Will Cisco drop to under $20/share in the next month? I have no idea. However, unless it does, I will not own but 100 shares. Why own it unless it is going to make a nice profit? If it gets below $20, I will own some more and the truck will be backing up at $18. The bottomline is that I know what I will be doing and exactly why. I am not saying that I know what is going to happen because I do not! However, I know what I am doing even if it is wrong. If it turns out that I am wrong and Cisco goes to $16/share, I know that it won't be long before Cisco again does what it has done since it started...It will go up in price again. Patience is the key. The only problem I have run into is that I often "back up the truck" on a stock too early...it goes even lower after I buy. If I can work it out, I will buy even more at the lower price knowing that history is on my side. So far, history has not let me down.Anyway, I hope this explains how the picture can easily change with a new company. That is why I prefer businesses with at least 25 years of performance. They are past that high growth/high return stage. I prefer to make my 70%/year gains on a stodgy old business that is severely undervalued. I find that to be the case over and over again. The market has little faith in history...they tell us so every day. "Past performance is no guarantee of future results."I laugh every time I hear that! What a pile of crap those words are. Of course there are no guarantees in the future...but the past is all we have to evaluate! That is what the BMW method does. It quantifies the past for me. Then, the future seems very clear to me. I hope this explanation helps.
"And for fun- try using your trick on Apple..." - yttireFirst, look at the AAPL curve. What does this show us long term?http://quotes.fool.com/custom/fool/html-chart.asp?osymb=&osymbols=AAPL&symbols=aapl&currticker=AAPL&time=all&uf=0&compidx=aaaaa%7E0&ma=0&symb=aapl&freq=3mo&lf=1&comp=&type=2&sid=609The answer is, "Nothing!" This approach does not work for many stocks. Cyclicals like General Motors will not allow for this compound growth analysis to work. Apple is similar. It has no long-term growth trend that we can try to rely on. I have owned AAPL in the past and made money. In hindsight, I was gambling. I lucked out. I bought when it was very cheap and sold when I had triple my investment. However, I did not use my method because there was no trend. I just assumed that AAPL would survive and that it was cheap. Quite frankly, neither assumption was a good one...they just happened to work out. That is how many people invest. I hate gambling with my money."How many stocks do you attempt to follow with your graphing method? 10? 100?" - yttireI just counted the file folders...I am tracking 64 right now. I own less than 20 of them. Well, that is not entirely true. I actually own all but 2 or 3 of them. When I say that I do not own them, I mean in a big way. I always keep 100 shares of any stock that I follow. Owning it keeps my interest up even though my position is not highly significant to my portfolio. When I actually "own" a stock, I will hold maybe 2000 shares or more. yttire continues: "How often do you sample these same companies? All of them once a month? Or do you rotate through them on a quarterly basis and try to hit each one a quarter. It seems like sampling too often would be tedious and rather pointless, but if you wait for a full year you may miss out on a good deal."I revise the curves yearly about this time. They do not change drastically from one year to the next. However, a business like Pepsi might have changed in price between 1973 and 1974...it might have doubled back then or been cut in half. The same irrational things were driving stocks 30 years ago!This will change the percentages but not the curves. An 11% curve might become the 10% curve or the 12% curve. But, what I am looking for is a series of predictable parabolas! Once you get into this, you will find that the percentages are not that important...it is the consistent growth that defines the curves. Plus, if the percentage changes from 10% to 11%, it will likely shift back the other way the next year as the stock "corrects" in 1975. However, you do bring up an interesting point. Just as with the Cisco reduction in the rate of growth, large corporations do experience a slowly declining rate over time. The truth is, they really cannot continue to grow at the same rate forever. I can show specific examples of this later. However, over a two or three year period, this loss of growth is insignificant. What is significant is the moves within the trend lines from being over-sold to being over-bought or vice versa. Just looking at a chart without the growth lines tells me absolutely nothing! I mean, how low might that stock go...or how high? The growth curves show the historical limits. I apologize for being so long winded here. However, I am very enthused about what this approach shows. I love to explain it to folks who care to listen.
"Just one question. How did you arrive at the information that the shares were selling for $64 each?" - rdevineIn "Big Charts" there is a tab for "Historical Quotes". I just ask for a quote from exactly 30 years ago. The quote page also shows the split adjusted price.
Thanks BMW,This is one of the better conversations I have seen in a while. Please feel free to continue it. It is very interesting to me and I would like to see about applying it in my purchases. Jason
Actually, I do the calculations at 5, 10, 15, 20, 25, 30, and 35 years...then I connect the dots freehand using a flexable curve that I found at a drafting supply store. I looked online for a while trying to find out the actual equation of a "french curve". I wondered- could it actually be an exponential growth function? If so, it would be a good idea.However, it would be easier to take the natural log of each of the price points, and then plot them and use straight lines. Taking the natural log would flatten out the growth curves, making deviations easier to spot, I would think.In any event, I wondered to myself- can you really take exponential growth functions and lay them on top of each other? I mean, isn't a 10% growth function much different than a 13% growth function- more than just tilting it over?To prove it to myself, I made this little chart for you to idolize:0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 151 1.1 1.21 1.33 1.46 1.61 1.77 1.95 2.14 2.36 2.59 2.85 3.14 3.45 3.80 4.181 1.13 1.28 1.44 1.63 1.84 2.08 2.35 2.66 3.00 3.39 3.84 4.33 4.90 5.53 6.25 1.00 1.17 1.35 1.55 1.77 2.01 2.27 2.57 2.89 3.24 3.63 4.06 4.53 5.05 5.62 6.25
The top number is the year. The next row is the 10% growth function, and then the 13% growth functin, both for 15 years. Finally, I attempted to "tilt the 10% growth function" to match the 13% growth function to see if they lined up. I brought both lines to intersect at zero, and scaled the second line linearly (tilted it). You can see that they do match at the ends (I lined them up) but they don't in the middle. The lines are different, and using a different curve- you can't use a simple mechanical device for a long projection on an exponential curve. What this boils down to is that your french curve is an approximation (and perhaps there are different growth curves along different parts of its surface).. but make sure your data points are close enough or else you are introducing crazy noise into your comparison. Adding more data points gets rid of the error by reducing it.Now if you take those same numbers, and take the natural log of them.. then you can tilt one into the other.. they are both linear equations. Here is the same table, but with the LN instead.0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 12.00 13.00 14.00 15.000.00 0.10 0.19 0.29 0.38 0.48 0.57 0.67 0.76 0.86 0.95 1.05 1.14 1.24 1.33 1.430.00 0.12 0.24 0.37 0.49 0.61 0.73 0.86 0.98 1.10 1.22 1.34 1.47 1.59 1.71 1.830.00 0.12 0.24 0.37 0.49 0.61 0.73 0.85 0.98 1.10 1.22 1.34 1.47 1.58 1.71 1.83The last line is the first line scaled into the second- they match perfectly. Now the angle of the line corresponds to the exponential growth- the 13% line is merely tilted at a higher angle than the 10% line. Note that log base 10, or log base 2 does not work, it has to be natural log.It may be more of a pain in the neck for you to convert it into natural log, but it is an idea. The problem with this idea is you have already trained yourself on your current technique, so it may be more confusing and less useful to you, but it is an idea.
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 151 1.1 1.21 1.33 1.46 1.61 1.77 1.95 2.14 2.36 2.59 2.85 3.14 3.45 3.80 4.181 1.13 1.28 1.44 1.63 1.84 2.08 2.35 2.66 3.00 3.39 3.84 4.33 4.90 5.53 6.25 1.00 1.17 1.35 1.55 1.77 2.01 2.27 2.57 2.89 3.24 3.63 4.06 4.53 5.05 5.62 6.25
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 12.00 13.00 14.00 15.000.00 0.10 0.19 0.29 0.38 0.48 0.57 0.67 0.76 0.86 0.95 1.05 1.14 1.24 1.33 1.430.00 0.12 0.24 0.37 0.49 0.61 0.73 0.86 0.98 1.10 1.22 1.34 1.47 1.59 1.71 1.830.00 0.12 0.24 0.37 0.49 0.61 0.73 0.85 0.98 1.10 1.22 1.34 1.47 1.58 1.71 1.83
Hi BMW,I also am guilty of looking at the charts. Just thought I would throw in 3 cheers as well for your discovery. It does confirm my beliefs JNJ is undervalued. Thanks,Chin
"Just thought I would throw in 3 cheers as well for your discovery. It does confirm my beliefs JNJ is undervalued." - ChinwhiskerGreat observation! Johnson and Johnson happens to be one of the 64 stocks I am following closely. I would love to hear what your analysis shows. Actually, Abbott Labs brought me to JNJ. Both have been beaten down of late...both are going to come back. Historically, ABT has been a better performer than JNJ but I actually like JNJ better right now. If you compare the two with the CAGR's plotted you will see exactly why. JNJ is moving from the 10% CAGR up through 11% while ABT is not moving at all with respect to it's lower CAGR. The JNJ data shows up another advantage of taking this very long view of a company's growth over time. Look at 1994 to 2000 for JNJ. JNJ was available at $9/share in 1994 and was at $54/share by 2000. The $9 price in 1994 was significantly below the historical growth rates...of course 1994 was a recession year. The low price made since but without the trend lines, who would know that JNJ was severely undervalued while some other company was not?Anyway, if an investor knew that JNJ was undervalued in 1994 by a significant amount, that investor could have netted an annual gain of 34.8% over the next 6 years when JNJ was moving above it's historical highest growth range. Plus, it paid a "maximized" dividend the whole way!Starting in 2000, JNJ over-corrected to below it's average growth rate and was again available at attractive levels. Sure enough, it started back up again moving from $34/share to $64/share in under two years...another 37% increase. All of these are long-term gains and subject to the lowest tax rates. Plus, the dividend was there the whole time sweetening the deal!Just a couple of months ago, JNJ was again at the lowest growth rates since 1994. Now, 1994's price was at a CAGR of 8%! I honestly doubt that will be repeated again anytime soon. But, thinking about that is interesting to me.That is the overall logic of this method. Once you see that JNJ (or any stock for that matter) is selling at a price that puts the CAGR at levels never seen before, you have to ask yourself, "Is this rational? Do I think that JNJ is a viable business that can recover to it's old performance?"I have never found a case where the answers were not pretty easy to answer. Does anyone believe that JNJ is a significantly different company than it was in 2002? It was selling at $64/share but it was at it's historically highest CAGR. It was over-priced! That was all that was wrong with JNJ!At $43/share it is under-priced. At $70/share, I will be looking to lighten up on JNJ. Of course, all this is predicated on how fast it gets to $70/share. If history repeats itself, that will happen in 18 to 20 months. Do the math. The last two recoveries netted 35% to 37% in what I call the "short-term". By my definition, long-term is "over 20 years"...short-term is "under 5 years." Like I have said, patience is the key to making money.I consider myself to be a "trader" since I do so many short-term trades. I am also a "market timer!" However, my persective is significantly different. I buy and sell maybe 6 or 7 stocks per year, I am very patient and I let the market do the work. All anyone needs is faith in the market. At any point in time, some stocks are under-valued and others are over-valued. The key is to know what to buy and what to sell...and when the time is right.What I have covered here is another iteration of the same method. Once you see the big picture, you can break the chart down into smaller pieces and analyze the CAGR's that exist within the longer term trends. Once you see the smaller trends, your return on investment will grow greatly. While the DOW might grow at 8% over the long haul, JNJ beats that average! Other DOW stocks have not. The DOW is an average of 30 stocks so if you can pick the best of the DOW, you can always beat the DOW. This is what led me to the BMW Method in the first place.So, Chinwhisker, do you look at JNJ as I do? I would love to hear your take on this investment after plotting the CAGR onto the chart. Does my analysis match yours? If so, let's get rich together. That is my goal with trying to explain the BMW Method to other folks. It works for me.Speaking of stodgy old DOW stocks...do the curves for JP Morgan (JPM) and Citigroup (C). Look what was available in the last 18 months! 100% returns were there for the taking but the DOW was up a measly 27%. Who needs high-tech when you can double your money on JP Morgan? This isn't rocket science.
So, Chinwhisker, do you look at JNJ as I do? I would love to hear your take on this investment after plotting the CAGR onto the chart. Does my analysis match yours? If so, let's get rich together. That is my goal with trying to explain the BMW Method to other folks. It works for me.Speaking of stodgy old DOW stocks...do the curves for JP Morgan (JPM) and Citigroup (C). Look what was available in the last 18 months! 100% returns were there for the taking but the DOW was up a measly 27%. Who needs high-tech when you can double your money on JP Morgan? This isn't rocket science.Hi BMW,I love that last statement; it's one I use when trying to explain my theories on index investing on the Morningstar boards. I don't have 60 stocks to play with; actually only two:) After 4 year's worth of studying equity valuation, this is all I can come up with. I do have a few more I am watching. My feelings are, first find a great company, then worry about price. Berkshire (BRK.A) and JNJ are the only two companies I have found I am comfortable investing in that have offered value in price. The rest of my port, I hold in an index strategy. Berkshire has run up 24.55% since I bought it 7 months ago, and JNJ has only gained 2%. Berkshire I made a single purchase of, and JNJ I am dripping into. I am quite happy continuing to Drip into JNJ at this price level, and forever if it never corrects. My strategy is a little less busy than trading. I will not sell either of these stocks, but will not buy when I see no value in their share price. I will only capture half of this value. One of the reasons for this is that my income tax is closer to the capital gains tax than I am sure most on this board. The other reason is it is difficult for me to find a company I feel comfortable investing in over my index portfolio. I only have 6 companies I am watching right now, and am finding it difficult to find the 7th. I use a modified intrinsic value calculation derived from a study we did of Dr. Aswath Damodaran's style. He is the author of several books, most famous "The Dark Side of Valuation", and the most complete "Investment Valuation." As Dr. D stated in one of his classes, it is more the journey through the evaluation of a company than it is the actual intrinsic value you come up with that holds the value. My intrinsic value for JNJ is at $57 a share, and BRK.B (B shares) is $3K which is actually where it is at the moment. I don't place much value on my intrinsic values, because analysts have never recognized the value of Berkshire or J&J. It is the long term prospects in these two that interest me. No matter what the price is today, at some point in the future they will both draw the price they deserve. JNJ would work well in your charting, but Berkshire is a different company than it was 5 years ago; the earnings are more transparent. JPM and C should make good charting companies for a trader, but for me, the derivatives, especially JPM offer a risk I am not willing to take. The derivatives, since they are a banks, also offer the opportunity to overstate earnings. This is one of the 'Red flags' that turn me away from some companies. Another would be the repeal of the Glass-Stegal act, in that it opened the doors for corporate governance issues between the different financial services being under one roof. I can't claim to be right about any of this, and the institutional investor is not going to look at these companies this way, so price is not going to reflect these issues as much as the risk effects my decisions. C and Sandy Weill received most of the press on this, but I actually believe JPM is the time bomb waiting to explode. It may never happen, but I just don't want o be around if it does. Your charting method has teeth IMHO. I would imagine most of the companies you look at are the large caps that influence the volatility of the S&P 500. This being the case, the prices will have high volatility, and the companies are less likely to go under; especially if you look at only companies with a 30 year record. It makes more sense than anything else I have seen. It fits in with my indexing strategy in that I buy the asset class that underperforms, hoping to capture half of the value, but the difference is I don't sell the overperforming asset class. I will be using the same method for the stocks I buy. I will buy when the value is there, but not sell when they are overpriced. The difference between your stock strategy and mine would be that I will continue to buy as long as the price is right, but by not selling when the price is to high, it just takes out the guessing, and the possibility I could be wrong. Irrational exuberance can run a price up for a long period; or down. I just simply capture half of the value, and half of the growth, but do not buy into growth. This also relieves me of the tax consequences of selling high to buy low, and it leaves me more money to invest; leaving my account balances higher until retirement; higher untaxed balance. Of course, this benefit will not be that large because I will have to pay taxes in retirement, but every little bit helps. Of course, if you can be accurate in your buy and sell ranges, your strategy will offer higher returns despite the tax consequences. Did any of that make sense?Someone should have warned you, I am a ramblin man :~)Chin
That is the overall logic of this method. Once you see that JNJ (or any stock for that matter) is selling at a price that puts the CAGR at levels never seen before, you have to ask yourself, "Is this rational? Do I think that JNJ is a viable business that can recover to it's old performance?"BMW there is one thing you have underestimated us on: our ability to ramble on. With that out of the way, here I go...I think your system is awesome. If I could have anything in the world at this moment, it would the list of your 64 stocks. But hey, I can't get everything for free you know.But now onto my main points. I will summarize them at the top so if you are easily bored you can skip the meat of the matter.1) You should be wary of systematic risk- risk that all of the securities you are moving into have a shared flaw2) You should be wary of individual security risk- I am a little concerned that you have all of your assets in 6 individual securities3) You should attempt to back test securities which "fail" your system and find out why they failed.4) You should ignore pretty much everything I say, because I don't know what I am talking about1) You should be wary of systematic risk- risk that all of the securities you are moving into have a shared flawIt is possible that a number of your stocks will all move into "nice territory" at the same time. (Obviously, they must, or you wouldn't be able to buy a few securities at any one time). Now the problem here is if all of them moved into that territory for the same reason, and it was a legitimate reason. Some reasons I can think of might be: they have a decent amount of debt, interest rates rose, and now their earnings are reduced in servicing that debt, accounting laws changed, and now all the ones in your group must pay taxes differently than before which has changed their overall financial picture, they all are being obsoleted by technology in some subtle way, they all are being impacted by the change in minimum wage law.. etc. You get the idea. The problem here is that if you bought into a bunch of securities which all had an underlying "flaw", and that flaw doesn't go away because it actually is becoming a real problem and it is shared across all of your companies- then your portfolio suddenly has a real problem.Your due diligence would hopefully uncover any sort of systematic problem to all of your securities- but it is something I would be wary of. This due diligence part of your method is the part that then becomes the most important, and least likely to be able to be transmitted easily through a few simple notes. Thus even if your system is awesome it may not be transferrable to another who does not have your acumen and experience.2) You should be wary of individual security risk- I am a little concerned that you have all of your assets in 6 individual securitiesIf any of your securities get nailed with accounting fraud- you won't be broke, but a big part of your portfolio will undermined considerably. Hopefully none of your stocks will go the way of Enron- but you get one screwy CEO in charge for a while who is hiding stuff on his books and you never know. Thus if I were you I would have a big chunk of your money outside of the risk category of either systematic risk or individual security risk- in an indexed fund. This will necessarily reduce your overall yield. However, it sounds like you may be at a point you could live with less yield. (In fact at the moment it sounds like your stocks are better bets than the stock market as a whole, so not only would you get less yield, you would move into negative yield possibly, but I still think this would be preferable than introducing the above two risks into your overall portfolio)3) You should attempt to back test securities which "fail" your system and find out why they failed.I looked over coke to see how it faired with your system. It actually worked with your system well- for a while. As you point out, not every stock works- but a lot of stocks do work for a while and then will fall apart. If you knew why and how these stocks fell apart, for all those which do adhere to your system for a while and then fail, you would possibly be able to reduce your chance of it happening to own of your chosen in the future.4) You should ignore pretty much everything I say, because I don't know what I am talking aboutYou obviously are doing a good job and are successful with it, so I would discount anything anyone else says pretty heavily- you are doing well. However, I do like to throw my 2 cents around and listen to it jingling.
