__________________ "To each his own, but I think that using the BMW method as a starting point to screen stocks is a useful tool but to use it for predicting the direction of the DOW is taking a leap of faith." - bsteam Become a Complete Fool
All investing is, to some extent, a leap of faith. Every US Dollar and Coin has the words, "In God We Trust" on them for that matter. So, faith is the basis of all investing. We have to trust in the ability of mankind to survive and, more importantly, to prosper. Many civilizations have learned to survive but few have prospered like ours. I look for the reasons behind our prosperity and I see them as the key to my success as an investor.
I have no reason to try to influence your actions, but I worry when you say things that go contrary to my thinking. The above quote is a perfect example.
You say that the BMW Method is a useful tool for screening stocks but not any good at predicting the direction of the DOW. That just does not sit well in my mind. It goes contrary to the BMW Method. In other words, you seem to have missed the whole thing...or maybe I have.
The BMW Method exists only because I spent considerable effort analyzing the markets in general. I looked at the S&P 500, the NASDAQ and the DOW 30. However, I spent the majority of my effort on the DOW because it was made up of just 30 stocks and that made my job much easier.
By applying the compound growth curves to the historical DOW, I was able to show that the DOW had grown, on average, at 8% for about 60 years. It slumped as low as a 5.5% CAGR in 1982 and it had grown at up to a 10% CAGR in the 1950's. This led me to conclude in late 1994 that I expected the DOW to reach about 10,000 by the year 2000. The DOW was selling at about 3800 at the time. Thus, I was predicting an unprecedented 165% rise in just 5 years...a CAGR of 21.3%.
Further, I was already worried about the future collision of the underlying 8% growth capability of the DOW with that 21% CAGR of the market that I was seeing. Of course, back then this was all BMW Theory. It just made sense to me by applying compound growth curves to the overall markets.
I was pleasantly surprised to see that things went as I had expected and the collision occurred at 11,700 on the DOW rather than at 10,000. However, this was to be expected because the market always over-does things in both directions.
In 1997 when Alan Greenspan made his warning of "irrational exuberance," I thought that I knew exactly what he was saying. I believed that he saw exactly what I was seeing because of what my CAGR curves showed me. By then, the DOW was around 7800 and it was passing over my 8% CAGR line well ahead of schedule. However, after a small pullback, the market quickly ignored the warning and moved higher again.
The more my real-life observations backed up my theory, the more I began to think that I could make investing decisions based on picking stocks that were at their low CAGR. After all, the markets were just groupings of individual stocks. In late 1999 with the DOW approaching 10,000, I began to sell off my winners from the bull markets and I began looking for stocks that were severely undervalued.
I found MO, RJR, NGH, CAT and some others. However, I put my biggest investments into MO and CAT, the two DOW stocks that showed me the best opportunity. I was buying MO under $21/share and CAT below $34. Six years later, MO is approaching $80/share and CAT is about $135/share. I have sold most of my CAT as I have discussed here in the past...I am still holding all of my MO. CAT returned a CAGR of 37% plus a 4.2% dividend while I owned it. MO has given me a CAGR of 25.6% plus a 8.5% annual dividend on the invested capital.
Now, two stock successes do not make me a guru, but every stock I have bought with the BMW Method has given me a nice return over time. Sara Lee is my biggest disappointment because it has followed the low CAGR curve rather than rebounding, but it pays a 5% dividend. Knock on wood, but I have never found a stock that failed me using the BMW Method. I know that my day will come.
The BMW Method is based completely on the market continuing to repeat history. Thus, I have to disagree with your assumption that it is not good at predicting the DOW. The DOW is just 30 stocks, and we can evaluate all 30 without too much trouble. I do not see many over-valued stocks in the DOW. That is a problem. The fact that the vast majority of DOW stocks are well below their average CAGR tells me that we have too many choices today. That dilutes our ability to pick the very best stocks because most will do well in the future bull market. Conversely, in 2000 almost all of the DOW stocks were over-priced. Thus, I see a situation today that is very similar to 1994. Everything seems in line for a boom rather than a bust.
I have to admit something here. I am placing my faith in the BMW Method because I have lots of confidence in it. I have spent 12 years of my life on this thing and it is a part of me. That does not make it perfect because I am an imperfect being. That is why I brought the BMW Method here to the Motley Fool. I figure that together we can make this thing better. But, we have to understand what it says to us before we can use it to our advantage.
I happen to use the BMW Method to analyze almost everything. I have been known to use it on commodities, bonds, stocks, America's GDP, stock markets, mutual funds, federal spending, government revenues, and even antique cars. I look for those compound growth curves everywhere because they are to be found everywhere in America. Understanding them makes life much easier on me. I get a lot of pleasure from knowing where we are on the curves. That is how the BuildMWell Company stays in business. I make a nice profit, year after year...just like all great businesses. But, the key is to understand the market we have chosen to be in.
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"To each his own, but I think that using the BMW method as a starting point to screen stocks is a useful tool but to use it for predicting the direction of the DOW is taking a leap of faith." - bsteam