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On the coverage question, I believe that everyone who has responded so far is generally in agreement although saying it in different ways: buying quality stocks when uncovered is better (higher return potential) than buying equally high quality stocks when covered.

The rationale is probably a number of different things. All of them rely on changes that occur when coverage begins:

1) the general bias of analysts to give optimistic estimates
2) the attention that is drawn to any stock just starting to get coverage
3) a high ROC and high earnings yield should draw more buying attention than selling attention when coverage starts

Certainly you want to already be holding the stock when those things happen. It seems like (and this is certainly not scientific) these factors will, over a large number of "rolls of the die," produce a good average return.


Re: the BMW Method. I haven't tried any cross-method approaches. Generally if any stock comes up anywhere as an interesting potential buy, I refer to the BMW charts as one of the first steps. If the company is solid, long term, and still largely the same business as it was over the stretch of the BMW chart, then it is a useful indicator of mispricing. But a lot of companies don't fit BMW criteria; I ignore companies under $1 billion market cap, for example, in the charts I generate, and don't produce any charts for companies with fewer than 16 years of price history.

I wouldn't use just std dev as a buy indicator but as something to get me interested. It's common for people to look into the BMW Method a little, see the charts, and say it's a mechanical chart-driven method. That's a piece of it but there is a lot of DD also done, of a different flavor. We're looking for stocks that are very far below their historical price growth rates, and looking for two things:

1) why is it so far below? Is it a temporary problem, or has the business fundamentally shifted?

2) will it, with reasonable assumptions, recover its previous business growth, and therefore can we expect the stock price to revert to the mean?

So the charts and the std dev numbers are the first of a two-step process, like maybe the Earnings Yield of MFI. Then we manually do a business evaluation to see if the company has the ability to correct the very high earnings yield (kind of like the MFI's ROC). The difference is that we look at 20 or 30 years of history to determine many of these things. At less than 10 years, it's really a different method entirely.

It's actually pretty uncanny how well it works, but it is slow. Stocks tend to take 1-3 years to get back to where they should be. You can catch companies near very low points in their price growth rates. One of my favorite examples is Merck (MRK). Based on the charts and the group's work to try to figure out just how big a problem Vioxx was, I bought MRK in October and more in November, 2004. Now that's a year and a half ago and it has not recovered much until very recently. You can see where the buy point was in the 30-year chart here: http://invest.kleinnet.com/bmw1/stats30/MRK.html .

I have also found that Warren Buffett has bought stock almost always at points you would expect on BMW charts. Look at BUD in mid-2005: http://invest.kleinnet.com/bmw1/stats20/BUD.html and it has even dropped a little further.

I think all these methods are good as long as they focus on finding quality business at a bargain price. There are many ways to implement that, and MFI, in my opinion, is the one that average people can do well over and over, which is why I am so jazzed about it. It lends itself to a mechanical implementation that produces good results, and (I think this is the very very important thing that most people miss about MFI) its mechanical approach removes the emotional and judgmental actions that cause most investors to fail. Stock picking is only half the story, if that; portfolio management is a very big part of success (or failure) and few methods provide a clean solution.

Sorry, this got a little longer than I intended but it's a great topic.

-Mike
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