"This also relieves me of the tax consequences of selling high to buy low, and it leaves me more money to invest; leaving my account balances higher until retirement; higher untaxed balance. Of course, this benefit will not be that large because I will have to pay taxes in retirement, but every little bit helps. Of course, if you can be accurate in your buy and sell ranges, your strategy will offer higher returns despite the tax consequences." - Chinwhisker First, did you take the time to draw up the JNJ CAGR curves onto the 30 year chart? I am anxious to see if you can justify the various things that I suggested in my last post? Anyway, back to your statement above. If I could give you any one piece of advice, it would be, "Never let the worry of capital gains taxation keep you from taking a solid gain and pocketing the money. Taking your gains, holding cash for a while and buying back at a significantly lower price later is never a mistake."That is the hardest lesson I have had to learn. All we do with holding an equity long-term is to limit our potential and delay the tax consequences. However, in my opinion, the tax consequences will only get worse with time. I prefer to pay them now and know that the money in my account belongs to me! That way, Uncle Sam has no claim to a huge capital gain anytime in the future. Sooner or later the taxes will be have to be paid...the only question is, "What tax rate will you be taxed at?" The lower the rate the better in my book. If you have a fairly low taxable income now...this is the time to use that low tax rate to your advantage. Pay the tax now...take some profits. The desire of most people to not pay taxes is the biggest trap in taxation. Many folks end up at age 70 with huge capital gains that keep them from diversifying because they refused to take some profits much earlier, raise up their basis and diversify when the price was right. In my JNJ example, if you bought in 1994 and sold in 2000, you had a 35% capital gain per year. If you owned 1000 shares at $9/share and sold at $54/share, you had a gain of $45,000. At a 20% Cap gain rate, you would have given back $9000 plus the state tax. But, you would have had the original $9K plus the $36K to reinvest. As it turned out, you could have bought 1300 shares 6 months later. What you would have gained is 300 shares (30%) in the number of shares PLUS you would owe no tax. I call this phenominum, "Gaining on it."Selling those 1300 shares in 2002 at $64/share gets you $83,200 but you owe tax on $37,000. You pay the tax and keep $30,160 plus your $45,000 that has already been taxed. Your original $9000 is now worth $75,000 and you owe no tax. That is your money! That is a 30% return on your money AFTER taxes. If you had bought and held JNJ, your original $9000 would still be worth $64,000 in 2002...a total return of 27.8% BUT you would still owe the tax. You now have succeeeded in putting the government in your wallet! You think you have a gain but they own a big chunk of it still. After taxes, you actually have $11,000 less than you think and you are trapped! So, you just hold your 1000 JNJ stock and ride it down to $42/share. Why?The 15% capital gains rate is a blessing! The way I do things, my gains are always long-term. But, I love paying those taxes! Well, that ain't exactly true. I wish that there were no taxes to pay...but since we have to pay eventually, I love paying the lowest rate possible. Plus, this is how I eat. This is all that I do for a living. I have to take some gains and pay the taxes so that I have income to live on. Day trading becomes a full time job. I prefer being much lazier than that. I trade maybe six times each year.Ten years ago, I figured this all out. I realized that I was worth more to myself than I was to any business. I have been getting nice raises every year since I quit my job. That is how I have the time to follow so many companies. The way I look at it, I have some of those businesses working for me. I have no problem with laying them off when they are too expensive. They would do the same with me, wouldn't they? Turnabout is fair play.
1) You should be wary of systematic risk- risk that all of the securities you are moving into have a shared flaw.You are correct, however, this is very unlikely. I own all sorts of businesses in almost every sector. The only real exposure is a total collapse of the stock market. While that could happen, I am not betting on it. If it happens, I will be hurt real bad, but who won't be?2) You should be wary of individual security risk- I am a little concerned that you have all of your assets in 6 individual securitiesI regret that I gave that impression. What I said was that I trade only 6 or 7 stocks each year...often less. That doesn't mean that I own just 6 or 7 stocks. I own almost all of the 64 that I follow. However, I may own only 100 shares of CSCO right now bwcause I sold all but 100 last month at $29/share. I still own CSCO. If it drops below $20/share, I will buy maybe 900 shares. If it drops to $18/share, I will buy another 1000. At that point, I am into CSCO as far as I plan to get. Well, unless it happens to drop below $16...then I might do something stupid and buy way too much. Heck, it may not get below $20! Who knows?If I get Cisco at $20 and at $18, I will just wait and see what happens for the next several years. If Cisco does whatI expect, it will continue to grow at about 30% per year and spike up occasionally. I can live with that performance. If it spikes up to my 35% growth curve, I will be forced to sell it again. But, it will be a long-term gain and I do not mind paying my 15% to Washington.3) You should attempt to back test securities which "fail" your system and find out why they failed.I am not bragging, but the system has never failed for me. I rarely buy stocks that do not fit the method. Look at GM or Apple or many others...they have no pattern except that there is no pattern. That does not make them bad investments...it just makes me shy away from them because they do not fit my system. What I look for is a nice parabolic curve forming over 30 years. That makes me feel nice, warm and fuzzy! I know that the business is stable and growing. I know I can buy it right and sleep like a baby. The rate of growth is not that important...the key is buying low. For instance, last year I bought many, many shares of Duke Energy and TECO. Both are utilities and both have grown over time at between 6% and 8%. Normally, I would not give either stock the time of day. But, last year both were decimated by the market. Both fell to a CAGR that was about 3% overall. That made no sense to me. Think about the logic. Here were two great utilities that had grown at an average of 7% for 30 years...in that whole time neither had ever sold below a CAGR of 6%! But, both were at a 3% CAGR. That was very intersting to me. I had to know why.I looked closely at both companies and found the reason for the stock price decline. I determind that the fall from grace was temporary. Most experts were bad mouthing both stocks and both continued down. I was able to spot the bottom and bought both at their lows of $12.74 for Duke and $9.92 for TECO. Now, I bought some of both above those figure but when I bought my biggest position of each, I had my cost on DUK under $13 and TECO under $10. Duke is up 75% and TECO is up 50% since then...I am not selling either because they are both undervalued still. Do the graphs, you will see what I mean.Unless something very, very serious happens, any great business will recover to past levels. The underlying business is still right there...only the market has changed. For some reason, the market has decided that the business is not worth as much as it thought it the business was worth before. So, the obvious question is, "Which market is a body to believe? The one that is here today or the one from last month or last year? Which market has the stock priced correctly? Do you see the problem? Why believe the market? It is as likely to be wrong today as it was last year. I believe in great businesses...screw the market!4) You should ignore pretty much everything I say, because I don't know what I am talking about.And, you should do the same with me. Try the method...if you see an opportunity that makes sense, try it. Or, if you think you see an opportunity, tell me about it and I will do the charting to make sure that things looks good to me. I might just help you drive the price up!No method is perfect. But, in ten years the only times I lost money on an investment was when I took a flyer on someone else's opinion. This method has not let me down yet. How can it? That is the best question. What is wrong with this method that will cause it to let an investor down? That is what we need to figure out.
First, did you take the time to draw up the JNJ CAGR curves onto the 30 year chart? I am anxious to see if you can justify the various things that I suggested in my last post?If I did it right. Of the stocks I follow, JNJ, PEP (you mentioned), and K (Kellogg) show value through your "French curve" (though mine may be a little southern French:), and BRK.A and BUD don't. MSFT doesn't have 30 years worth of data. Co-ink-a-dink-ally, this also coincides with my estimates of intrinsic value for these companies. On the pre-tax compounding, over a period of 30 years, $1 would grow to $13.27, and $0.78 would grow to $10.35. Your future tax would have to increase to 28% (fed and local) from 22% current. And, I do agree this is quite possible, knowing our Gov. I cut my income in half 3 years ago purposely so I could spend more time with my friends and family, so the pre-tax benefits will show up much more for the years prior to 2001 savings, and their future returns. So, since I am only now starting to invest in individual companies (if you can call it that), the tax consequences may not hold as much concern. Tax consequences aside, I like to really get to know the companies I invest in (especially BUD:), so I don't have time to study 50 or 60 companies at a time; hence my indexing strategy holding the bulk of my investments. In my retirement years, I want to putt across the country on my Harley, so I need companies I can feel comfortable with. This means I have to trust the integrity of management more than anything else, plus the sustainability of their product or service. That said;The way I look at it, I have some of those businesses working for me. I have no problem with laying them off when they are too expensive. They would do the same with me, wouldn't they? Turnabout is fair play.I like the way you think.Chin
BMW, I really like these kinds of simple approaches too. The fact that you back up the chart-oriented analysis with a modest amount of fundamental analysis is comforting :-).One significant simplification: since CAGR--compound annual growth rate--is in fact an exponential function, it is really simple to see on a logarithmic price graph. BigCharts.com has this as an option. A constant compounded annual growth rate is simply a straight line. This makes it very easy to see trends and graph all the growth rates you want. I always want to look at logarithmic graphs because it's easy to compare ratios between any dates on the graph.I tried applying your approach to MRK, which was also mentioned in this thread. It is interesting to see what came out of it.First of all, MRK share price history has two distinct segments: the part before 1986, which has a very low CAGR, and the part after 1986, which has a rather high CAGR (I'll get to the specifics in a moment). I couldn't really decide which starting point to use for the CAGR anchor. Instead, I used two: 1970 and 1981 (which seemed like a conservative point to start for the high growth segment), and did the analysis separately for each.For the 1970 starting point:1. Iinitial share price (adjusted for splits) is about $1.25 (I couldn't get exact data but estimated off the logarithmic scale). To today's price of $49 in 34 years is a CAGR of 11.4%.2. Eyeballed "center" line of growth is about 11%. This has virtually all prices since 1987 above the line, and virtually all before 1987 below the line.3. Extremes: highest stock prices (1988, 1992, 1997 - 200) are along a 14% CAGR line. Lowest stock prices after 1986 (1994, 2003) are along a 10.5% CAGR line.4. What the various CAGRs above translate to for today's price: Center line 11% $43 Extreme high 14% $108 Extreme low (since 1986) 10.5% $37 Today 11.4% $49Conclusion: using the 1970 price as a starting point, MRK looks mildly undervalued today.For the 1981 starting point:From the logarithmic graph, 1981 looks like a conservative point that marks the beginning of a 20-year stock price growth period for MRK. Actually anyone could effectively argue that all the way up to 1985 might be a good start of this growth period, but that would not be very conservative. (Price from 1977 through 1985 hardly changed at all, then took off like crazy.)1. Initial share price (again, reading off the logarithmic scale) is approx. $2.00. To today's price of $49 implies a constant CAGR of 14.9%. Note how much higher this is than the 1970 case.2. Eyeballed "center line" is easier to identify and is about 18.5%. That's high!!3. Extremes: high price points (1987 - 1993, 1998) mostly lie along a 22% CAGR line. 1982 and 1987 are significantly above that, even. Low price points (1994, 2002, 2003) mostly lie along a 15% CAGR line. Today's price is below this line, just barely.4. What the various CAGRs above translate to for today's price: Center line 18.5% $99 Extreme high 22% $194 Extreme low (since 1986) 15% $50 Today 14.9% $49Conclusion: using the 1981 price as a starting point, MRK looks strongly undervalued today (as in, "back up the truck"), even slightly lower than 1994, its lowest point since 1986.DiscussionThe analysis using 1981 as the starting point might lead you to believe that MRK is a fabulously great investment today. It might be, but as BMW says, this indicates phase 2 of the analysis should start. Is there something different this time? is the question to ask. Fears about a sparse product pipeline is what knocked the stock down to this level.Choosing to segment MRK's stock price growth into a pre-1986 segment and a post-1986 segment makes a big assumption that the next few years will follow the post-1986 trends. Maybe that is not a good assumption.Hopefully this is some useful analysis.-Mike (mklein9)
Center line 11% $43 Extreme high 14% $108 Extreme low (since 1986) 10.5% $37 Today 11.4% $49
Center line 18.5% $99 Extreme high 22% $194 Extreme low (since 1986) 15% $50 Today 14.9% $49
"The analysis using 1981 as the starting point might lead you to believe that MRK is a fabulously great investment today. It might be, but as BMW says, this indicates phase 2 of the analysis should start. Is there something different this time? is the question to ask. Fears about a sparse product pipeline is what knocked the stock down to this level." - mklein9 That was an excellent example of the use of this method. You are seeing it correctly. However, whether you start at 1970 or at 1981, as long as the curves encompass the range of low to high prices, you have defined where MRK's price is today. So, when you find a range from 10.5% growth to 14% growth as in your first example or a range of 14% to 22% as in the second, you have defined the range. By either analysis, MRK is under-priced today. Forget the percentages...they will change over time. The range stays the same.With MRK, it happens that my last calculations showed a starting price of 02/01/74 of $2.04 and an ending price on 02/01/04 of $47.96. My lowest line shows 10% and the highest is 15%. According to that graph, MRK is presently plotting directly on the 11% growth curve. In late 2001, MRK was selling at a price that was over the 15% CAGR. It is interesting that my starting point was between your two points of origin and my curve percentages are falling in between your two sets of data. That doesn't really matter that much except that you and I both know that a company the size of MRK cannot grow consistently at 22%...or at 18% for that matter. Obviously, MRK did that from 1981 until 2001 and that is impressive...but that is why I use 30 years as my starting point. Finding a great busines that can grow for over 30 years at 15% to 17% is a tough challenge.Please do not get too interested in the percentages they are interesting if they happen to be high, but the goal is to find undervalued stocks. A business that has grown at just 8% for 30 years can be a much better value than one that has grown at 17% historically. What I am looking for is stocks that have dropped out of their historical growth range by a substantial margin. If they are going to come back to the norm, they will generate the most impressive return in the shortest time period. It is not unusual for a stock like that to rebound by 150% to 200% in 1 to 3 years as the market regains it's sanity. That would show a CAGR of 40% to 60% if you graphed that particular period of time. But, we all know that MRK cannot grow at 40% for very long, don't we?But, back to the MRK chart. Look at 1994 to 1999...MRK went from the lowest CAGR curve at $11/share in 1994 to the highest CAGR curve at $80/share in 1999. In 5 years, MRK's stock price grew at 48%/year and paid a maximized divident the whole time based on the invested dollar...that nets the investor well over 50% per year! Obviously, that is impossible long-term...like for more than about 5 years as MRK proves right here. However, knowing that you were buying MRK at the lowest price in 30 years and selling it at the highest price in 30 years surely does make sense to me. Why fight the percentages?Regardless of the percentages which we place on the various curves, we have defined a price range that has historically been maintained. When any stock gets to historical lows, I think that they deserve a real close look. When they are at 30 year highs, I would just as soon pass on the investment and wait for a better time to buy that stock. Or, if I happen to own it, I am a seller. Actually, that is the only time that I will gamble on a stock. As it passes above the highest historical price curve, I will watch it really closely. I am confident that it is going to collapse in price but I have no idea when that will occur. So, that is when I will be checking it closely every couple of days. It isn't going to fall apart in a day or two...this will be a longer term collapse...taking years...or, at least many months. Again, look at MRK. Since 2001, MRK has dropped by 50% in price. In my opinion, it has over-corrected. Stocks always over-correct because the market has no brain. It lets emotion drive it's movement. If you get into the BMW method, you will find that a stock will collapse in price and then try to make a bottom at a historical growth rate. On my curves, MRK did that at my 12% growth curve...it did that for almost a year during 2002 and 2003. But, then it broke down again and is presently plotting on my 11% growth line. However, since 10% is my "historical low" curve, MRK is now a decent buy at this point. Could MRK go lower? Absolutely! Could MRK drop to $30/share? Absolutely. But, at that price it would be an even better deal than it has been in it's entire history! Is MRK going belly-up? I don't think so. At $30/share, someone would be buying the whole company! Merck may be down...they surely aren't out.You said, "Choosing to segment MRK's stock price growth into a pre-1986 segment and a post-1986 segment makes a big assumption that the next few years will follow the post-1986 trends. Maybe that is not a good assumption."Take some time and look at MRK closely using the BMW method. Look at 1989 to 1982. MRK went from $9/share to over $25/share in three years...a 40% growth rate followed by 2 years of collapse. Then the 1994 to 1999 period of 48% growth...followed by a collapse. Ask yourself, "Is this time different?"Why would it be? MRK has always come back from slow periods.So, what do you think? Does any of this make sense? As I said, "This isn't rocket science."
BMW---just trying to understand what you are trying to do; how do account for spin offs? e.g.Medco from MRK, YUM from PEP, etc.
"BMW---just trying to understand what you are trying to do; how do account for spin offs? e.g.Medco from MRK, YUM from PEP, etc." - missash Good point. These spin-offs do confuse the picture in the short-run. In the case of YUM, I began to follow it separately and tried to sort out some rational growth based on the history that I could uncover. However, YUM explains a drop in PEP price short-term and some long-term reduction in growth rate. However, over time, that spin-off will not be that significant, in my opinion. The whole reason for the spin-off was to increase Pepsi sales! Competitors preferred Coke because they looked at the purchase of Pepsi as helping their enemy! Now, YUM is a separate entity and Pepsi sales are increasing again. The situation with MRK and Medco is similar. The spin-off immediately showed up as a stock price drop. I mark that on my chart and note the drop in price resulted from a spin-off. However, the way I see it, if keeping Medco was good for MRK, they would not have spun it off. Thus, the management obviously thinks the company will be better served without it...that should make any recovery that much better.From the spin-off onward, I am following Medco and MRK to see what happens. YUM doubled in a year...maybe Medco will too. I really don't care that much...I am interested in MRK. It has the track record and a definable history.As I mentioned in an earlier post, MRK dropped from the compound growth rate of 12% to 11% on my graph. I failed to mention that the drop coincided exactly with the spin-off of Medco. However, That is exactly what happened. Did MRK become a better buy because of the spin-off? Time will tell. However, I am still watching MRK while I am not adding to my position. I think it is underpriced...but not enough for my tastes.Anyway, you raise a good point. Spin-offs seriously can confuse the method's results if you fail to compensate for them. Over 30 years, they will become just a small blip in the data. Medco was worth approximately $3.20/MRK share. MRK's price dropped by $10/share coinciding with the spin-off...does that make sense? To me, MRK actually became a better deal because of the spin-off. Or MRK's management are dolts. I don't believe that. They are trying to improve stockholder value...I believe them.The main point to recognize with MRK is that the stock was at historical highs in 2002 at $90/share. But, just a few months ago, even with the spin-off, MRK was approaching 30 year historical lows at $40/share. To me, that makes MRK a stock worth a much closer look in 2004. I do not think that I ever said I was backing up the truck on MRK. However, I would never suggest that it isn't a decent buy right now. Because I think it is. If MRK recovers to its historical average CAGR, $80/share is a reasonable price target for 2006 even without Medco. That would be a 100% increase from the recent lows. However, if MRK were to drop in price to $30/share as I mentioned earlier, I would most likely be an avid buyer unless something in the picture told me there was a rational reason that it could go even lower. That is what the charts show me on MRK.Let's do the math backwards. If the stock dropped to $30/share in 2004, MRK would be showing a CAGR of under 9%. Never, in MRK's history, has the stock been priced at that level. Could the spin-off of Medco explain that? Or, would it just be the result of lots of negative news that is being over-hyped by the "experts"? That is when I would do an indepth study to make sure that I have not missed something. I would still fully expect to see MRK at $80/share by 2006! But, the compound return would be far better than buying today at $48/share, wouldn't it?Great businesses always come back. If they don't, they weren't great businesses. However, you can always spot the great ones because they have the long term growth to show what they are capable of. Our job is to spot the winners and have faith in them.
