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Investment Analysis Clubs / The BMW Method


Subject:  Re: So about Verizon Date:  12/11/2012  1:15 AM
Author:  WendyBG Number:  40838 of 42250

<What's interesting here, and what's affecting all the charts with a similar pattern, is the 2000 bubble. The whole bubble, from the 1997 start of the run-up, is still included in those charts, making the starting prices suddenly out of whack.

I think that, at least for the next few years as the 16 year charts continue to begin in the midst of the bubble, you'll see patterns that aren't so useful.>

Sorry for the long delay, but I haven't been frequenting this board weekly as I did when Jack Cade published the Mr. Goodbuy stock screen.

When Build'M'Well (BMW) began his stock investing (so he told the story), he used the rulers and curves that all engineers owned before computer aided design. (My father had them, also.) BMW used his rulers to draw lines that seemed to make sense over the long term stock prices.

It was Dr. Mike Klein who used his deep math knowledge to draw curves and calculate CAGRs (for which we all owe him a debt of gratitude).

BMW himself said that admired Mike's math but he still used his rulers.

I agree with your observations that the 2000 stock bubble and the 2008 crash distorted the calculations of CAGR. It might make more sense to go back to BMW's method and draw your own curves with a ruler, using your feeling for how the market would realistically have valued stocks without these extreme swings.

As kelbon points out, the BMW Method only works if a company's business has been stable over the time period you are studying.

In addition, the unusual actions of the Federal Reserve since the 2008 crash (forcing money into stocks by inflating the money supply and cutting bond yields to zero) may be causing stock prices to rise. If and when the market is allowed to revert to normal, prices may drop. The lowest risk is probably with low-beta stocks with strong balance sheets, low P/E ratios and a well-covered dividend.

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