How the BMW Method came about
The Method is a stock selection technique that I developed over the past 12 years. It has worked so well that I decided to share it. It has been studied in great detail by hundreds of investors at The Motley Fool and has evolved beyond my wildest dreams. All of our experience says one thing about the BMW Method ...it really does work.
I decide to go into business for myself
The BMW Method started sometime after I retired in 1994 at age 50. Faced with a situation where earned income did not exist, 12.5 or more years remained until Social Security would kick in and absolutely no desire to find another job, I had to learn to fend for myself. I had some savings from my work career accumulated, which included a conventional brokerage account and a rollover from my pension plan. Thus, I decided to go into business for myself. I became my own financial planner, my own broker and my research analyst. I was the business.
No one needs to quit his or her day job to start a business like this. But, it surely helps to look at yourself as a business. Once you approach your investing as a business, you will see that it behooves you to become as productive as possible, cut operating expenses and make maximum profits. But, how can you ensure that you are doing the very best possible? You must have a tool for measuring your progress over time. That is how I invented the BMW Method. It is my tool for measuring my own business as well as any other businesses that I own.
I attacked this new enterprise just as I attack any new venture. I decided to really understand the whole thing, inside and out. I wanted to be in complete control and I wanted to know where I was going at all times.
My daughter named me BuildMWell in 1994 when we first bought a computer and signed up for an on-line service. I have no idea where she got the idea for the name, but she capitalized the BMW. I kind of liked that and it has never changed.
The BMW Method
The BMW Method is a rather simple concept even though it has never been offered by any of the investing gurus that I have read. In fact, every book on investing that I read seems to talk all around the BMW Method without getting to the guts of the matter. To me, the Compound Annual Growth Rate (CAGR) is at the heart of all investing, but no one seems to want us to understand it. My main goal is to change that.
Most investing methods revolve around earnings and the estimates of future earnings. Of course, earnings are very, very important. But, to me it makes more sense that a business that has grown at 13% for over 30 years will continue growing at approximately 13% even if the earnings drop for some reason. Market forces may cause the stock price to plummet, but the underlying business is still right there. Thus, I have found that much too much emphasis is being placed on earnings and not enough on the underlying, ongoing business.
I place little stock in P/E ratios or the PEG. I trust the CAGR. That is the compound average growth rate. I look back 30 years to get a base number to work from and I then calculate the range of CAGR's that encompass the full range of stock prices over that 30 year period. The curves are extended into the future by 5 to 10 years and I have a complete picture of what has been and what can be if the business just rolls on along. I buy stocks when they are priced significantly below the lowest historical 30 year CAGR. It happens often. If I cannot find a business that is significantly below the low CAGR, I will settle for some that are on their 30 year lows or just below that level. These do not enthuse me nearly as much, but they will rebound also. The history proves it. This is a definite buy low, sell high concept...except it works. In fact, I want anyone to explain in detail how it cannot work.
Nothing but a Tool
The BMW Method is nothing but a tool. It is a method for finding real value very quickly. Once you spot it, the buying becomes somewhat of an art. I have fine tuned this also. But, we have to have a stock to buy before we can get into that. The main weakness of this Method is that is very easy to get too enthusiastic about a stock too early. It is easy to put too much money into the idea too soon and then watch it go even lower to an even better price level. That is not a problem because we can buy more then...but we will be wishing that we held off a little longer. Nothing happens real quickly in the markets. There is always another day and the possibility of a lower offering price. Patience is the key.
I have used the BMW Method exclusively for seven years and I have never bought a losing stock. Prior to that, I used it some of the time and compared my results to stocks that I bought based on one of several newsletters that I subscribed to. However, during those years, the BMW Method never let me down either. I can recite these stories if they become important. However, my past successes are of little consequence. We have to deal with the future.
The first step is to get to a basic understanding of what the CAGR analysis shows us and how to generate the compound growth curves for any index, mutual fund, or individual stock. That is what the BMW Method is all about.