Very interesting thread, BMW. I saw where Mike used a log chard on Big Charts which should plot out as a straight line.I used Excel and first plotted the 33 year chart on a log scale. In Excel it's not too difficult to use the chart function. To get a log scale you have to use the custom chart feature. I could see that it would be fairly east to compute different percentages and plot all of them on the same chart. I tested DRI since I'm long on that stock. It doesn't have 35 years of life, but about 12 years. After computing it's historical growth rate, I plotted it using the Natural Log function (Ln) and Anti Ln function (Exp). When a semi-log scale is used the growth plots as a straight line. Of course, we are judging todays price by the price generated by the historical growth rate. I think this is valid; since we have only historical data to go by, this gives us a picture of the growth potential of a business. You still have to use due diligence and judgement to see if there is a valid reason the stock price is above/below it's historical value. In all-this was a good thread, and I enjoyed reading every post.Delwin
Okay, I took a shot at this thing using the MRK chart. After reading this entire thread, I'm not totally sure I'm performing the BMW method exactly as intended, but I think I'm at least close. I printed the MRK chart for 30 years of data from 2/8/74 to 2/8/04. Since one of those dates was on the weekend, I used the closing price from the previous Friday. So I used $48.76 for the present closing price and the corresponding 30-year old split adjusted closing price of $1.9555354.With these two values, I determined the CAGR to be 11.3%. I then created a spreadsheet to determine the price points that would fall on the 11.3% curve every two years. This enabled me to plot the data directly on the chart with my French Curve I use at work.I then determined the price points at two year intervals for the 10% 13%, and 15% curves and plotted those onto my chart with my handy dandy government issued French curve (I know, government issued and French are words that just don't seem to belong together, do they?).Now, I assume the pivot/starting point for all of these curves will always be $1.9555354. Is this correct?If so, because of the small scale, I actually only plotted the last 20 years worth of curve data. What I noticed is that the 15% curve is just a hair above the high price outliers of 1992 and 1999. Likewise, the 10% curve just kisses the low price outliers of 1994 and 1988 (I think someone else said the 10.5% line fit better). What's of interest is that the stock traded below the 10% line from the beginning of my data up until about 1986. Lastly, I picked the 13% line because it was midway between 11% and 15% and after plotting it, it bisected the data, acting as kind of a centroid line if you will.Am I doing this right? I did not try to back out what growth rate that would coincide with a recent high or recent low. I just plotted even numbered CAGR's on either side of the 11.3% curve to visually see what was going on. If I am doing this correctly, MRK looks pretty good at it's current price (probably because of the endpoint used to plot the 11.3% CAGR) yet would be talking more to me at around $35 - or closer to that 10% line. I would not expect it to get much below the 10% line given that it hasn't been below it in almost 20 years.I do wonder though how things would plot out from say 1971 to 2001 gven that the all time high was in 2001. Would the CAGR lines look the same?I may try this one next. I would also like to investigate some other big boys like MMM and HD with this approach.Comments welcome. Thanks.
"Am I doing this right? I did not try to back out what growth rate that would coincide with a recent high or recent low. I just plotted even numbered CAGR's on either side of the 11.3% curve to visually see what was going on." - ferienYou are now looking at exactly what I have been talking about. You have described it perfectly. You now have one picture that shows everything historically for 30 years and gives you a nice way to spot excellent buying opportunities as well as an idea when to lighten up on your position in MRK.Using this, I knew to buy in 1994, sell in 1999. I missed the highs in 2001 because the price never got my attention in 200 when it dropped to the 13% CAGR...I was looking for 10% to 11% which is where we are right now. I am watching to see if we get another downturn on some short-term bad news. MRK is not a bad buy right now, but I would like it a bit lower as you indicate. $35 to $38/share would be peachy anytime during 2004.
Question-Does anyone know of a source (available to non-subscribers) where you could find the data for all 30 years you want to cover? Preferable if one could import it into an Excel spreadsheet. Excel will do the graphing bit very well-either a curved line if you use normal xy axis or a straight line if you use a log chart.The formula for CAGR FV=PV(1+i)^n can be expressed as Ln(FV)=Ln(PV)+n*Ln(1+i). The latter is a form of straight line equation: y=mx+b where b is the y intercept and m is the slope. In the case of CAGR equation the y intercept would be Ln (PV) and the slope of the straight line would be Ln(1+i). Ln(FV) would be the ordinate and n or the date is the abcissa. If a log chart is used for each date and it's corresponding price for a particular interest rate, the resulting curve is a straight line. And Excel can plot 9%, 10%, 12% etc on the same axis. Hope I've explained this without being too wordy. Ln is the natural log. n is the number of years. The only trade-off I can see is that you would have to plot the actual price values of the stock at intervals to see it's actual performance. I got around this (after a fashion) by computing the CAGR and using it as one of the percentages. You can also select portions of the data to chart in order to give a readable scale. For example, if you are interested in an interval from 1990 to 2009, you can generate a chart for these 10 years only that will contain each percentage growth. The columns do have to be contiguous, but it is easy to move columns in Excel. Even if you could import a chart from Big Charts into Excel, I don't think this spreadsheet would superimpose the other data. Delwin
I have to admit I've been lurking for the last few days and am very intrigued with your method. I am drawn to its simple and straightforeward approach. Being fully aware of my limited capacity for advanced analysis and a nonexistant mathematical aptitude, I would need an approach similar to yours if I can ever expect any real success investing in the stock market. I suppose I could always take the easy way out and buy mutual funds but the adage 'if you want something done right you have to do it yourself' has always held true in my experience. Right now I am bubbling with Sara Lee's chart trying to apply your method after reading a recently posted article: http://www.fool.com/specials/2004/04020902sp.htm While battling with trying to grasp CAGR, Big Charts and growth rates I was wondering if I could impose upon you for your take on their present status and how they would fit within your methodology? best regards........
I've just read through this entire thread (all 30 posts) and am intrigued with the BMW method and totally confused about how to actually do it.Conceptually, I understand the logic of computing and charting a stock's long-term CAGR (average, low and high) and then buying or selling based on where the current price is vs. long-term rates. I like the simplicity of it and, being visually-oriented, like the ability to look at what the charts and trends are saying.However, I am incredibly math-challenged and don't have the slightest idea how to actually go about making all of this happen. When I read the posts containing discussions about how to get Excel to create straight line equations where b is the y intercept and m is the slope...well, we might as well be talking about how to build a lunar lander.Would someone be willing to take me under their wing and (patiently) explain step-by-step how to implement the BMW method? I'll try real hard and promise to clean up any mess I might make!Thanks.Robertwho's still trying to figure out that Excel charting thing
I've just read through this entire thread (all 30 posts) and am intrigued with the BMW method and totally confused about how to actually do it.Conceptually, I understand the logic of computing and charting a stock's long-term CAGR (average, low and high) and then buying or selling based on where the current price is vs. long-term rates. I like the simplicity of it and, being visually-oriented, like the ability to look at what the charts and trends are saying.However, I am incredibly math-challenged and don't have the slightest idea how to actually go about making all of this happen. When I read the posts containing discussions about how to get Excel to create straight line equations where b is the y intercept and m is the slope...well, we might as well be talking about how to build a lunar lander.Would someone be willing to take me under their wing and (patiently) explain step-by-step how to implement the BMW method? I'll try real hard and promise to clean up any mess I might make!Thanks.Robertwho's still trying to figure out that Excel charting thing -----------------------------Me three :)I can run million dollar scanners, slice and dice folks and irradiate to my hearts content, but, you know the old saying, show a man to fish (figure this out reasonably and logically and repetatively) and ....The main concept I see, and forgive the redundancy, is that you want to find a stock that has a 30+ year history of growth. The longer the time, the more accurate and smoother the %'s. Seems to me that just starting with the S&P 500 or DOW stocks would be appropriate. Find the old folks. Now, do yoou take each year's CAGR and the plot those 30 numbers on the chart, then draw your french curve from day 1 to yesterday looping up and to the highest or to the average of all 30 points. (?). Then, just draw the curve to encompase the low prices.The confusion to me (I did pass algebra and geometry) is the curve vs. the prices. The french curve (aka ogee?) is used to plot the CAGR over the 30 years, correct? Then isn't that the only number you have? The lowest curve and the "middle curve are created...how?Oh my, this isn't Kansas anymore Toto..Enlightenment and clarity.....cat (out on the left coast)
Me too, Me Four, I like the number 4.BTW What's a "French Curve" mean here.???.The only french curves I know are the ones that walk on the runway,in those skimpy outfits, wearing the latest fashion. You wouldn't know it, but,I used to be a math major, long ago & far away.Thanks Z
Z, BTW What's a "French Curve" mean here.???. http://www.steinlaufandstoller.com/FC-341.jpg Ralph
French curves used to be used in "mechanical drafting" to connect a series of points with a smooth curve. In real life, it is a ususlly a clear plastic sheet cut in irregular shapes, mostly with each point on the surface representing a curve with a different radius. Hence, it's surface is a curved surface with varying radii. The reason it was valuable was that the draftsman could draw an average curve through a series of points which could not be described mathematically. Even if the series could be described in such a manner, it would be too time consuming. You can get french curves at a store that sells drafting supplies. Also, you can get what used to be called "ship's curves" which was a long spline-like device that would bend to fit a series of points. I have never used one in ship design, but it is likely that the designer would be able to use it to draw in profiles of the ship's outline at different heights to aid in construction.Delwin (who has just told you all he knows about french curves)
"Right now I am bubbling with Sara Lee's chart trying to apply your method after reading a recently posted article:http://www.fool.com/specials/2004/04020902sp.htmWhile battling with trying to grasp CAGR, Big Charts and growth rates I was wondering if I could impose upon you for your take on their present status and how they would fit within your methodology?" - chowpappy OK, glad to oblige. I read your post at 1:20 PM today and I am starting to type this at 1:40 PM. I hope to show you how much we can lern about a stock in under 30 minutes using this method.I have never looked at Sara Lee before. Todat is my first experience and, thus, I am now telling you all that I know...Due Diligence is in order. However, I like what I see so far. I would be interested in buying SLE if I can explain some things in more detail.In this 20 minute span of time, I looked up SLE, got the historical data, copied the chart, calculated the CAGR for todays price from 30 years ago and I have plotted the key curves. Like I said, Sara Lee looks very promising at the present price level. It was slightly better situated a year ago at $17/share...however, I doubt it will go there again...maybe ever. So, today is about as good as it gets unless something really unusual happens to SLE.Here is what I see. The CAGR from 1974 to today is 12%. Last year SLE touched 11.6% and that is as low as SLE has ever been in CAGR in the past 30 years. This raised the immediate question, "Why?" We need to answer that question. Why is SLE at historical lows?But, back in 1998, it was making historical hughs at $31/share. This was on a CAGR of 17% for 24 years, so maybe a pull back was in order. That would be my first assumption. Obviously, it has pulled back before. Look at the high in 1992 which is just above the 17% growth line that was followed by a low just 18 months later that was on the 14% CAGR curve. From that low in 1994 to the next time it got to the 17% CAGR curve, it rose to the all-time high in 1999 of $31/share! That high generated the next pull back which we are still experiencing.If Sara Lee had continued growing at 17%, it would be priced at $110/share today...instead it is at $22. So, we still have some work to do explaining the present price, but it look to me as if SLE has a bright future if history repeats itself.Now, here is why I say it is a buy and that it is not likely to get back to $17/share as it was just last year. First, look at the drop in price in 2000 to $14/share. That was not the lowest when you look at the CAGR...that occurred in 2003 at $17/share. But, it tested the same level in 2002 also. Using this method what I have found is a stock will give investors several chances at the lowest growth rate price. SLE gave the first chance in 2002 about May and then again in 2003. Since then it has grown to $22/share. a 29% increase. OK, I am done. I knew what I have told you here in 20 minutes from the time I started. It took me 25 minutes of writing to tell you what I found. If I can get you to see how efficient this method is, I can save that 25 minutes the next time. The method is a very quick and dirty way to spot bargains. I see SLE as a goo bargain right now. It could easily go fairly quickly back to the 14% CAGR that seems to be a very reasonable expectation based on the past 30 years...that would be a price of $46.35/share in a year or two. That is a 110% return in one year and 45% return in two years. I could live with that.However, there is more work to be done. We have some questions to answer, remember?
In this 20 minute span of time, I looked up SLE, got the historical data, copied the chart, calculated the CAGR for todays price from 30 years ago and I have plotted the key curves. Can you walk me through the steps you took to accomplish all of this? I went to Big Charts, got the quote from 30 years ago (do you always use 30 years?), was able to calculate the CAGR (fortunately, I also came up with 12% CAGR) but that's as far as I know how to go. Here are some of the specific questions I have about what to do next:-- do you determine the 30 yearly plot points based on a 12% CAGR and, if so, how do you do that? do you start with the initial stock price and just continue increasing this by 1.12% each year for 30 years? if so, do you do this by hand or do you use a spreadsheet to perform the simple calculations?-- once you've calculated the 30 plot points, do you mark the points on the Big Chart print out and then simply connect the dots to get the 12% CAGR trend line?-- how did you determine that SLE has a CAGR of 17% for 24 years? did you use the starting price from 30 years ago and then take the highest price from those 30 years and calculate the CAGR from those two data points? (If so, I assume you could do the same thing to get the lowest CAGR using the lowest stock price of the last 30 years.)-- when you are using Big Charts for the 30-year view, do you look at stock prices on a monthly basis to see where they cross the average, high and low trend lines or do you use a different setting for viewing the stock prices?I think I'm beginning to understand the process of how to do this. I'm anxious to see your responses to see if I'm on the right track.Thanks.Robertwho thinks he's seeing the light at the end of the tunnel
"Can you walk me through the steps you took to accomplish all of this? I went to Big Charts, got the quote from 30 years ago (do you always use 30 years?), was able to calculate the CAGR (fortunately, I also came up with 12% CAGR) but that's as far as I know how to go. Here are some of the specific questions I have about what to do next:-- do you determine the 30 yearly plot points based on a 12% CAGR and, if so, how do you do that? do you start with the initial stock price and just continue increasing this by 1.12% each year for 30 years? if so, do you do this by hand or do you use a spreadsheet to perform the simple calculations?" - rokmillerExactly! However, I do the calculations at 5, 10, 15, 20, 25, 30, and 35 years. Obviously, the 35 year plots are for future growth. The 12% curve should fall right on the present price since that is the CAGR for today's price based upon the price form 30 years ago. And, yes, I use 30 years just as a staring point if the business has beeen around that long."-- once you've calculated the 30 plot points, do you mark the points on the Big Chart print out and then simply connect the dots to get the 12% CAGR trend line?"Yes, but as I said, I just have 8 points to plot for each CAGR. That is enough to define the curves."-- how did you determine that SLE has a CAGR of 17% for 24 years? did you use the starting price from 30 years ago and then take the highest price from those 30 years and calculate the CAGR from those two data points? (If so, I assume you could do the same thing to get the lowest CAGR using the lowest stock price of the last 30 years.)"I merely look at the chart and see what appears to be the highest price points. Then I take one of those and do the same calculation back to 1974's price. In the case of SLE stock, that was $32/share in 1998 which showed a 17.27% CAGR. I rounded to 17% and plotting the 17% points...I ran out of chart at 6 points in 1999 but I went ahead and calculated today's value at that growth rate just for fun. I put that on the chart for future reference. It could happen but I wouldn't bet on it. Then, I looked at the lowest prices...they were above 11% but I plotted the 11% curve and the 12% curve as a reference. All data for SLE fell between 12% and 17% except for a very small section in the last two years. But, do you see how the last drop in price just a year ago was the very lowest when you consider the CAGR?"-- when you are using Big Charts for the 30-year view, do you look at stock prices on a monthly basis to see where they cross the average, high and low trend lines or do you use a different setting for viewing the stock prices?" Sort of. It depends on the stock and where it is in the big picture. With SLE, I would be watching it daily for a pull back. In my opinion, we have missed the best deal when the stock was at $17 last year. So, I would not expect it to go back to that level again. It could, but I wouldn't bet on it. If SLE was selling today at $35/share, I would be checking it monthly or quarterly. I add the monthly price ranges by hand every several months or so to see if the stock is behaving as I expect it to."I think I'm beginning to understand the process of how to do this. I'm anxious to see your responses to see if I'm on the right track.Thanks. Robert"Let me know if your chart starts to take form based on this answer. Then, try something else. Look at the low in 1994 of about $10/share and the high in 1998 at $32/share. In four years, Sara Lee jumped by 320%! That is a CAGR of 33.7%...plus it paid a great dividend just like it does today. That tends to sweeten the pot for me.Anyway, What I have noticed with all sorts of stocks is that history repeats itself over and over again. If SLE rebounded at 33.7%/year in 1994, why wouldn't it do the same in 2004? Not that it will, but why not? If it did, then today's $22/share will be $30 in a year, $40 in two, $53 in three and $70/share in four years. You can lightly plot those points in for 2005, 2006, 2007, and 2008. The sketch in the 33.7% CAGR curve...that is not an unexpected result. No guarantees but not unprecidented.Do you see what is going on here? Not that it will happen again, but it gives you a line to follow as the stock comes back once again. The points that I just gave you plot out another CAGR curve that intersects the 14% CAGR curve sometime in late 2006 at $50/share. Do you see that on your chart?Does that make sense to you? If not, look at what has already happened. The stock was at $17/share at all-time lows just a year ago...today it is at $22/share. That is a 29.4% rise...but will it continue? I say that history says it will. Of course, what I say means nothing. But, I think that my logic is as good as anyone else's logic. Plus, I have proven my thoughts with real, honest data that has been determined from 30 year's experience. The market tells me I am right. The question is, "Do we want to trust the market?" I do not know that we have a choice as investors. I have trusted the market to do the right thing for years...it always seems to do just that. It just doesn't always do it on schedule...the market has a mind of it's own.I plan on doing some serious looking at Sara Lee's financials. So far I love this opportunity. It could be a big winner in the next three or four years. The real question is, "Why not? What is wrong with Sara Lee?"
This is starting to make sense!!!I printed out the SLE chart and plotted 12% CAGR at five-year increments (1980, 85, 90, 95, 00 04) and then extended the line into the future. I did the same thing with the 17% CAGR and the line went off the top of the chart (my Big Chart print-out tops out at 32 -- the all time high in '98). I'm still having trouble figuring out the low CAGR trendline. I'm not sure that low point use to calculate CAGR -- shoudl it be 6 in 1990 or 10 in '94 or 14 in '00? Each of these low points yields a different CAGR.However, based on what I've done tonight, it looks like there were a couple of good buy points in the past 5 years -- 14 in '00 and 16-17 in '02 and again in '03. I'm not sure I know how to use this to spot a sell point. Of course, it's always easy to see the tops in hindsight but how do you use the trendlines to decide when to sell in the future. If I bought SLE today at 21, the 12% CAGR would say the stock will be around 30 in three years and 38 - 40 in five years. How does knowing this help me decide when to take profits?I also tried this on XOM and would like to tell you what I think I see. If you track Exxon, can you tell me if this is consistent with what you see on this chart?-- CAGR from '74 - '04 is about 9.5%. The high CAGR was 11.3% when it hit 47+ in 2000. Low CAGR is about 9% based on a low of 30 in 2002.-- Buying opportunites would have been in late '94, when the stock was at 14 (considerably below the avg. CAGR line). The last year has represented additional buy points as the stock was below the historical 9.5 CAGR line. It only now is back to that trend line -- Selling could have occurred anytime from '98 - '00, as the stock ran away from the 9.5% CAGR trendline. (Again, how do you use this to time a sale?)-- If XOM achieves a similar growth rate (16%) over the next few years that it did from '95 to '01 (in 95 it also dropped below the 9.5% trendline), the stock could be in the mid to high 80s by 2009 (a double from here).How often to you update your CAGR to bring it current with recent pricing? Once a year? Depending on what happens with the stock price, your timeframe and frequency of updating the historical CAGR will greatly impact your trendlines and your point of view about a stock's relative value at a given point in time.Now that I think I understand the basics of how to create the charts and trendlines, I'm now wondering how you interpret and use this data to actually manage your portfolio and time buys and sells. I'd appreciate whatever insights (or practice exercises) you'd care to share.Thanks.Robert
cagr:I found this page to help me get a handle on this:http://www.moneychimp.com/calculator/discount_rate_calculator.htmin my example I take the begining stock value 30 years ago as $1.The ending stock value is $23 (current).The CAGR is 11.02%So, what confuses me about "plotting" a CAGR on a chart using the french curve is you are plotting this on a chart that is dollar based in it's vertical axis and time based in it's horitontal axis.How do you get the curve..?cat (who really knows he can get this...:)
Hehehe..well professor, it looks like got yourself into more work than you bargained for explaining your investing style :) Just think of the money you'll make though, when "The BMW Method for Dummies" finally hits the shelves. The Gardner's will be scowling at you from across the B.Dalton at the book signings :) I've always suspected, for all its complexities, that the stock market has always been as simple as buying low and selling high. When it comes to an abstract perception like value though, figuring out what is low or high seems to have the smartest of us at wits end. I've read a mountain of information about charts and stocks and so far, the way you go about it seems the most sane. You look at a chart zigzaging up and down, and for all the scrutiny and theories about cups and handles n' such, all I can really know about the future of that chart is its going to continue to zigzag up and down. The only other thing I can halfway count on is that a company that has been around for a long time is probably a pretty good company, and its a good company because its continued to grow. (grow or die as they say).. Your approach to me sounds about as logical as they get. In fact your adage "work for a good company or make good companies work for you" has stuck in my head. I'll probably be pestering you to death with silly questions until you run away screaming..hehe Again, thank you for your time a patience and hopefully there's some hidden dividends in all this trouble you're going to as well :)
BMW, You mentioned you use bigcharts. Have you ever noticed if you can directly download their data to a spreadsheet? I've looked around briefly, but didn't see what I was looking for. For instance at Yahoo, if you set up for monthly quotes for the maximum available history for MRK, you get this: http://finance.yahoo.com/q/hp?s=MRK&a=00&b=2&c=1970&d=01&e=13&f=2004&g=m Down near the bottom of the page is a "Download to Spreadsheet" option. Although the data shown only appears to go back to 1998, if you click that link it actually loads monthly data into a blank spreadsheet back to 1970. I suspect that using the chart wizard in Excel, I'm now getting close to being able to run your analysis in about a minute or less per stock. Given the level of interest in using Excel to automate the drudgery, I was hoping to demo this capability. The problem I'm having is with the data at Yahoo! The "split and dividend adjusted close" drops to zero sometime in 1984. If you run a chart, the data looks more reasonable: http://finance.yahoo.com/q/bc?s=MRK&t=my&l=on&z=m&q=l&c= So I don't know if the historical data at Yahoo is wrong, or if I'm interpreting their data incorrectly. In any case, having another site where you could download data directly would sure be nice. I'll keep working with the Yahoo data to see if I can just demo the concept, but clearly I don't want to propogate GIGO. Suggestions from anyone? Ralph
Ralph,I checked around the BigCharts site and I could find only this:"How can I download market data from BigCharts?Due to licensing limitations with our data providers this feature is not available."Rich
Ralph:You can download stock chart data from MSN Money's site straight into Excel.Robert
yttire says:2) You should be wary of individual security risk- I am a little concerned that you have all of your assets in 6 individual securitiesI disagree. This shows the "fallacy of averages" for lack of a better phrase.If you pick up nearly any college securities analysis book, they tell you to have at least 10-20 stocks and they often say something about being involved in several sectors simply to average out severe losses from one or a group of stocks.This strategy will fail every time to produce market beating results. The reason is that it destroys the ability to "beat the market". As you add progressively more stocks to your portfolio, it acts more and more like the stock market itself...eventually, your portfolio acts exactly like an index. You never have to worry about losing it big, but conversely you can't possibly "beat the market" because all the gains and losses tend to cancel each other out severely.If you suppose that you can beat the market, then spending endless amounts of time balancing your portfolio and worrying about "keeping all your eggs in one basket" will end up producing the exact opposite result...that you will never be able to beat the market in any meaningful way. On the other hand, if you don't believe you can beat the market, then the only viable reason to invest in individual stocks is simply that you can produce similar results to an index fund with a lower expense/fee structure than an index fund (if you have enough cash to do this).It seems like you'd have to invest in a lot of stocks to reach this point. However, this is simply not true. For instance, all of the "total stock market" funds out there clearly state that they use some sort of sampling technique to own a fraction of the "total stock market". They own just enough stocks to give the SAME return as the stock market in the large without owning a piece of everything.I don't have a nice chart or some math to show you or anything, but the securities analysis classes I took in college said that you can essentially reach similar performance with less than a hundred stocks, and that the properties of the long term average are a significant piece of your portfolio when you own just 10-20 stocks!So what I'm surmising from BMW's words is that he owns his own custom-designed "index fund" which consists of 64 stocks. It doesn't really matter (due to averaging) if any of those stocks are really stellar performers or complete losers. He has a second component of his portfolio which consists of 6 stocks that have been picked to produce market beating results. Thus, he's achieved the TMF "index fund plus a few" strategy in a roundabout way.Your claim that owning "just 6 stocks" is too few fails in that it would actually REDUCE overall returns IMHO. I'd throw a little more concern on the fire if it wasn't wrapped in a self-imposed "index fund" as well. If anything, I'd be looking at whether the money that has been placed in "small amounts" in the 58 stocks (64-6=58) is actually EXCESSIVE and should be trimmed back in favor of putting more money towards the growth part of the portfolio (the 6 biggies).
BMW lovers, I have built a BMW template spreadsheet that does the graphing for you. Just load (via a copy and paste from a downloaded spreadsheet) the dates and closing prices. Then play with the lower and upper CAGR values until the curves seem to bracket the price curve in a reasonable manner. Here is a sample of what it looks like: http://home.comcast.net/~grandparalph/bmwtemplate.htm Disclaimers: 1) I don't fully understand BMW's full analysis process, so this is certainly not an "automated" BMW analysis. It's just an attempt to replace mundane math manipulation and graphing with the capabilities in Excel, so that more time can be freed up for more creative processes. 2) I downloaded 10 years of Pepsi data from Yahoo. I believe this data is flawed in some way... possibly adjusting for dividends incorrectly. The graph is for demo purposes only, not for analysis of Pepsi. 3) I have been anxiously awaiting the "graphing" portion of the Excel class, because I'm a novice. There are probably better/easier ways to generate the graph and label everything. The actual spreadsheet (not just the web page image above) can be downloaded from here: http://home.comcast.net/~grandparalph/bmwtemplate.xls Ralph
If I follow this, what you are plotting is the returns over some period of time, and then curve fitting the highs and lows.I have seen a very similar technique elsewhere. I know that this is sounding much more like TA, but in the commodity markets, there are numerous chartists who plot an upper and lower line. The commodity prices tend to bounce between those two extremes. What they are looking for is the point where the commodity price breaks out of those two lines. This inevitably happens if the upper/lower lines are converging (they are never parallel).Anyways, the strategy is usually to either predict when the break is going to occur or to buy low/sell high initially and buy/sell just before the "breakpoint" to preserve as much profit as possible.My dad was doing these "crossing line" TA strategies with commodities in the 80's that I can recall. It never made sense (fundamentally at least) to me but he did seem to make money at it most of the time.
Howdy all ya'll,Not meaning to step on anyone's toes or paws, but ... well ... I sorta put together a little interactive Excel file based on BMW's system for winning, wine & women (OK, so it might help with stock investment returns too). I think it sorta lays out the primary features and caveats as per BMW, but since us 4 legged fur bearers often misinterpret you 2 leggers, ya may want to confirm this. The file tries to be instructive, but I wrote it very VERY late in the evening (the wee hours of the morning actually) after a tremendously tedious and long day while trying to avoid what I should have been working on, so its "style" is even a little wierd for me, apologies up front!In terms of the historical data, I didn't find Yahoo better than BigCharts (then again I generally prefer Pinot Grigios to most Cabernets so what can I know?), so ya sorta have to enter those split adjusted prices in manually, and I sorta prefer (and set up the spreadsheet) for 2 year intervals. I did this mainly because I wanted to see a few more points than BMW is comfortable with. Maybe I'll try to delve into the black arts of macros to let them do the heavy lifting in terms of deriving and formatting the historical data appropriately from the net, then again, maybe not. I can be influenced of course by large sums of money or bottles of good french wines <mischevious grin>.I say its interactive because you can twiddle with CAGR's for finding the best fit high & low limits, but it magically (OK, OK, automatically via the wonders of MSFT's Excel and certain personal assumptions) sets intermediate buy and sell lines plus MAJOR buy and sell lines - as this seems to be BMW's modus operendi. Its got an overview chart for the 30 year period, but a bit more easier to read more focused in time chart to for checking buy and sell prices. I also threw in a quick little caculator for CAGR between any 2 dates and they don't have to be exactly years apart.Please note this is really just a first draft (although it may well be the alpha and omega <g>), but if you want to check it out, please email me and I'll post a copy to you. **IF** you don't think it smells too badly, er ... I mean providing you don't think I should try to stuff it someplace or another <smile>, please let me know what you liked / didn't like about it and maybe together we can develope something worthwhile.Take care,IcyWolf
Hiya IcyWolf!Not meaning to step on anyone's toes or paws, but ... well ... I sorta put together a little interactive Excel file based on BMW's system for winning, wine & women (OK, so it might help with stock investment returns too). So.....are ya gonna share it?PosFCF
I have a question for BMW or others who have been working with his CAGR trendline approach.If I use the current stock price to calculate the CAGR from some earlier starting point, the trendline always overlays the current price. Consequently, according to the trendline the price today is exactly the "right" price -- it's never going to be underpriced or overpriced. As a result, it seems that the trendline is of little value in deciding if it's time to buy or sell the stock today.Should I calculate the CAGR up to some point in the past (say one year ago today) and then carry the line out to today's price to see if the stock is a buy or sell based on it's position to the trendline? Is there some other way to use this approach to make a judgement about the value of the stock at today's price?All suggestions are welcome as I try to find a way to make this actionable in the near termThanks.Robert
2) You should be wary of individual security risk- I am a little concerned that you have all of your assets in 6 individual securitiesI disagree. This shows the "fallacy of averages" for lack of a better phrase.If you pick up nearly any college securities analysis book, they tell you to have at least 10-20 stocks and they often say something about being involved in several sectors simply to average out severe losses from one or a group of stocks.I agree to disagree with you.I actually agree with your statement that the more stocks you have, the more you diminish your capacity for return. For after all- how many truly great stocks are possible to find? Isn't one of them actually better than the others, and shouldn't you ditch the rest in favor of that one?I also agree that you move further and further towards overall market return with the greater number of stocks that you have. However, I disagree that you should be satisfied with 6 stocks (or fewer) in your overall portfolio.A truly experienced investor may well be able to reduce the risk of single securities substantially due to their experience brought to bear on the choice to hold em or fold em. However, even a person working full time on a particular stock and studying it at all times of the day with non stop analysis of competitors, pricing of products, etc, can not diminish the inherint risk in an individual security. The more time you spend with it, the more you can reduce the risk. However, time will elude you, and there is an element of real risk that all the study in the world can not do away with.Therefore, you are taking on real risk with individual securities- accounting fraud, the marketing arm of a major corporation, a new technology you had not conceived of, or a fundamental flaw in a corporations operations (such as some part of the process becoming illegal) which can not be done away with causing staggering losses to an individual company and its stock. If you happen to "get lucky" with 3 of your 6 stocks- due to information completely beyond your control- then you are SOL. This would never happen to you. Okay.Maybe lady luck smiles her favors on you in a most benign way- but unfortunately statistical analysis of the real world shows that clumping- unexpected gatherings of infrequent events- are the norm, and not the exception. If they appear in your portfolio- guess what, you are either specially chosen by the fates or are merely the demonstration of an unfortunate real world occurance.The only way to be rid of this calamity is to not have your entire portfolio in a few individual securities. My current hypothesis is that it is okay to have a portion of your entire portfolio in a few securities- and be exposed to this improbable, but possible risk. However, this shouldn't be everything you are relying on for retirement- because the risk is real and can not be done away with despite whatever rhetoric you throw at me.Thus, a portion of your portfolio should be free of this risk- and either in indexed funds, or in a carefully selected set of 30 (less well performing stocks), or in mutual funds (subject to systematic risk of the pickers of the fund). And further, you should have a portfolio which allows you to retire and eat despite unfortunate coincidences seemingly gathered to destroy you.Some investor may have had Enron and Worldcom as a nice big fat chunk of their low risk- big company- stake. Sure, your due diligence is better than theirs... you can see accounting fraud in the font choices of the 10K.If you can prove to me that you can get 30% returns on average over long periods of time with accurate picking, I will acknowledge that you can accept higher risk with fewer stocks because you can gain back your losses in a reasonable time. However, I have yet to see such a demonstration, nor will I believe your proof anyway but I'd like to see it.
Hi Robert,I am certain that there are others here much more qualified than I to address your concerns re: BMW's lil system. But it seems all ya got for now is this mangy ole 4 legger - moi <smile>.First, unless I misunderstand you and or BMW, which is always a possibility because you furless 2 leggers aren't exactly well known in the animal kingdom for being understandable ya know, BMW calculates the CAGR for each historic SPLIT-ADJUSTED price starting from 30 years ago, not a trendline. BMW does stipulate that his method shouldn't be expected to work unless there is a clear and discernible trend for the 30 year period. Basically, if the stock price is generally upward, thats all that really seems to matter. The obvious exception would be a stock price that increases through this time period with a constant CAGR year on year. However, I haven't seen a stock price do that yet, and while possible, I think it so unlikely as to not worry about.OK, ya got historical prices roughly same day every year or 2 years or 5 years apart for 30+years. Next to that ya got a column of CAGRs that represent the average compound annual growth for that price and time compared to the starting point (30 years back). Then you sorta eyeball those CAGRs and pick something close to the highest and close to the lowest and plot em on a graph starting at the starting year and price. You'll have an historical price that sorta bops around reflecting differing growth rates for each of the periods involved, but a max and min CAGRs that almost all the prices fall inbetween. Otherwise adjust the CAGRs until you do.Then, if I understand BMW right, you plot more CAGRs trying to find one that is an average in the sense it bisects the historical priceline.So now you have a MAX and MIN CAGR that the historical price bounces between. You have an average CAGR that more or less bisects the historical price. Ya draw 2 more CAGRs that sorta split the difference between the MAX or MIN with the average CAGR. And so for any time point you have 4 important CAGR lines:First is the MAX CAGR which if you find your stock price in about there, SELL it all as rapidly as possible, run away and don't look back! Next, just a little bit under that is a halfway between MAX and average CAGR. If the price hits that maybe sell some and watch things more closely to bail if the price starts getting closer to the MAX CAGR. Similarly, if your stock price is below the average CAGR and halway to the MIN, it's time to do some serious FA and see if the company (and or its environment) has significantly changed in any way leading you to suspect that its history is no longer a reliable indicator going forward. If you think the company is fundamentally unchanged, start to buy a bit. If the price gets to the MIN CAGR line, Back up the truck and buy the max for a single holding in your personal investment scheme of things.Bottonline, BMW's system isn't about a "trendline", but rather the use of its maximum and minimum historical price growth potentials as a guide for BUY and SELL prices. As such, we seek company graphs where the present price is at or near the MIN CAGR line as a signal to BUY!If you want to see a plotted example, just email me and I'll send you an Excel file (first draft so it may not be all it can be -- yet <g>) I put together. Its got a plot that might help you follow my explanation. It also will allow you to plug in the historical prices of what ever company you might want to look at, and allow you to adjust the CAGR's to fit correctly.Hope this helps more than confuses, Take care,IcyWolf
Hope this helps more than confuses.IcyWolf Wolf:Thanks for the thorough explanation. It definitely helps clear up some of my confusion. I had been calculating a single CAGR using today's price and the historical price, not a CAGR for multiple points in time. I now see how using multiple points in time helps to create the ranges of growth rates so I can see where in that range today's price falls.I appreciate you taking the time to clear this up. It all makes a lot more sense now!RobertBTW -- are you the guy in those car commercials who was raised by wolves? (LOL)
"BTW -- are you the guy in those car commercials who was raised by wolves? (LOL)"Naw ... thats my weird cousin Thornton ... he's a lowland wolf from questionable parentage, his mother was a real bi.... er ... ah... I think ya know what I mean. He has always been sort of an embarrassment to his pack.Real wolves love and live in snowy mountain areas.Take care,IcyWolf
BMW:I have used a similar system as yours to get a quick idea of where a stock is relative to it's long term growth. A couple of points:First, I echo other's thoughts that it is much easier to use such a system if you do it in log space. Stock growth is exponential due to compounding (for growing stocks). Plotting stock prices in log space means that growth is a straight line. All I do is pull up a log chart at Yahoo and hold a piece of paper up to the screen to create a straight line. Charts on Yahoo default to log space. I connect the lows to see where the current price is relative to it's long term growth. This takes less than about a minute. If you want, you can compute the CAGR for any line you draw.Second, and more important, you are to be commended on your patience. It takes a lot to of it to wait for a stock to come in range of a very attractive price, and you have obviously mastered that.Third, and most important, I think many stocks are going to be busting their historic 25-30 year growth rates over the next few years. I believe we have crossed a major turning point. 25-30 years ago, interest rates were high, as was inflation. Stocks have effectively had booster rockets on them ever since due to falling interest rates and inflation. Consider a long term chart of the DOW:http://finance.yahoo.com/q/bc?s=^DJI&t=myConnect the lows on this chart with a straight line and you will arrive at the conclusion that stocks, as measured by the DOW, are not undervalued based on very long term growth rates, despite the recent nastiness. I think value investors who look at the fundamentals such as Warren Buffett tend to agree - Buffett really hasn't bought large US equities in years. You could assume that growth rates will be the same over the next 25-30 years as the last 25-30 years, but you have to wonder why they would be, given the long term history in this chart. My best guess is that we have entered a period like 1965-1982 where stocks effectively went sideways. This doesn't mean you can't find stocks to invest in using your method, you just have careful and look at the fundamentals. There were plenty of outstanding stocks in the 1965-1982 period. One must look at the stock fundamentals as you suggest and wait for the right opportunity. Your system is better than most at identifying the opportunity. Looking at the fundamentals is much more difficult.
"25-30 years ago, interest rates were high, as was inflation. Stocks have effectively had booster rockets on them ever since due to falling interest rates and inflation. Consider a long term chart of the DOW:http://finance.yahoo.com/q/bc?s=^DJI&t=myConnect the lows on this chart with a straight line and you will arrive at the conclusion that stocks, as measured by the DOW, are not undervalued based on very long term growth rates, despite the recent nastiness." - mrgroovski3 First, let me apologize for not being here to answer some of the questions since 02/12/2004. I went on a cruise with my wife and left the market to do it's thing while I was away. Obviously, I did not miss anything. That is the beauty of long-term investing. Anyway, if there is any continued interest in the BMW Method, I am back and will dedicate any time needed to help with explanations.Now, to this post from mrgroovski3. He makes an excellent point concerning the DOW. In fact, the DOW30 is what led me to the BMW Method. I did my very first CAGR graphs on the DOW30 since 1940 and uncovered the theory behind my method. What I found was that the DOW30 graphs out very neatly between a CAGR of 6% and 10% with 8% being the almost perfect average CAGR. Based on this, I was quick to spot the recent bubble before it occurred. What I saw coming was a collision between the average 8% CAGR and the shorter-term 18% CAGR from 1982 to 1999. It was obvious to me that 19% was not sustainable long-term when 8% was the 60 year average CAGR. However, looking at the DOW30 CAGR told me something else too. The DOW30 is 30 stocks which make up the total index. Thus, by analyzing the individual DOW stocks using the BMW method, I was able to spot the ones that were under-performing and those that were over-performing at any point in time. By, owning the under-valued stocks and not owning the over-valued stocks, I figured that I could beat the DOW30 average easily. And, sure enough, I have ever since. When the DOW30 was peaking in late 1999 and early 2000, there were two great buys in the DOW...MO and CAT. The Dogs-of-the-Dow method would have pointed to Kodak, SBC, JP Morgan and DuPont as great buys, but the BMW Method showed that MO was at 30 year lows and CAT was close to 30 year lows. The others were still historically high priced. In 2000, MO doubled in price and tripled by 2001 while CAT tripled since then too. Meanwhile the DOW30 was taking a dive to about 7500 from it's 1999 highs of 11,700. None of the other 2000 DOD stocks have done anything to write home about during this time except for JP Morgan.JPM was at 30 year CAGR lows just 18 months ago and has doubled since then. Again, the method spotted the great buy in JPM when it arrived...not in 2000 when it was a buy according to the Dogs of the Dow theory. Citigroup became a great buy at the same time. Try the BMW Method on the S&P 500 or on the NASDAQ. It works beautifully to define any unwarranted move from historical norms. It told me to buy the QQQ at the 8% CAGR last year. That was absolutely ridiculous for the NASDAQ...but without the CAGR curve to show me that, I might have missed that buying opportunity all together. The NASDAQ has almost doubled since the lows of 2003...and that is the entire NASDAQ market! That market has historically grown at over 10% and averages close to 12% over the long haul. Now, that NASDAQ of 5100 in 2000 was crazy to the high side, but a NASDAQ of 1100 in 2003 was almost as crazy to the low side. Markets are not rational in the short haul. That is why this method works over and over again. History does repeat itself. What goes up must come down and vice versa. The key is having a basis to judge what is down and what is up. Plotting the range of CAGR curves for the various stocks that interest me gives me that guide. By doing the same with markets does the same. The DOW could easily be at 13,000 this year and not be over-valued. The NASDAQ could be over 2600 and not concern me in the least if earnings continue to improve. Actually, a NASDAQ of 5100 is very likely by 2010...but, back in 2000 that market was ten years ahead of itself. I mean, does a long-term 28% CAGR for the entire NASDAQ Market make any sense? Of course not...but a 100% increase in 2003 does! Understanding the CAGR is the key to understanding what is reasonable and what is not.
Thanks BJ! I was asking that question as I read the BMW thread. If I take the example near the bottom of the MF article you reference and apply your formula.....((1,458.60/1000)-1)^(1/4) = 0.8229Using the method in the article where the initial amount is multiplied by 1 + yearly return for each of the years......(1.4586)^(1/4) = 1.0990The method in the article is obviously not practical for a thirty year time frame. Can you help me a bit further?Thanks in advance for your time.Curiousdan
BMW,Great method!!!! Never been much of a technical investor, but this just makes sense. My question is what do you do with companies that only have existences of 10-15 years? Does this method work with companies younger than 10 yrs old? Basically, from your experience, what is minimum amount of years you like to see, to feel confident with the method?Thanks for your time,TRS
BMW, Sorry but I seem to have taken your name in vain (yet again <g>) over on the KP boards. Here's a copy of my post as it might well pertain here as well.http://boards.fool.com/Message.asp?mid=20395471Hmmmm ... is your investing like a light switch? Either ON or OFF?Do you actually believe that diversity is a good (the best?) equity hedging strategum? Or does the notion reside only in thought and never get translated into action?Why not have BOTH long and short-termed aspects to one's portfolio? Why not employ the best that FA AND TA have to offer? Why not have some fun and invest a small portion (only occassionally) on whims without following typical rules? etc. etc.A related thought to help the infectiousness of longer horizons ... Do you actually worry about the cost of your trades? I mean if you (the general you, not you specifically Anne) seek low cost online traders to escape the princely fees of dealing directly with those bonkers brokers, why does your expense sensitive natures seem to stop right there?So what the heck is the flea bag trying to talk about now you might be asking? Well hang on there you whiney 2 leggers, and I'll tell ya <smile>:What's your TIME worth? If you have to spend mega hours learning and or developing a system (vs picking from the myriad choices already out there), AND you have to spend multiple hours a day tracking, buying selling, sitting up all night worrying that all the CEOs of your holdings conspired and emptied all the accounts and are now running coffee plantations in Belize, etc, etc. ... what is it really costing you to "invest"?One of the striking things to me, that sorta got me thinking along these lines, is looking over BMW's CAGR methodology. It really almost requires that as few as maybe 75 companies TOTAL can be considered. There are some absolutely fantabulous spreadsheets <cough, cough> that can do the heavy lifting for ya. And its been backtested up the gazongers and shown to be profitable in UP, DOWN, and sideways markets via the magic of LONG TERM horizons. Its takes in the order of maybe 10-30 hours a YEAR to manage (vs 127% of your normal waking life) and has relatively few payouts to the vultures known as brokers. Anyone want to try to compare the total cost of short and mid term momentum systems to something like this <wolven grin>?Why do we so often seem to forget that relatively few things are really either or? Why do we seem to forget there are more costs in things than might appear obvious? And finally, why do we generally seem to want to ask "Why" instead of "Why not" <g>?Take care,IcyWolf
Howdy TRS,Not meaning to speak for BMW, who does rather well for himself although he may be almost as wordy as certain wolves I know <cough cough>, but I have been thinking about CAGRs and the 30 year thing.I suspect that any "system" can be used for various time frames with reasonable results if the system is properly explained, constrained, employed, etc. However I think its also clear that any system's efficacy would increase for companies that have established themselves as a function of the time they can display stability (at least in terms of their performance in that system).Maybe using more points (shorter intervals) within whatever time period ya want to look at will help things a bit, but I suspect the central feature that BMW takes advantage of is that a company that has been relatively stable within a trend for 30 years (regardless of the number of data points employed, is more likely to follow along within that system than a company which has been consistant for 10 or 15 years, regardless of the number of datapoints employed. Whew -- that was a long sentence for a wolf without stopping for a breath <g>.Another feature I attribute (and LOVE) about BMW's scheme for wine, women and the goodlife (Hmmmm ... BMW should start an investment type club and maybe call it "BMW's GoodLife Society" - has a ring to it, don't it <g>?) is that it seems to minimize the number of signals while maxing the potential for success. I don't want to pay for them &&%%(^%&*)_*& broker's Mercedes and the Ivy League tuition fees for their pups. Also, anything that mixes TA and FA has to be better than either, at least from my den's pov <smile>.Anways, I guess the bottom line, like usual, goes back to the individual. What timeframes are most appealing to YOU. What kind of "system" do you prefer - one where you have more/less signals? How much do you intend to send to the IcyWolf Foundation for Unwed Lupine Fathers? etc. etc.To each (2 legger) his own, and to my brethren lupines ... whatever they can get away with <wink>.Take care,IcyWolf
"My question is what do you do with companies that only have existences of 10-15 years? Does this method work with companies younger than 10 yrs old? Basically, from your experience, what is minimum amount of years you like to see, to feel confident with the method?" - trs6070You raise a great question. Unfortunately, the answer concerning the number of years is not that easy since it varies with the business involved. But, that is why I prefer 25 to 30 years of data before I get interested in a business.Let me use Cisco Systems as my example to explain this. I actually bought CSCO back in 1994 but I did not use the BMW Method to pick it. In fact, I was just developing the Method in 1994 and at that time I was buying stocks based on their financials and according to what was recommended to me by the "experts". Cisco grew at phenominal rates from 1994 until the bubble popped in March of 2000. By then, I had my Method well developed and I could see that Cisco was not reasonably going to grow at 75% to 100% per year. No company can grow like that for very long.By really studying Cisco Systems, I could see what was happening to the growth of the business. Early on it grew at a very fast pace but the CAGR was steadily declining. In other words, the CAGR was actually declining year over year and approaching a 25% to 30% CAGR where the stock is today. I fully expect the CAGR to continue to decline over time but at a steadily reducing rate of decline until at 25 to 30 years the business will have "found" its long term CAGR. For Cisco, I have no idea where that CAGR will be...we will see where it falls as the business matures.Based on the specific business, the inevitable maturaltion of its CAGR could stabilize at 4% or at 17%. IT all depends on the business and the management. However, it is very, very rare to find a mature business with a CAGR over something like 15% to 17%.As you can see, using the BMW Method will cause one to miss opportunities in any new technology. Lacking real long-term performance data, it is necessary to speculate on what is "reasonable" for the future concerning the CAGR and I do not like speculation. I am comfortable with mature businesses with 25 to 30 years of history...even more history than that is better. However, I just evaluate the previous 30 years at most and then extrapolate the data 5 years into the future. That pretty well outlines the range that I expect to see in the near future. The way I look at it, why speculate on a Cisco Systems when you can make even better returns with a mature business? If you can get 50% to 100% annual returns on a stock like Philip Morris, who needs to risk capital on a new business? That is what the BMW Method taught me. There is security in buying a mature business. Now, having said all that, there is more to the story. I have discovered that even mature business like Philp Morris experience declining rates of their CAGR. The same is true with Berkshire Hathaway and many others. The decline is very gradual and it has almost no effect on using the Method, but as you graph these businesses over time, you will spot this inevitable slow decline. And, it makes complete sense. The larger a business grows, the harder it is to grow the business quickly. There is a huge market in America but no business can grow forever. Buy "grow" I mean it is not possible to have an increasing CAGR...I do not mean that the company cannot continue to grow continually. It will inevitably stop growing at an increasing rate but will actually see a declining growth rate of the CAGR. I hope this makes sense to you.The reason that a business can continue to grow is that the economy is growing and we will experience some inflation. In other words, as the GDP expands over time, a part of that expansion comes from real growth and the rest is due to inflation. Real growth is the difference. Any business should get an increasing portion of that growing GDP so long as they do not lose market share. By increasing their market share they can beat their competition's earnings and remain a Gorilla in the sector.Now, based on this, let's say the economy is growing at 5% and inflation is 2%. The net 3% growth in real GDP will raise all sales by 3%. Meanwhile, a great business is improving their efficiency of operations through increased productivity. Thus, the business can show increasing earnings growth far better than the 5% GDP growth. This is why the better businesses can consistently grow at 12% to 15% or better. However, 20 years from now, that same business may be able to grow at 10% to 13% at best. That is the inevitable decline that the BMW Method tends to uncover over time.The good news is that none of this matters! While it is inevitable and sad that huge businesses cannot continue to really grow their CAGR, the very slow decline in the CAGR has no affect on our ability to get rich by buying the business at 30 year low CAGR's and selling the business at 30 year high CAGR's. The track record of the business is what we are buying and selling...not he fantastic CAGR! Actually, companies with historically very low CAGR's often offer better deals for the investor than higher CAGR companies. For instance, last year many utilities were severely underpriced following the Enron scandal. Those utilities had very low average CAGR's but the stock price dropped to CAGR's that have not existed in the history of the business. That made no sense to me. If a utility has been growing consistently at 5% to 7% for 30, 40 or 50 years, and suddenly it is selling at a price that shows 2% growth for 30 years, something is very wrong. Either the market has missed the boat and over-sold the stock or the business is getting ready to fold. Utilities rarely fold...the State cannot let any utility fold. Plus, the underlying income stream is still in place. It is not likely that everyone is just going to stop using electricity. Also, the underlying growth is usually there. The 5% to 7% growth that has been consistent for 50 years is due to some increase in demand per customer but mostly it has come from new customers moving to the area. New customers most likely are still moving to the area. The business is still generating kilowatts and they are still selling them at a tidy profit. The cash flow analysis will show that fact.Thus, the underlying business is still sound, the growth is still there, the business is not going to fold and there has to be another answer as to why the stock price is at 30 year lows. The answer is, "The market has missed the real value of the business."This happens over and over again. The key is to spot the market's mistakes before the market recognizes it's own mistakes. Obviously, the market will figure out its own error and make the needed corrections. But, by spotting the screw-up before the market can, the BMW Method puts us ahead of the market...sometimes too far ahead of the market. And that is why supreme patience is absolutely required. You must have faith in the Method regardless of what the market tells you.It is very easy to spot an excursion into "back-up-the-truck" territory and then watch the market drive the stock price even lower. But, if we have backed up the truck all ready, the truck is full and we have no gas! Again, the key is patience. Nothing is changing real fast in the market...good deals will not suddenly appear and then dissappear in an hour. This takes many months. You have lots of time to get your position established in a stock.There is no urgency to buy too fast just because we see a stock at 30 year lows. Just because the stock has reached the 30 year low CAGR at 8%, does not mean the stock price will not make an all-time new low CAGR at 4%. If you bought some shares at the 8% rate line, you are now in the hole on those shares...but you can buy more at the 4% curve as the market offers an even better deal to you. Once the stock price turns, and they always do, you will be able to buy even more shares on the way back up. The nice thing is, with the curves in front of you, you will be able to see precisely where you expect the stock to go in the near future. The stock will often double in a year...or it may take three years. That is not important. What is important is that you own a great business at 30 year low prices or less. If the stock merely goes back to it's average price range, you will double or triple your investment dollar. If the stock doubles in three years, you make 26% on your investment plus any dividend.Let me wrap this up by discussing the effect of dividends on the BMW Method. Dividend producing stocks make the Method work even better. Let's make up a hypothetical business that has grown at a 12% average CAGR for 30 years. The historical data that we graph out shows that the lowest CAGR rate was 10% and the highest was 14.5%. At the average 12% CAGR the stock pays a 3% dividend of $1/share...thus the stock is presently priced at $33/share at the 12% CAGR.Several days later, things turn nasty for the stock. The business is sued for some reason by irate consumers and the most recent earnings report missed by three cents per share. The stock drops by $7/share and is selling at $26/share. No one seems to want it...suddenly it is a dog according to the experts. The BMW Method shows that the stock is now on the 10% CAGR curve which is the 30 year low CAGR plus the $1/share dividend is now yielding 3.8%. While everyone is down on the stock, I am getting real interested! An analysis of the Free Cash Flow shows that the business is making money and the lawsuit sounds appears it has little merit when we look into the details. Now, I am getting very interested indeed.The gurus on CNBC are saying that the lawsuit might bankrupt the business and others say the dividend is in danger. Several other experts say that the earnings look weak for many more quarters. The stock drops to $22/share on the negative hype. That is when I start buying! The dividend yield has risen to a 4.5% yield, the stock is at a 8.8% CAGR which has not been seen in well over 30 years. A month later, the stock has fallen to $20.15. The yield is at 5% and I am backing up the truck. The business is not goinng to fail...conversely, by this time I have had lots of time to find out exactly what is going on with the business and I now know that the lawsuit is bogus, the earnings are secure and the management is buying shares like crazy! What is not to love about this investment? But, no one seems to love it except me. So, after two months of this, I might own 5000 total shares at an average cost of $21/share with a 4.8% yield on my capital. I am confident that the stock will at least return to it's 30 year average CAGR in due time. In 2 years, that will be at $41.40/share...remember, the stock has grown at a 12% CAGR for over 30 years. Thus, in two more years the old $33/share price from three months ago is obsolete and the new 12% goal is $41/share for 2006. The instant that you buy the stock, your perspective changes. The way I look at it, once I own the stock, I will not sell it until I get the fair price...I expect to be getting at least $42/share by 2006. Why would I agree to sell my shares for less than their average value over the past 30 years? For that matter, why would anyone? That is what screws up my brain. Who was selling at $20.25/share? What were they thinking?I will begin selling at $50/share(The 13% CAGR). That is a 138% gain on the investment plus the 4.8% dividend which would be down to 2.4% at the average price of $42/share except for the two dividend increases in 2005 and 2006. Sure enough, the lawsuit was won early in 2004, the earnings came right back to their old levels before year's end and the company has even raised the dividend two years in a row. The business did not go bankrupt and every expert is recommending the stock as a buy. It is funny, I notice that the very same guys who said to get out at $22/share are now tauting a buy at $54/share! What are they thinking? Is anyone other than me paying attention? I just have to laugh to myself...who would have thought that CNBC is funnier than the Comedy Channel? At $75/share(The 14% CAGR), I will be down to 100 shares which I will hold until I start buying once again at a later date when the bad news is again driving the price of this hypothetical stock down to the 30 year low CAGR's and the dividend is back to 5%. It will happen...it always does. Just look at the history.So, my average cost going in was $21/share and my average price getting out was $69/share...but I was fully invested in the business for 4 years. That is a 34.6% average return plus I was paid 4.8% on the dividend for a total return of 39.4% per year. Not too shabby for a stodgy business that has been running nicely for over 60 years. However, by referring to my chart, it is obvious to me that the business will not sustain a 14% CAGR for long. Even though I have held the stock for 4 years and have gained almost 35% per year in price escallation, that is not reasonable in the longer term. My four year short-term 35% gain curve is colliding with the historical 14% maximum CAGR curve...something has to give! So, I give up the majority of my stock. Someone else sees something that I am missing. More power to them. If they are right and make money, I compliment them. However, I am happy with my investmant and I still own a few shares anyway. I am looking at a different stock that is reaching its 30 year low CAGR curves. To me, it will offer a far better opportunity over the next three or four years. I could be wrong but I doubt it.I ask again, "Who needs to invest in high tech?" Why risk your money on a speculative business when you can get great returns on an "almost sure thing". Of course, there are no sure things in investing but many are surely safer than others. I hope this description helps to define why the BMW Method has to work as long as history repeats itself. And, what do we have to guide us but history?
Thanks for the thorough explanation, I'm with you completely. I have a couple of questions though.1) When looking at these charts, JNJ for example, I see the stock splits but the price doesn't cut in half. I imagine all this means is that the chart adjusted for the split, otherwise it might give the impression of an erradic stock at first glance. Let me know if I am wrong and any adjustment need be made.2) Tell me if this makes sense: If we pick a point in the past (6 mos. ago, 1 yr. ago) and make the graph from that point, drawing all the CAGR lines and continuing it through today and a couple of years out, we would hypothetically be able to realize at what range the stock is trading at today (A buy or a sell), compared to it's historical CAGR from one year ago. I guess you wouldn't need to do this if you have been charting the company for some time, but it should be a decent indicator if you are finalizing your valuation after your necessary due diligence!!The reason I mention JNJ above is because I charted the company today. I am interested to see if my analysis somewhat resembles yours. I managed to come up with a 11.37% CAGR going back to Feb '74. After plotting the different growth rates, I see that if JNJ continues to grow at its historical CAGR, then it is a great buy now; should be between 50-100% move in the next few years. If not, is it safe to say we will be backing up the truck on this one!!!After charting a few stocks, I've noticed that one of the most valuable things I've noticed is that we can see what price the stock should be trading at, in the future, if the company continues to grow at different, historical CAGR's!! JNJ for example, if it trades as it has for the past 30 years, we are looking at a nice move up the y-axis in the next couple of years. I bought JNJ a month ago due to it being one of the worst performing DOW components of the past couple of quarters. It really has taken a beating and is immensely underappreciated in my opinion. Great companies only stall, they don't fail!! I would like to know what you think of the airline industry right now. I personally like Southwest Airlines (LUV), but I bet the BMW method would uncover some hidden value somewhere. Have the airlines taken a bigger hit than they should have???? Only the BMW method can tell!!!! LOL......Just something to think about, I believe I will start charting some of these companies this weekend.Thanks for sharing your advances, the method really is brilliant in my opinion. Good Day,TRS
"The reason I mention JNJ above is because I charted the company today. I am interested to see if my analysis somewhat resembles yours. I managed to come up with a 11.37% CAGR going back to Feb '74. After plotting the different growth rates, I see that if JNJ continues to grow at its historical CAGR, then it is a great buy now; should be between 50-100% move in the next few years. If not, is it safe to say we will be backing up the truck on this one!!!"- TRSAs it happens, I have been using the BMW Method on JNJ since 1999. When I look at my charts, your analysis precisely mirrors mine. I get the same CAGR position that you do. I cannot say it is precisely 11.37% because I cannot read my chart that closely, but the present price is just a tick above 11% the CAGR on my graph.However, I would not say that JNJ is in a position to "Back up the Truck". It is in a position to safely buy the stock and get a nice return over time. The time to have backed up the truck was back in 1994...can you see that on the graph?I am more greedy than you are. I look for stocks that are severly undervalued. In my book, JNJ is under-priced today and it will move back to more realistic historical levels in the future. Today, all phamaceuticals are beaten down by all of the negative politics concerning pricing coming out of Washington. That, by the way, was what had JNJ at all time lows in 1994...remember the Hillary Health Care? The instant that it was killed, JNJ and other's stock prices took off. That was the time to back up the truck.Anyway, as you can now see, JNJ was at historical highs back in 2002 at just over a 13% CAGR. That was the time to lighten up on this great company. I always own some of JNJ...it is always a great business to own. Sometimes it is a better buy than at others.Just about exactly a year ago the stock bottomed around $42/share based on some very silly rumors out of Puerto Rico concerning a disgruntled boiler house operator who had been fired. He went to the press and claimed that he knew all sorts of bad stuff about the company and that JNJ was corrupt. The FDA announced an investigation was underway and the stock dropped like a rock! On this guy's word, the stock price collapsed to $42! I have to tell you, I was laughing so hard that I hurt myself. I was buying JNJ and loving it. But, I never backed up the truck. If JNJ had reached the 9% CAGR or lower, then my truck would have been full. As it turned out, the next round of typical problems that normally show up to drive a stock down to the all-time lows never hit JNJ. I was looking for it but it never came. Thus, I never got my chance at the 9% CAGR.That final round of price drops usually occur after a severe stock price drop as the trial lawyers bring class action lawsuits against management. Those lawsuits always spook the market into coughing up that last percent of CAGR or so from shareholders. Investors can stomach lots of bad news but a contracted lawsuit against the business will get them to sell every time! I have watched it happen over and over again.On JNJ, the present price of $54/share can still net a decent gain in the future. On my chart, the 12% CAGR shows what I consider to be the "goal" for the stock. The recent price of $60/share was directly on the 12% curve and then JNJ declined to $42...people were waiting for JNJ to get back above $65/share which was another all-time high. It never got there just like it never got back to the 1994 lows at an 8% CAGR...that was a unique situation combining a bad stock market and a bad President's wife. This is why the politics are so important in investing. Once you see the BMW Method working for you several things will happen to you. You will become interested in politics if you have never been before, and you will surely become a stauch conservative. You will understand Capitalism and understand the future. It is inevitable so be careful with this investing scheme. You will look at guys like John Edwards as a Presidential candidate and shivver in fear. Trial Lawyers scare the heck out of me even though I have learned to use their antics to make me richer. I would prefer to give up my last 1% CAGR to get rid of the trial lawyers...I believe that they do far more harm than good for our Country. Overall, I believe that the CAGR for all businesses would go up if the class action lawsuits did not exist. Watch what happens to the stock market if we get tort reform that is meaningful in America.But, I have digressed from the subject. You said, "After charting a few stocks, I've noticed that one of the most valuable things I've noticed is that we can see what price the stock should be trading at, in the future, if the company continues to grow at different, historical CAGR's!! JNJ for example, if it trades as it has for the past 30 years, we are looking at a nice move up the y-axis in the next couple of years."Exactly, as you noted earlier, if JNJ goes back to the 12% CAGR level, the price will be over $70/share. JNJ could not break through $62/share two years ago but it is reasonable to see it go above $70 in another year...if history repeats itself. Now, at that point, I will not empty the truck. The stock has historically seen 13% CAGR's often before, it could logically do it again...but will it? I know it will eventually make new highs...but will it make new CAGR highs? That is the question we need to be asking ourselves...and we should be asking ourselves what we can do to help JNJ make new CAGR highs. For, the real answer to the future is inside each of us and is going to be determined by what we do ourselves. The whole thing is about our attitude. I will get back to that later.If I sell 1/3 of my position in JNJ at $75/share in May 2005, I will have locked in a 27% gain in 30 months. If it happens in December 2005, I will have a 21% gain in 3 years of holding the stock. See? I am continually calculating my personal CAGR versus history. But, by buying at the historical low CAGR and selling near the highest CAGR, I can optimize my own personal CAGR. To me, that is what investing is all about...or, have I missed something? Plus I have the dividend on JNJ that was maximized by buying at $42/share.But, this isn't about me, this is about you. Let's look at this from your point of view. You can see that JNJ has begun it's move back toward higher CAGR's. If you buy today at $54/share, the chances are good that you will be able to sell JNJ in the next two years at over $70/share. History says that is reasonable and the stock is still representative of a great business that is growing and developing new product all the time. Investors love to own JNJ and it is a good buy today...why won't it go up in price? So, let's assume that you do what I just said that I might do...sell JNJ at $75/share in 18 months(for me it is 30 months since I bought a year ago). Your gain will be 24.5% if it happens in 18 months and 17.9% if it happens in 24. You will also get the dividend which is worth about 2% more the last time I checked. Not the 50% to 100% that you suggested, but not bad either. Remember, the CAGR is all you really get...before taxes. That is why the lowered 15% Capital Gains tax is so good for America. You get to keep more of what you earn from your hard work of investing in America! But, where else can you net 19 to 26% on your investment dollar before taxes? Unfortunately, the answer is, "Lots of places." That is why I never backed up the truck on JNJ...the deal never developed for me as I had hoped. The trial lawyers let me down. But, I still go my JNJ at a decent price and I am happy with it. The better deal last year was Duke Energy at $12.75/share...it is over $21/share today and going higher. OR HAL at $9.85/share...it is over $30/share now. But, that is what happens when politics get tossed into the investment picture. If you combine politics with the BMW Method you will find that doubling your money in two years is the standard...not the exception. Triples are no surprise. JNJ making 30% is a ho-hum. Nothing special there. But, JNJ is still a great stock to buy at today's prices. I am not buying because I already own it!Look at Philip Morris in 2000 and again in 2003. I was able to triple my investment in 18 months and double it again in 12 more. I am getting ready to sell MO again in the near future. With MO we had the best situation I have ever seen. We had The BMW Method, bad politics and an attack by the trial lawyers! TWICE in 3 years! God, it gets no better than that! $50,000 invested in MO in early 2000 was $150,000 by June of 2001, after the election. But, the trial lawyers came roaring back and MO was again at 30 year lows last year...but the Company fought back and kicked butt! I knew they would...they always do! Philip Morris is possibly the best business in America...look at the CAGR for over 30 years! Today, MO stock is over $57/share, more than a 100% gain from a year ago...that $50,000 invested in early 2000 is today $300,000 if you used the BMW Method for investing. The net was a 6 fold increase in 4 years...a 57% return...plus the dividend was at 10% from 2000 to 2001, and it was at 9% for the last year. That brings the net yield to over 65% per year! Now, that is the BMW Method at work. And, remember, all this was happening during the recent "bubble." While the market was tanking, the BMW Method was strutting its stuff! Now, please do not get me wrong...I am not bragging. The BMW Method has nothing to do with me. I will explain all this later.First, can you see why politics and the law get my interest? I just listen to the news and I know what to do. I watch the Democrats and listen to their silliness and I know exactly what to do to make great money. In all honesty, I cannot imagine how things have gotten so screwed up here in America...maybe it has always been this way. But, to me, it doesn't matter. The more screwed up things get, the easier it is to make money using the BMW Method. Maybe I should explain this now.Here is the bottom line of the BMW Method. "Business pays for everything in America." There is the whole premise of the BMW Method in one sentence. That one line is the basis of the entire Method. Like I said, the BMW Method has nothing to do with with my abilities. All I have done is to recognize what makes America work.The industrial revolution began in the mid 1800's as mankind began to put machines to work for him. Innovation and Energy were the keys. The invention of the steam engine or harnessing the power of a river made the machines work better for mankind. No matter whether it was the development of electric power or the invention of the nuclear reactor...the botton line is we have learned to take energy and machines and improve our lot much faster than we could have without machines and harnessing energy. Business soon learned how to take machines and energy and build wealth for those who recognize the bottom line. The botton line once again,"Business pays for everything in America."Business actually pays all taxes and they pay all wages and they make all of the profits which are taxed before business pays all dividends! The recent "bubble" resulted from businesses that paid no dividends but promised "great rewards" for the investor. Lots of folks lost their shirts because they had no concept of the BMW Method...remember our credo..."30 years experience before we get interested. Why waste your capital on a new idea when there is better than 30% per year to be made on old, proven technologies?" Do you see why the bubble should never have happened? Great ideas are a dime a dozen...making profits from those great ideas is what built America! Promises are worthless unless they can be turned to real profits. Once everyone sees this, we can all get rich together. If too many folks fail to see this, we are in trouble in America. I wish that I could have the time and energy to show the BMW Method to more people. Once a person really understands it, he can see what has made America great...it is also what makes socialists hate America! It is why we have our buildings attacked by terrorists. America is an embarrassment to the rest of the World. Our success embarasses them to no end. They hate us instead of joining us. They hate us because we are so good. They attack us politically, economically and with terror attacks...but we still are the best Country in the World. That is what the BMW Method recognizes and Capitalizes on. I hate that others hate us...but I love the reason why they hate us. We know how to be successful no matter what the others do.I can not change any of that. All I can do is to make money using the knowlege that "Business pays for everything in America." . And that is what caused me to develop the BMW Method. The reason that the BMW Method works is that it absolutely has to work or we will all fail together. Think about it. Everyday, people in America get up and go to work. They work at their jobs, they earn money, they pay taxes and they buy things that make their lives better. All of those "things that make their lives better" are made by business in America. That business is what gives those people a job. Thus, the system works as long as people go to work and buy things. However, it is business that creates things to buy. This is also why Government is bad. Government makes nothing! Now, I am not saying we do not need a government because that is absolutely false. We need laws and we need government...we need a small, efficient governemt that takes as little as possible from the business of America. Taxing business is what pays for all Government.People think that they pay taxes since wages are taxed...but who pays their wages that are taxed? Business. This is really very simple.But, let me contradict myself right here. In truth, the consumer pays all taxes! Think about that. Every dime of tax that goes to Washington from wages or from profits is added into the price of anything we buy in America. If a tax is paid, it is hidden in the product cost. So business merely passes the cost back to the consumer in America. Everyone is a consumer! Everyone who buys anything pays the same tax! The rich, the poor the retired the retarded the crippled or the blind...all pay precisely the same tax as everyone else. If the poor buy less than the rich...it is because they are poor. It isn't because the rich are not taxed enough! It is because the poor are taxed too much! Big Government taxes the poor...not the rich. The rich understand the BMW Method even if they have never heard of it. The rich cannot be taxed. Personal Assets are protected from seizure by the governemnt. It is un-Constitutional to tax the rich...which is the reason that our Constitution is continually under attack by the socialists...they want to tax the rich but they cannot until they alter the Constitution. By consistently weakening the Constitution, they can eventually tax Capital. That will be our downfall. Socialism will have won the Cold War in America. Of course, Capitalism is alive an learning how to thrive in Russia...isn't that just special?Business is the tax collector and business pays for all governemnt. Remember, "Business pays for everything in America." If you do not absolutely believe that, forget the BMW Method. Once anyone can admit this one very simple fact, we can make progress and build wealth. That is why I developed the BMW Method. Socialism has all but killed America. The cold war brought down the USSR but it also brought down America. The silliness of the trial lawyers is nothing but a drain on America's business. The trial lawyers know that "Business pays for everything in America." Heck, the trial lawyers are paid by business once the business is sued and loses. Who else could pay? But, of course, the consumer really pays! Those losses get passed on to the consumer! That is you and that is me! And that is the BMW Method's purpose! The BMW Method is our artillery against the bad guys! The BMW Method takes the socialists game and turns it aginst them to our advantage. The more the socialist try to get free money out of business, the more money I make by betting on business to defeat Socialism! It is the exact same game we have been playing for 60 years in this old World. It is Capitalism versus Socialism. I have defined the battleground and I am winning the war! The BMW Method merely bets on Capitalism to win in the end.Let me wrap this up. "Business pays for everything in America." Thus, the key to winning is to buy businesses that can beat the "system" consistently. Washington is going to be there...we need governement as I have said before. However, we do not need the Government we have in place today. The design of our Government is fine...the size and scope is out of control because of promises that will kill America...like Social Security and Medicare. Over 50% of the federal budget is merely moving this money around. They take from the workers and give to the non-workers or to the retired. Years ago, these funds were promised and the promise must be fulfilled. Thus, business is going to pay all this money in the future...it has to. Who else can pay it? Oh, that's right, the consumer!So, what will pay for the future promuses of the politicians? Once you see the answer, it will all make sense to you. It will all be paid for by the CAGR of the businesses that survive! Business has to grow so the CAGR has to continue or we are all screwed. We are all in this thing together! You, me and everyone else. That is why the BMW Method is not a method at all...it is survival for America defined.That is why I have placed my future in my Method. If I am wrong, it doesn't matter because we shall all perish together. The BMW Method has to work. America has no other choice. Can you see how simple everything is in reality? The BMW Method works...it has worked since the industrial revolution began and it always has to work. We have no choice in the matter. Each of us is just one human being trying to survive in this old World. Each of us needs a method that will work for us. I have shared my method with you...it works for me and I hope you see why it will work for everyone if they will just understand it.Lots of folks have reasons not to want to understand the BMW Method. They are betting aginst Capitalism and their future depends on their own success at destroying it. And, that is where we are in America today. The 2000 election proves it! Almost precisely 50% of America is on the take...the other 50% is on the give. I can explain it no other way.The good news is that both political parties know who pays for everything...those guys aren't stupid. They have us paying them to screw us. That is nice work if you can get it. One side talks about taxing the rich...the other talks about cutting taxes. Both sides get half of the vote because the story sounds so good. However, only one side has a story that fits the BMW Method's ultimate success. Because, in the end, "Business will pay for everything in America." The consumer has to have a job...and retired people still have to consume stuff. Talking about the "Evils of business" is self-destruction at it's worst. That story just has no legs. "Business pays for everything in America." Can you tell that I believe that is absolutely true? That is what created the BMW Method. It isn't about me...it is about America.
First, yttire puts out a very laudable but probably impossible challenge (pre '01 insider trading with Janus fund managers excepted): If you can prove to me that you can get 30% returns on average over long periods of time with accurate picking, I will acknowledge that you can accept higher risk with fewer stocks because you can gain back your losses in a reasonable time.Heck, I'd settle for half of that (15%) over time, which is still 2-3% above the market average!Seriously, actually, we do agree for the most part. What you're suggesting is to have a portfolio which consists of a base which performs at the market average (let's say 11% over time just to pick a number). This portion of the portfolio should essentially be an index of some sort; either as an index fund outright or as a group of stocks that proxy as an index...as you suggested:Thus, a portion of your portfolio should be free of this risk- and either in indexed funds, or in a carefully selected set of 30 (less well performing stocks)... (last option to use managed mutual funds deleted because it doesn't match your other two suggested strategies due to proven lack of equivalent performance over time).I prefer the index option for 3 reasons. First, it usually achieves lower costs. Second, even a "sampling" type index fund (such as a so-called "total stock market" index) invests in far more stocks (and thus the averages are closer to the market average), and third because it takes virtually no effort on your part (and time==money!).However, here is where we differ. Neither BMW nor I ever hinted at the idea that ONLY 6 stocks is acceptable. However, you seem hung up on the idea of going to one extreme (6 stocks total) or the other (30+ stocks total).BMW has exactly that. He has a set of 6 stocks in which he is heavily invested, and then a much larger set which is his index proxy.Let's say that in my 6 stock grouping, I did achieve the 30% return that you suggested. If that consumes 25% of my portfolio and the market return is 11% (to pick a number...not going to argue ad infinitum about this), then my total (market beating) return is 15.75%. Even if the odds swing the other way and I'm 30% in the hole, then I'd still almost break even (0.75% return) for that year. Of course if the law of averages works even in a small world (it doesn't!), then my bottom end should be closer to 11%, which still nets me a 11% "worst case".At 11%, it will take me just under 7 years to double. However, if I can hold the line at 15.75%, it takes just under 5 years to double. Sounds like a worthwhile endeavor to me.The real trick is obviously being able to quantify both "upside potential" and "downside potential". BMW's charting method tends to do this because he's looking at a spread over a huge number of years (30) and he's charting both the historical worst case and best case numbers. It's not perfect but I'm guessing that he has very high confidence in not suffering the catastrophic events that you are foreboding.Personally, I'm split 4 ways. One fork is individual stocks, with a small cap. bent to it. One fork is overall stock market indexing. One fork is indexed into small caps. (due to historical market beating results even among indices). And the final fork is in bond indexing (due to their cyclical nature with respect to stocks; this is a small but recently significant portion of the portfolio).Strategically, I can see two differences between what works for me and what works for BMW. I have had more success with small caps because I seem to have a more intuitive feeling for "valuation methods" while they don't seem to work as well (at least for me!) against large caps. I'm venturing to guess that BMW's method works better for very old, large caps. (the GE's and JNJ's of the world). And second, rather than the big grab bag of stocks that BMW uses as an index proxy, I'm simply invested directly in index funds.
"Seriously, actually, we do agree for the most part. What you're suggesting is to have a portfolio which consists of a base which performs at the market average (let's say 11% over time just to pick a number). This portion of the portfolio should essentially be an index of some sort; either as an index fund outright or as a group of stocks that proxy as an index...as you suggested:" - PaulEngrYou are close, but not quite there yet. The Index fund is fine...if you use the BMW Method to decide when to be in the fund and when to be out of it. Here's the way to do that. Bring the index 30 year CAGR performance up on the BigCharts.com site. Better yet, get all of the data you can on the index back as far as you can get it. Then, apply the BMW Method to the index. It will be astonishing to you! You will see exactly when to get out and when to get into the index.If the index overall has done 11% as you suggest, then you can do far better than 11% and never own anything but indexes and bonds.Do the BMW Method on the 10 year bond price. Buy low, sell high. About the time you are selling bonds, like a year ago when bonds peaked, Stocks will be at all time lows! Conversely, when a stock index is at 30 year highs like in early 2000, bonds will be at historic lows and you can sagfely buy bonds. I did in 2000 at over 6%! I bought zero coupons at that rate and sold them for a very nice profit last year to buy stocks again. Of course, I did not buy many bonds. Just a cushion in case my stock picks went wrong. I use bonds for diversification when the time is right. Otherwise, I buy the index funds. If you can make 6.25% in bonds with the driving force moving them to a higher price, why not buy bonds at 30 year low prices? I am sorry to keep saying this, but this is not that difficult. You just need to use good logic.Once you really get into the BMW Method, you will plot 10 Year bond yields onto the index fund price curves. You will see how the two change with respect to each other over time. Today, the driving force favors stocks by a huge margin. We are at 45 year low interest rates...where else can a person get a decent return on his investment? Please, try graphing the DOW, the S&P 500 and the NASDAQ. It will open your eyes to the driving forces in action.
BuildMWell,Thank you for showing us the next logical conclusion: to use the BMW Method on indexes. Of course you're correct.Thanks again for turning on a light for all of us,Barry
BuildMWell:Interesting (fascinating) discussion. I keep looking for buy low sell high tools that reduce the emotional guesswork required, and your method goes right into my toolbox.Comments, in a random order:1. Your method has some similarities to the method of Geraldine Weiss, who tracks dividend yield and chooses from a universe of large cap, safe dividend payers for her newsletter (something like Investment Quality Trends) and the couple of books she has written. She buys when her stocks sell for near the high yield and sells when the approach the low yield.2. As an early response mentioned, your use of growth lines has similarities to the stock picking system used by NAIC and similar organizations.3. In Peter Lynch's first book, he uses charts (from a charting service) that reflect the stock price in relation to growth in earnings per share. In general, those charts support buying when the price has fallen below the trend of the earnings line and selling at some point above the trend line.4. The thesis behind the NAIC stock picking approach is that a stock's price will reflect, over the long term, it's growth in earnings. Your figure of (nominal) 8% for the Dow30 bears that out; and no doubt for the individual companies you look at. 4a. You talk about a "CAGR" of such and such, when referring to stock price change. It's worth remembering that it's only stock price growth your method looks at. It would perhaps be interesting, even if unnecessary in terms of using your method, to compare growth rates of, say, revenues and/or [choose your favourite proxy for earnings] over different periods, as an indicator for divergences between price change and revenue [earnings] change in any given period.5. By using 30 years of data, you effectively average out 1) changes in earnings that arise over the course of a normal business cycle; 2) changes in earnings created by fundamental changes in the business of the company you're looking at; and 3) as we have seen so recently, changes in the psychology of investors as to what they're willing to pay for a dollar of earnings. I haven't thought through the significance of choosing a more recent starting point (eg, Merck from 1986 versus from 1970); obviously, one probably runs the risk of picking up a trend just as its about to change.6. Your method relies on finding solid businesses (tennis balls and not eggs). As you and others have mentioned, using indexes is one method of getting around the risk of an individual company not coming back to its long term trend. Though solid businesses aren't all that hard to find (banks, utilities, pharmas, some consumer products companies; to name a few industry groups).jacko2
Jacko2, I appreciate your fine comments. I would like to respond to one of them. You said, "Your method has some similarities to the method of Geraldine Weiss, who tracks dividend yield and chooses from a universe of large cap, safe dividend payers for her newsletter (something like Investment Quality Trends) and the couple of books she has written. She buys when her stocks sell for near the high yield and sells when the approach the low yield."Actually, that does work relatively well. However, when a stock is dropping in price, the question becomes, "How high will the dividend yield go before you decide to buy the stock?" Obviously, the dividend yield is maximized at the lower CAGR and minimized at the max CAGR. I do use the dividend yield as guide to prompt me to review my holdings. But, I do that on the sell side...not on the buy side. The example that pops to mind is Philip Morris. I started buying MO in early 2000 at about $24/share. It was below it's record low CAGR price at the 13% line. At that time I was just getting really convinced that this Method was really very good and was going to be my "system". However, I had not refined my method of buying. The hazard with this system is that you tend to want to get into the stock too quickly. Philip Morris taught me that fact.As MO went below the 13% low CAGR, there was no reason not to buy it unless it was going substantially lower in price. I actually had not considered that possibility and I bought something like 800 shares at $24. Two months later i was at $20/share...the yield was over 9%. I thought I was happy at 7.5% until I saw that 9% was possible. But, I was too greedy and messed up again. I bought 800 more at $19.75. But. MO went on down in price and I got my last purchase at a 9.8% yield at just over $18/share. I could easily have waited longer for my first purchase. But, what I actually learned was to just buy 100 shares on the first buy. I learned that great companies can plunge in price well below the 30 year historical CAGR curve before sanity in the market place takes over. The ability to rationally watch the price drop day after day and pick up more and more shares all along is the key.The way to do this is to just place limit orders at increasingly low prices for higher and higher numbers of shares. Some thing like 100@$24, 200@$22, 800@$20, 2000@$19 and 4000@$18. In other words, by drawing in the 10% curve which has never been met in the like of the business, you know you are getting one heck of a buy! If the stock never gets there, so what? You can always place orders after you see the stock has made its turn. Lets say it bottoms at $19. When it goes back to $20, place that last order at $19.50. 9 times out of 10, they will go back and pick up that order at $19.50 to sell 4000 shares. I do not know why, but it happens often. They are so shocked at that point that any buyer is a blessing. The market makers are afraid the stock will go lower again.Another swell way to deal with this bottoming process is to sell puts at $18.50 or $18.00. Some one will actually pay you to agree to buy their shares at those prices! At the bottom, everyone is going nuts. That is the time for very sane, rational people to step in and take control. Since you want all of the shares that you can get at these levels, why not let the market force you into buying? If the stock drops, you get the stock at a great bargain...if it turns up, you buy your puts back for a nickle each and then buy the stock anyway.So, back to your point. I do not know how Geraldine Weiss can actually use the dividend yield to achieve what I do with the BMW Method. I like to have lines on paper to guide me. That way I can see exactly why I want that stock and the price that I will pay. Since the curves slope upward, I may get a better deal in a couple of months if the stock stumbles a little. Do you see that logic? Once you buy at, say the 10% CAGR and 13% was the lowest the stock had been in 30 years, how can you lose? If that price was at $18/share, a year later you get about the exact same deal at $20/share. In the case of Philip Morris, that happened 3 years later when it dropped to $28/share. I was buying again like crazy.Many people buy a stock low and then refuse to buy it again because they think they can get the same deal again. That is rare. But, in truth, you may well buy the stock years later at a higher price and actually have a stronger position than you had at the lower price. Without using the BMW Method, you would never see that obvious fact...because it is not intuitive to recognize what is really going on here. People think in terms of straight lines. There are no straight lines in compound growth! That is the reason for the BMW Method. It teaches folks to look for the compound growth parabolic shapes. Once they see it, they are hooked on the method. It opens up all sorts of opportunities and it reduces risk to miniscule levels. I have never gone wrong buying low and selling high. I am guilty of buying too soon and selling too soon...but, I still never lose money. I just do not make as much and that bothers me. I want to perfect this Method. It never has lost money in the long-term...but it could have been applied better. I am still learning how to really utilize this tool.I hope this makes sense to you.
BMW,I really appreciate your effort to educate us.Perhaps it is my engineering background, but I have continued to think in terms of straight lines. That is why I modified your wonderful method to the log graphs. There is one other advantage to the straight line approach: since I've printed out all the 30 year, or 29 year, log graphs in the identical format, I use a protractor to determine the percentage growth. (I created a small table which indicates that an angle of so many degrees corresponds to a specific value for the CAGR.) The "protractor" I had from geometry in high school disappeared after many decades. I had to splurge and purchase a new one - now made in China. But it's really made the work very simple and easy to grasp.I'm sure some of the FC have created nice spreadsheets to replicate the features. But I prefer interacting with the data. For me it's much easier to print the plot on paper. Then draw a few straight lines. Finally I determine the angles with the protractor and look up the corresponding percentages.Thanks again,Barry
BMW,The problem I'm having with your system is that it seems to be based on whether or not a company is significantly below its historic 30-year CAGR and there is obviously no guarantee that a company can or will be able to maintain that in the future. It seems like just so much TA/chartist arcana.If I recall from your initial post, you had used Pepsi and had pointed out there were various points in its past where it was well below its CAGR and would have been a "back up the truck" buy, I think you termed it. But would Pepsi's CAGR have been the same at the time, would there have been even enough data at the time, to "know" that Pepsi was such a screaming buy?I have a feeling this method borders on data mining. Please don't misunderstand me. I'm not trying to be disrespectful, but rather I'm trying to understand why this method of stock selection is any different than, say, Michael O'Higgins going back and observing some interesting anomalies with the Dow 30 stocks and coming up with his "Beat the Dow" system?Moreover, can it be even proven to have worked in the past? Had you been using this method in 1982, would it have worked? I know you say you've used it with 100% accuracy at picking winners over the past 10 years, but is it possible to backtest to see if there's even the slimmest of statistical probabilities your method is sound?Again, I'm not trying to disrespect your work, but to understand it better.Regards,Rich
A few comments in reply:1. Re Geraldine Weiss and lines on the paper to guide you: If you have a decent library near you, wander in and pick up one of her books. She charts the dividend yield on graph paper by way of upper limit bands and lower limit bands (I'm making it sound more complicated than it is). (And I'm not saying that your method and hers are the same; only that they do share points of similarity.) It's like the MIN / MAX CAGR estimates that you draw in your method. She charts the price on top of the bands. So by the time the stock price is approaching her bands, it's either pretty low (relatively speaking) or pretty high. Not to say it can't go outside the bands; but by the time it's at the bands, you know that, apart from a catastrophe, the price is close to its outer limit. Her bands function in the same way yours do: they give a picture of where the stock price might go.2. Regarding your suggestion of buyer large quantities of shares as the price trends lower: About a year ago I stumbled across the AIM (Automatic Investment Method) dreamed up by an entertaining writer called Robert Lichello in the late 1970s. Lichello came up with the method having been devastated by the bear market in the 1970s. Lichello's method offers a structured approach to what you suggest, on both the down side and the up side. If you follow it, it forces you to buy low and sell high. A fellow named Tom Veale uses this approach extensively. See his website at www.aim-users.com for Lichello's book title (hokey as it is), and Veale's adaptation. (And Bill Miller's comment that "the one with the lowest average cost wins" is apposite.)3. About the "how can you lose?" remark: In an individual stock, that is, of course, the $64,000 question. One has to have the skill or the luck to differentiate between tennis balls and eggs (a Lichello phrase, I might add).4. Your point about being able to buy at a higher price because the price falls at the lower CAGR band is one of the best points about your method.5. Lastly, on a totally new point: I like numbers but lack some depth in math. It occurs to me that, for the math and spreadsheet afficionados on the board, though at a large risk of losing the simplicity of your method, one could work out standard deviations from the central tendency of the CAGR line. The usefulness of SD is that they quantify the outlier of the price trends: a 1-SD event is at a 66% probability; a 2-SD event is at a 95% probability. You already do this, but without the label, when you wait for the price to approach the MIN/MAX lines.jacko2
The success of the method is predicated on the long term growth of the company reverting to its long history. This seems plausible, likely, but not guaranteed. So, as a system to beat the odds, I think it is great. If you were thinking of dumping all you money in a single stock uncovered by the BMW method, I would think again.BMW mentions a few specific instances when it worked- basically when the market overreacted strongly to specific events (pending lawsuits which blew over, one time charges, etc). This is self selection. That is to say- he did not invest in every single company which fell into the BMW buy criteria- he bought those which fell into the criteria and which were being slammed by events he deemed to be unjustifiably showing up in a depressed price.These are two very different things. That is to say- he is using the method in an intelligent way, not blindly applying it to any stock which has a 30 year history.The underlying question is- will the stock actually revert to its long term growth?This is where due diligence comes into play. You would not have any success with the method without being able to forecast, slightly, future growth. This is why I think his method may not be for everyone- it is only for those with the right experience, and possibly with the right lense up front to select the companies to examine. The lense he has chosen, which is a good one, is to watch the news for political events and other overblown events which will not fundamentally change the entire business. This works.Therefore I suspect pulling companies out of the blue and trying to see if they fit into the BMW method is more risky, more prone to error, and requires greater DD, but also would work.
I'm curious what the returns have been. I've scanned the 73 previous posts on the BMW Method and can find no mention the return. For example, how does it compare to holding the S&P 500? It sounds a bit like a stock newsletter that touts all the winners. Although it has been applied by one person, I'm curious what those returns were.
Barry, First, let me say that I loved your post. Your level of understanding of all this is commendable. You made me think about several things. You first said, "Perhaps it is my engineering background, but I have continued to think in terms of straight lines. That is why I modified your wonderful method to the log graphs." - That is interesting. It is my engineering background that led me to the BMW Method. However, in engineering I found that, in the real world, there are no straight lines. Throughout engineering, the various curves grow at exponential rates...that is why engineers are taught to use log graphs. Unfortunately, folks without training in engineering get confused by this. I decided to use "real time" graphs so that I can paint a picture that will make sense to almost anyone. You continued, "There is one other advantage to the straight line approach: since I've printed out all the 30 year, or 29 year, log graphs in the identical format, I use a protractor to determine the percentage growth. (I created a small table which indicates that an angle of so many degrees corresponds to a specific value for the CAGR.)"Excellent! That is how an engineer should look at this method. You have the entire technical concept under control and you can show the BMW Method to other engineers. However, how could you explain it to a janitor? He needs to understand the BMW Method more than you do.I have no problem with using log graphs. As an engineer, I have always had a problem with communication. Explaining difficult concepts to people who have no technical background is tough for me. Conversely, when I then go back to relating with technical thinkers, I get accused of "talking down to them." That is not my way. It just sounds like it. Anyway, I will stick with my curves and you can stick to your straight lines. "You say tomato, and I say tomato. If it works, don't knock it. I am happy that you understand the BMW Method. That pleases me greatly.God how I loved what you said next, it was priceless! "The "protractor" I had from geometry in high school disappeared after many decades. I had to splurge and purchase a new one - now made in China. But it's really made the work very simple and easy to grasp."That statement of yours was the most encouraging to me. For, you see, my goal was to design the BMW Method in such a way that a 14 year old could use it. Most people have forgotten those simple protractors that teachers made them bring to class. Back when they were using them, they asked, "How can I ever put this silly thing to use in the real world?" You have found a reason! You are using skills that have been hidden for years. The invention of calculators and computers have taught most people how to not think. I love computers and calculators...they are tools but they make people stop thinking for themselves. Thus, they look to the computer for answers. That is wrong! All of the answers are in the brains of the people using the computer. The computer has no answers. Or, better said, any answer that you can get from a computer is only as good as the question that you ask it.We tend to ask the wrong questions because we have lost track of the basic problem. The BMW Method forces anyone who used it to see the big picture. The Method has opened my eyes to may things other than merely building wealth. It works fine for picking stocks...but it works even better at picking the right questions.You continued, "I'm sure some of the FC have created nice spreadsheets to replicate the features. But I prefer interacting with the data. For me it's much easier to print the plot on paper. Then draw a few straight lines. Finally I determine the angles with the protractor and look up the corresponding percentages."Again, using the computer as a tool to plot the BMW Method is great. I love it! However, I agree with you that "I prefer interacting with the data." Somehow, doing the drawing of the lines, straight or curved, personally appeals to me. But, as I said earlier, If it works, don't knock it. "You say tomato, I say tomato and the computer graphers say tomato."Let's never become confused over methods. The truth is, The BMW Method works. It is a tool, the key to developing the art is in the application of the tool. I have designed the tool to be easy to use by anyone.But, the BMW Method is a way of thinking, it is not a conventional tool. The BMW Metod is an invisible tool. The BMW Method is like a computer program that shows a computer a particular way to think. So, in the case of the BMW Method, you are the real tool. You and your protractor. You have become your own most powerful tool because you are now thinking clearly using the BMW Method. Keep up the good work!I want no credit for this. I just happened to stumble upon it. But, once I saw it, it changed my life. I am trying to merely share it with others. You are far ahead of most people. Thank you for being yourself. And, thank you for considering my way of thinking. For, in the final review, I found the BMW Method inside my own mind. It is the conclusion of the best of all of my thoughts. It is how I think. After all the years, I was finally able to explain on paper how I think about most things...especially about how to become wealthy. So, I surely appreciate it when anyone will seriously look at the BMW Method. That alone is a great compliment to me. Thanks to all who have even considered the BMW Method. You are all very kind.
I have no problem with using log graphs. As an engineer, I have always had a problem with communication. Explaining difficult concepts to people who have no technical background is tough for me. Straight line vs. Logs... tough pitch to make. The Fool has done it best. Even I understand it and I majored in business.http://www.fool.com/foolfaq/foolfaqcharts.htmGood thread all, Ivan
"The problem I'm having with your system is that it seems to be based on whether or not a company is significantly below its historic 30-year CAGR and there is obviously no guarantee that a company can or will be able to maintain that in the future. It seems like just so much TA/chartist arcana.' - FoolishCop The fact that you are having a problem is very good! You are questioning and learning. That is what this is all about. Please do not aplogize for asking questions.The answer is, this is absolutely not like any TA/chartist method. Those mathods look at the short term and very often are wrong. If you think about it, those other methods are searching for ways to by the best stocks. However, since they are often wrong, the method is not always going to work. As you get into the BMW Method in deatil, you will find that it HAS to work. This is not some silly charting method. This is an almost perfect way to spot a great business at a low price.You said, "...a company is significantly below its historic 30-year CAGR, there is obviously no guarantee that a company can or will be able to maintain that in the future."You are absolutely right. That is where your Due Diligence has to kick in. However, the BMW Metod has already shown you the way to find the best buys. You have "shopped" and found the best deal on XYZ Incorporated that has existed in the past 30 years. But, is it still a good deal? That decision is still up to you. I cannot tell you what to buy. That is your decision.You continued, "If I recall from your initial post, you had used Pepsi and had pointed out there were various points in its past where it was well below its CAGR and would have been a "back up the truck" buy, I think you termed it. But would Pepsi's CAGR have been the same at the time, would there have been even enough data at the time, to "know" that Pepsi was such a screaming buy?"OK, the precise CAGR...like 11.5%...might not be the same. But, the lowest curve would still be the lowest curve. Don't you see that? Who cares if the number on the curve is 11.5% or 13%? Lowest is lowest.I have tried many times here to discourage the use of specific numbers on the curves that are drawn. The numbers are fine, but they are not that important. Actually, some of the best deals come with curves showing 3% or 2%. What is important is the future. What is logically to be expected in the next year or two or three? The company will tell you that...look at the Annual Report. Do the Free Cash Flow calcs. I cannot do anything buy show the way to think about all this. You have to make your own decisions. You say, "I have a feeling this method borders on data mining. Please don't misunderstand me. I'm not trying to be disrespectful, but rather I'm trying to understand why this method of stock selection is any different than, say, Michael O'Higgins going back and observing some interesting anomalies with the Dow 30 stocks and coming up with his "Beat the Dow" system?"First, I have not read the O'Higgins book so I am at a loss as to how to discuss it. I will make a note to check it out of the library the next time I go there. Once I read it, I will try to show you how it relates to the BMW Method and how it relates to the BMW Method. If he gives specific choices over time, I can go back and see how the BMW Method compares based on the specific stock's low CAGR. In fact, since you have the book, you can easily do that yourself before I even read the book. See if you can spot a problem.I have already explained how I found fault with the "Dogs of the Dow" and how the BMW Method sorted throught the choices and picked the two winners. Three years later it picked two more winners out of the whole bunch and left the over-priced stocks behind. In ten years, I have never gone wrong buying using the BMW Method. However, it could have a short coming. I am still looking for it. I never said the Method absolutely could not be wrong. All I have said is that it never has been so far...and that is pretty good in my book.You finished as follows, "Moreover, can it be even proven to have worked in the past? Had you been using this method in 1982, would it have worked? I know you say you've used it with 100% accuracy at picking winners over the past 10 years, but is it possible to backtest to see if there's even the slimmest of statistical probabilities your method is sound?"I see no reason to backtest it. As I explained above, low is low. If the business' stock ultimately came back and made new highs as the curves always show, the business' stock price surely did not make new lows. If it did, the curve would show that fact, right? We are looking at history. Some folks will say that the BMW Method is like driving by using your rear view mirror...and that is about as good as I can put it too. That is exactly what we are doing. We are looking back at what a business has done in the past, graphicaly represented that entire past on one page and then plotted how the stock will perform in the future if it just does in the future what it has done in the past. I see nothing wrong with this thought process, do you?To remain on the automobile driving theme, it is like getting a map and planning a trip. Once you see where the road leads, you feel comfortable stepping on the gas pedal. If you have no idea where you are going, why move forward? You might as well look into the rear view mirror and back up. You have no direction.The BMW Method point in a direction. I have given you the ability to draw your map. Are their detours ahead? How would I know? I do not even know which way you want to go. The trip planning is up to you. You have ot call AAA and get the road conditions and check the weather channel for that concern.But, forget taking a trip. We are trying to become rich. I say the method is precisely the same. The BMW Method not only shows you future, it shows you where to go. Once you plot the data, tou can see the future for that stock...IF IT JUST DOES WHAT IT HAS DONE FOR THE LAST 30 YEARS! That is all you know. You have to chack the road conditions and the waether! I can not do everything for you.So, will the business do what it has for the past 30 years? I have no idea. Will buying the stock make you rich? I have no clue. BUT! If you have used the BMW Method and the stock is at 30 year lows, I say that it is worth your consideration. And, that is all that I have said. The BMW Method is a method. It has never failed me...that is no guarantee that it won'r fail someone else. But, if it works for me and it makes complete sense, why won't it work for anyone?Now, back to the Michael O'Higgins book, "Beat the DOW." He, very well may actually understand the BMW Method. He knows what will work but he sells books for a living. Why would he tell you about the BMW Method? If he does that, he has sold his last theory. For, if the BMW Method happens to be the best method available to man, why would anyone buy a book to teach them an inferior method?Now, I will read the O'Higgins book. I am always interested in other people's theories and methods. However, what I have always found is that they are more interested in selling books than in helping people. Their books did help me to develop the BMW Method though. Investmant books are good. There is some real truth is all of them...but I have found none that actually gets to the BMW Method...and that worries me. For, if my method always works for me, and the ones in the books only work some of the time, I have chosen to trust my method over all others.Say I am an idiot, But, I have stopped buying Investmant books. I will check them out of the library and read the for free. But, that is all they are worth... almost nothing. Conversely, The BMW Method is absolutely free. But, what is it worth?I cannot answer that for you. The answer is in your future. However, I have gotten you to think about the BMW Method and I cannot ask for more than that. Thank you for your consideration.Your final words here, "I'm not trying to disrespect your work, but to understand it better."As I said in my first words here, "The fact that you are having a problem is very good! You are questioning and learning. That is what this is all about. Please do not aplogize for asking questions."FoolishCop, I really appreciate your comments. You are fast becoming a believer. Keep questioning and applying the Method. It will come to you as you come to it. You have to believe in it before you accept it. The more you question it the more dedicated you will be later. I know. I questioned it for 50 years. It took me that long to figure out the very Premise behind the BMW Method. I cannot expect anyone to just read my words and accept the BMW Method.I welcome any and all questions concerning the BMW Method. I am the World's greatest authority on it. I have thoroughly developed it over the last ten years since I retired. If it has any weakness, I want to spot it. Anyone is welcome to help me here. My goal is to make the Method as perfect as possible. Constructive criticism is absolutely necessary.
The following is in resonse to some of Jacko2's recent post:"Re Geraldine Weiss and lines on the paper to guide you: If you have a decent library near you, wander in and pick up one of her books. She charts the dividend yield on graph paper by way of upper limit bands and lower limit bands (I'm making it sound more complicated than it is). (And I'm not saying that your method and hers are the same; only that they do share points of similarity.) It's like the MIN / MAX CAGR estimates that you draw in your method. She charts the price on top of the bands. So by the time the stock price is approaching her bands, it's either pretty low (relatively speaking) or pretty high. Not to say it can't go outside the bands; but by the time it's at the bands, you know that, apart from a catastrophe, the price is close to its outer limit. Her bands function in the same way yours do: they give a picture of where the stock price might go."I have not read her book, but I will. However, I have a problem with her approach. What if the business cuts the dividend? Doesn't that action mess up her method? Suddenly, the "bands" fall apart. In that instant, everything changes.Conversely, with the BMW Method, the big picture not only stays the same, the dividend cut will make sense to you. The dividend cut will leave more Capital inside of the business. Now, I hate dividend cuts, but they are sometimes necessary for the continued success of the business. And, isn't that what is most important? If the business is going belly-up, we surely have no reason to want to own stock in it!However, watch what happens when a business cuts it's dividend...the price usually drops! Here we have absolute proof that the business is doing what it should do to make itself solvent in the future...and investors sell. That makes no sense to me.If the dividend cut is just another step on the way to total failure, then we will already know that because of our due diligence. We would never buy that business in the first place. However, if we own the business for all of the right reasons AND it was at or below the 30 year CAGR, the dividend cut is good, not bad. We already know that because we understand where the business is going...UP. The stock's price rise proves it. Jacko2 says, "About the "how can you lose?" remark: In an individual stock, that is, of course, the $64,000 question. One has to have the skill or the luck to differentiate between tennis balls and eggs (a Lichello phrase, I might add)."I fear that you missed my point. That is not the $64,000 question. That is the $64,000 answer! You have the answer...I gave it to you. The answer is, "How can you lose?" As you work with the BMW Method, you will continually find great stocks and after doing your own Due Diligence, you will have to sit there and say, "How can I lose." That is the final thing in your mind before buying the stock. Sure, it sounds like a question but it is your answer...The answer is "I cannot see any way! I cannot lose." However, you will never even get to that point because you will be hitting the "send" button to order some ahares of the stock. Your action is your proof.You will not get to that point until you use the BMW Method several times and it works for you. However, you wull normally see it begining to work for you in a fairly short time. The lower below the 30 year CAGR you buy, the faster you will see the Method work for you. The more you buy below that 30 year CAGR curve the better! The lower the stock goes, the better. BUY MORE! You already know the answer, "How can I lose?" You will find yourself glued to the stock's low price..."Can I get more at an even lower price?" God, I hope so!" You will rooting for the price to drop some more because that is in your best interest.Here is why that is ALWAYS true...not just some of the time...ALWAYS! You have spotted the business that is below its 30 year CAGR, you have done the due diligence and found a strong, healthy business. You know why the stock is down, that is obvious because that is why the stock is down in the first place. You say to yourself, "The only real problem that I can see here is that the company could go bankrupt. But, is that at all likely?"Once you think about that question for a few minutes, the answer will pop into your brain. The answer is, "How can I lose?" And, hit the "SEND" signal so that you buy the business...not all of it. You buy your forst piece of it. The future is bright, the business will make you huge profits and you know it in your heart and mind. You will thank me...unless the business goes belly-up. Then, do not blame me. You are the one who did the due diligence...not me. I just brought the BMW Method to you. Do not shoot the messenger. I am completely innocent.And, that is the entire basis of the BMW Method. Will the business succeed or will it fail? If it will not fail, it has to succeed. If it succeeds, its stock will go back to at least average 30 year CAGRs...why wouldn't it? You did the DD. It is the same compnay that was at 30 year high CAGR's in the recent past...your graph proves it! So, why will the business fail to rebound? You already know the answer...It will rebound...it always has! Unless it fails to rebound and goes belly-up.However, ask yourself this. IF you use the BMW Method on ten equally great ideas, how many will ever go belly-up? For me, in ten years, the answer is, "ZERO." If it were even one or two, I would be happy. The gains of the others are so astonishing that one or two misses would be OK. But, again, it is the due diligence that failed...not the BMW Method. No one can fault the BMW Method because it is nothing but a way of looking at a business and buying it cheap. It never fails in buying low...the price can still go lower but it is then a reason to buy more of the business. The question then is, "How much of this can I afford to buy and how much do I really want?"Now, you might have a question for me...let me anticipate your question for you.You might ask, "But BMW, in ten years, you have never picked a losing stock...but how well do your picks actually do on average?" The answer is, "They double in two to three years...every single one"Now, some have tripled and one has quadrupled. Most have doubled in under two years on average. The ones I bought last year are up 70% on average...two have more than doubled.Now, with that kind of gains, what do I care if one went belly-up? But, none went bankrupt because they were all sound, well managed businesses. How could they go belly-up? Of course, I could have picked Enron...but I didn't. It was never on my list to look at in the first place. However, that is a perfect example of the one weakness of the BMW Method that I have found...even due diligence can miss false accounting. That is unforgivable in my book. Lying about the numbers is evil.So, we have to do the work and try to spot the great buys...we have to be worried about evil doers. They will lie to us to take our money. Before I came up with the BMW Method, I lost lots of money by believing the liars. Finally, I fought back. The BMW Method is my attack weapon. It is powerful and it is honest. From Jacko2: "Your point about being able to buy at a higher price because the price falls at the lower CAGR band is one of the best points about your method."I am certainly glad that you see that. It is the key! The CAGR curves always are sloping up, aren't they? How can you lose? That is the BMW Proof!
BuildMWellI see one potential flaw in your current approach. That flaw has to do with inflation. Over the past 10 years inflation has been low and steady. If inflation starts to rise or bounce around, your CGAR plots might start to fool you. Let's say inflation spikes next year. Many of the stock you track will also spike in price. Some of them might even look over priced, however, the real value of the price of those stock might be relatively unchanged.The scenario gets more interesting if two years from now inflation drops rapidly and even becomes deflationary (i.e. negative inflation). Many of your stocks will drop in price along with the rate of inflation. Some might approach their low CGAR lines and you would be tempted to buy them, but their real price is not cheap. Inflation could fool you.I would recommend you look at using the CPI to convert your 30 year price histories into inflation-adjusted real price histories. Have you tried doing this? It probably doesn't make much of a difference to the graphs the past couple of years since inflation has been very low and tame. However, the future will likely include more complex inflation patterns. Does this make sense?I know that this makes your technique more complex, but I think it might prevent it from falling apart when inflation gets wild.I also bet that if you use the CPI to adjust past prices, you'll notice that your price charts look smoother. I'd love to hear your thoughts on this.Solidago
"...This is why I think his method may not be for everyone- it is only for those with the right experience, and possibly with the right lense up front to select the companies to examine. The lense he has chosen, which is a good one, is to watch the news for political events and other overblown events which will not fundamentally change the entire business. This works.Therefore I suspect pulling companies out of the blue and trying to see if they fit into the BMW method is more risky, more prone to error, and requires greater DD, but also would work." - yttire You are absolutely correct! As you say, "The BMW Method is not for everyone." I say, it is just for those who understand it. Understanding the BMW Method is necessary before it will make any sense to anyone. However, I have made it easy enough so that most people can see it and understand it. To me, that is a big plus.You are also absolutely correct that the BMW Method is not that valuable in just randomly picking a business and doing the CAGR charts. However, it is good practice and it is never a wasted effort to do that. The stock that you plot today may be in the news tomorrow and the price will be at 30 year lows...you will already have the chart. That will save time later. Even if the stock never hits the media, it may still drop to 30 year lows due to a bad earnings report or some "un sexy" reason that gets the newspapers interested. If you find any business at 30 year lows, it is worth your attention, in my opinion.What is so very nice about lots of bad news on a business is that you know why the stock price is down already. If that news gets you to use the BMW Method, that is fine too. All we want is to buy a great business at the best price. I mean, isn't that the goal of investing? Buy low. The BMW Method just shows the way to do what we all want...and no one gets hurt! You cannot buy low unless someone is selling low. If you refuse to buy...the stock will go even lower. That has to be 100% true because one less buyer means less demand for the stock. That is why timing of the purchase is key. Your purchase helps to stop the fall but it is not going to necessarily stop the fall. The price may be a better buy tomorrow. However, that is good. You have done your due diligence and you know the company is sound...the lower you can buy more shares the better!Think about something else here. If the stock is trending lower below its 30 year CAGR, people are scared. If you happen to be into options, think about selling puts at $.50 below the present price. Often someone will pay you a couple of bucks per share to promise them that you will take thrie stock at a further discount. You are wanting to buy it anyway! So, you will get it for $2.50/share if it stays down or you will buy back the option for a nickel as it moves up. They will have paid for "insurance" and you will have sold it to them. Then, you can buy the stock for yourself anyway at below the 30 year CAGR!Again, you are very astute in your words. You say, "If you were thinking of dumping all your money in a single stock uncovered by the BMW method, I would think again."ABSOLUTELY! Never put more than maybe 10%, at most, into any great idea. I have broken that rule on occasion though if I feel confident in the deal. Philip Morris in early 2000 was one of those occasions. I sold a house to buy all I could get at under $20/share! But, I knew that MO was going to double soon. And, of course it didn't. It tripled! I am not bragging, I am telling you the facts.I am here to tell anyone who cares...the Method works. At least, it works for me. I am just trying to share the wealth. Ask yourself, "Why would this idiot try so hard to give something away? What's in it for him?"When you answer that question, you tell me. I am anxiously awaiting an answer because there is nothing in this for me...except self-preservation. Think about that for a while. It is absolutely true.
"I'm curious what the returns have been. I've scanned the 73 previous posts on the BMW Method and can find no mention the return. For example, how does it compare to holding the S&P 500? It sounds a bit like a stock newsletter that touts all the winners. Although it has been applied by one person, I'm curious what those returns were." - yahooross My returns using the BMW Method should not be important to you. Your returns using the BMW Method are important to me...I want them to be maximized.In other words, you can do your own BMW Method on your net worth. That is the value of your stock certificate. One share of "The Yahooross Company" is worth your net worth. There is only one share...if you are married there are two. There are two equal partners, by law. That is how I see this whole thing.You can do the BMW Method on your portfolio...that is your liquid value. My goal is to make it grow as fast as possible. Using the BMW Method did just that for me. I actually could not care less if you want to use my method or not. That is your choice.My returns on "new investments" is about 70% though. My overall portfolio contains some funds and, on occasion, some bonds. I buy bonds using the BMW Method also. My zero coupon bonds doubled from 1995 to 2001. A double in 6 years is a CAGR of 12%...on bonds! Of course, that hurt my overall CAGR because my stocks did far better than 10%...more like 30%. Of course, the overall market was growing at CAGR of something like 17% during that same time frame. High yield bonds were my "safety net."I was still listening to some "experts" during that time. I did not apply the BMW Method to all of my purchases. That hurt my overall CAGR because I had not finalized the BMW Method yet. That happened in about 1999 and in early 2000. My BMW Method had absolutely proved itself to me. I can prove it to anyone in under an hour using nothing but a pencil, a pad of paper and the BMW Method. I can discuss it politically and come to very reliable conclusions. I can discuss it economically and prove the economics are sound. I can use specific stocks and prove it. You pick the points to discuss...I can prove that the BMW Method is as good as it gets. It can get better though...the BMW Method, I mean. You can help to make it better by using it and understanding it.During the "bubble" everything I bought went up at least double. While the market was tanking, I was douubling my money on my "new investments." Some took two years, some less. My CAGR was over 70%...but, that is not important. What is important is that you at least try the BMW Method. What have you got to lose?If you find something that looks good to you, tell us about it. I will be happy to chart it and spend some time doing some due diligence. The nice thing is we will be on the same page. We will both have the same perspective. Heck, I might buy some of your stocks along with you. I always put my money where my mouth is. I never sell something that I do not know is the best. I always buy the best. There are tens of thousands of great businesses in America. The GDP is growing! How can we lose?Try the method. You do not need to waste a single dime of your money...all it takes is a few minutes of your time to see how this works. It has to work. Once you see it, it will become obvious to you. This is not rocket science. This is really a quite simple method. I can explain it to a 14 year old and they understand it.
"I see one potential flaw in your current approach. That flaw has to do with inflation. Over the past 10 years inflation has been low and steady. If inflation starts to rise or bounce around, your CGAR plots might start to fool you. Let's say inflation spikes next year. Many of the stock you track will also spike in price. Some of them might even look over priced, however, the real value of the price of those stock might be relatively unchanged." - SolidagoI have a little problem with your premise. You are looking at this backwards! You "assume" that inflation will push up the price of stocks over time...and that is absolutely correct. However, the stock market hates inflation! Thus, the price increase that you say will occur to "flaw" the BMW Method is, in fact, not going to help the stock prices overall. This is a great thing to discuss right here and now. You have pointed to a real fine example of why the BMW Method always works! I thank you for that. To prove my absolute statement absolutely, we will have to use the BMW Method. Once you see this, you will come around and drop your misconception about inflation and stock prices. Here is how you can prove it to yourself. You do not need me. You just need my Method.Go to a stock charting site and print the DOW30 since 1940 if you can find it. If not, at least go back as far as you can possibly find. You MUST go back before 1960! If you fail to go back far enough, you will miss the proof.I will tell you what I clearly see on my CAGR curves of the DOW30 (Mine starts in 1940 by the way). The DOW30 consistently performed between a CAGR of 8% and 10% from 1940 until 1965. At that same time, the DOW stocks yielded about 3.5% in dividends! So, the DOW was able to give an investor an average return of 12.5%! That is the average! I was not around and the data is gone, but I know that the BMW Method would have worked back then too. It has to.Anyway, what was in place back then to make for 12.5% overall growth. Number one...inflation was low. Bond rates were at 2% to 3%, the Country was growing, we fought WW-II and the Korean conflict. Next, look at 1965 to 1982. What happened? Whereas the DOW#) was pushing 1000 by 1965, by 1982 it was still at 1000. Why? There is one main answer...Stocks hate inflation. Inflation was rampant from 1965 until 1982. It peaked at something like 13% or 15%! Stocks did not like that...stocks tanked! Look at the BMW Method plotted on the DOW30...the answers are crystal clear. But, besides inflation, what was happening from 1965 to 1982? We fought a war in Vietnam...and lost. We saw politicians giving money away like it was free. We watched the 30 year bond rate go to 12% and higher. If an investor can get 12 or 13% for 30 years guaranteed by the US Treasury, why buy stocks? The BMW Method proves it. Bonds were at 30 year low CAGRs...people were buying bonds. Stocks prices were at 30 year low CAGRs too...but stocks hate inflation. Who would buy stocks when bonds yield 13%? What stock could compete with a 13% Bond?The answer was IBM, by the way. But that is another story. Overall, stocks hate inflation. I hope you can see that now. But, what causes inflation? Run away spending and bad fiscal planning. Taxing Americans to pay for run-away social promises causes inflation. What causes run-away bond yields? Inflation and the growth of government faster than us taxpayers can fund the governemnt. The governemnt has to pay huge yields to get people to loan them money! An insolvent government causes inflation and high bond yields. Do you see where this is heading?From 1982 until 2000, the CAGR of the DOW30 grew at 16.3%! It went from a historical low CAGR at 770 to an 8% CAGR of 11,700 in 18 years...17 to you purists. That is a fifteen fold increase in 17 to 18 years...not too shabby. 16.3% to 17.4% CAGR for 17 to 18 years! Meanwhile, inflation was being brought under control and bond yields were dropping. The market loves low inflation!But, I agree with you also, some inflation is good. We surely would not like deflation, would we? So, high inflation is very, very bad and low inflation (deflation) is very, very bad. What we want is a low inflation rate. That optimizes the stock market growth. Businesses can deal with low inflation and they raise prices to off set it. That drives up the GDP ever so slowly and we all feel richer because we can get a raise that might just beat inflation if productivity improves. I cannot argue with trying to inflation adjust my curves. But, since I always go back 30 years, we would see screwball numbers back in the late 1970's. What would that do for us? What would 13% inflation show us? All we need to know is that inflation is under control and low. I see no benefit in confusing a very simple concept like the BMW Method by getting into things at just complicate the picture and achieve nothing. Lets keep this easy, OK?