Mike provided his choice of the best quote from the Berkshire annual meeting. This blew me away because I planned to talk about this exact subject today...from a different perspective. Become a Complete Fool
"In the real world, you uncover an opportunity, then you compare other opportunities with that. And you only invest in the most attractive opportunities. It's all about opportunity cost. The game hasn't changed at all. That's why modern portfolio theory is so asinine. If Warren were starting today, he'd put together a concentrated portfolio. Your 1 or 2 best ideas are way better than the rest. So when you act, you're thinking about how the alternatives compare to your best idea. But you don't want to own your 10th-best idea when you can use that cash to invest in your best idea." - Charlie Munger
I spent a major part of my career doing engineering cost analysis. That was my claim to fame. It embarrasses me that it took me 27 years to apply it to my personal investments. It is like the cobbler's kids going barefoot.
The key to doing this type of evaluation is to find various alternative solutions to a problem and then evaluate them to find the most cost effective solution. Then you present the best ones to management so they can make the final decision. It sounds simple but it takes some skill to do it correctly. The main thing to remember is to include all the costs and to estimate them accurately. Of course, this leads to all sorts of discussion about the accuracy of the estimates and the validity of the assumptions. Thus, my reputation relied on making rational assumptions, sound estimates and bringing the solution in under-budget.
The first and most important step is to evaluate the cost to do absolutely nothing. In other words, there are always at least two choices to consider before doing anything...1) Do Nothing and 2) Do Something. So, I would first do a thorough evaluation of the cost of doing nothing. That was very easy because I could readily see what was being done at present, thus any recommended change had to reduce the overall cost of doing business as usual. Plus, that change had to offer a payback that returned an acceptable return on the investment. I found it amazing how many engineers did not think this way.
Confronted with a problem, most engineers could immediately come up with the best solution they knew of. However, if you asked ten engineers to solve a problem, you would get at least four or more different solutions. Each engineer could logically argue the merits of his answer against any other solution and he could nitpick the others to death. The real problem was they were all right. There are many ways to skin a cat. The final answer in business comes down to simplicity and economics. That was my specialty.
My job was to break all of the technical answers down into real projects, analyze the costs and bring this all down to something that management could understand logically. It was always interesting to me that there usually was one outstanding solution that was the most cost effective but also the simplest. Of course, part of its value was in the simplicity.
As I read Charlie Munger's quote, I realized that he was right on the money. But, as someone here mentioned, it is hard to sort out the "best" alternative. This brings me to the BMW Method. For, you see, the BMW Method was exactly what I used to evaluate all alternatives. The BMW Method is what brought the various solutions down to the very best choices for management to evaluate.
At IBM I never drew exponential curves to show the choices. There, I used the exponential curves to bring all project costs back to "present value" so the management could see the lowest cost alternative. However, the time value of money was the basis of all evaluations. In hindsight, those IBM studies were far more difficult than choosing stocks for investment. With investments the whole thing is really quite simple.
After 27 years of doing this for a living, I realized that I could do the same thing for myself to make a living. I did not need a silly paycheck to live. I could use my own wits and analytical ability to earn my way. I just needed my own business and I could do my own evaluations to present to myself. I did not need a manager to report to because I could report to me. And, who better to answer to than myself? But, what career should I pursue? The choices were endless.
Thus, the BMW Method was born in my head. The first thing I had to do was to evaluate the cost of doing nothing. That was really very easy because I knew my own life better than anyone. I knew what I was making from my investments and I knew how much money I had saved over the 27 years I had worked. The question was, what could I do differently to make my life better and make even more money.
I had lots of choices, but the one that appealed to me the most was retirement. Could I retire and make more money than I would make if I kept on working? The answer was, "No." I had to keep working because the annual income from my investments was not that great. When I actually sat down and did the calculations, I learned that my stockbrokers had not even matched the yield of the DOW 30. In 27 years I had rarely beaten the DOW and overall I was making about 6% on my money...including dividends.
This really got my attention because I was failing at the very thing that had made me great in business working for someone else. Obviously, my stockbrokers were doing well buying and selling stocks for me, but I wasn't. So, what if I bought and sold stocks for myself? What if I became my own stockbroker? And, that is where the BMW Method hit a home run. I applied my trade to my own problems and discovered that I had one real basic problem. I had to drink the BMW Method Kool Aid. I had to believe that I was good enough at what I did to completely change career paths at the age of 50. But, could I sell myself (Management) on my idea. Was this solution better than doing nothing and maintaining the status quo?
I had never thought about being a stockbroker before, but the first thing that occurred to me was, "How would I go about selling stocks if I were a stock broker?" After all, that is what they do for a living. So, I engineered the problem to see how I would approach selling stocks. The BMW Method is that approach. If I wanted to sell stocks to me, I figured I had to come up with a system to sell stocks to anyone else. The system had to be next to perfect because I surely did not want to have a pissed off customer. Life is too short to make enemies.
If you will think about everything you know today about the BMW Method, you already know exactly what happened. My BMW Method analysis told me that doing something was the best choice. That "something" was to became my own financial advisor/stock broker. I listened to my own presentation and I bought my idea for The BuildMWell Company. I became my own manager and I quit my job as an engineer.
If you read the 13,000 plus posts on this site, you will find that 100% of mine are aimed at selling you on the stock market. I do not sell individual stocks to anyone but myself. Thus, I have no one to disappoint but me. However, the BMW Method is what I used to sell myself on stocks. I bought my story hook, line and sinker. It was good enough for me and I decided to present it to some other managers for consideration. You folks are that management group and I am anxious to hear your final decision. There is no hurry because I am not selling anything except a different view of reality.
I only gave you two choices. 1) Do nothing, which means ignoring the BMW Method, or 2) Do something, which means you decide to accept The BMW Method (or any portion of it) for your own business. The nice thing about this is I do not care what you decide because it is not going to help or hurt me in any way. You are the management...if you pass up an opportunity, that is your loss. I am already using the BMW Method because I believe in it. It is my best solution to the problem of investing and making the most money possible. If it is not appealing to you, I am sorry. At least I presented it to you. You can never claim that you did not know about it.
This is exactly what Charlie Munger was saying. Pick the best choice you have and run with it. The more you learn about the other choices, the more alternatives you have to choose from. But, don't take #10 when you have a #1 pick. The BMW Method gets us to the best of the best rather quickly. We look for stocks that are already on their own lowest CAGR line, which is the cheapest price relative to the history of that stock. In other words, if you want any stock, you want to own it at the lowest possible price...that is just good business. But, we have already found the cheapest stocks using the BMW Method.
The choice of the stock is up to you. But, if it is at it's own low CAGR line, you are not likely to get it much cheaper. If the market offers a better price, surely you want more of it. But, you have to want the stock to begin with. That is where the due diligence comes in...why do you want that particular stock? The answer is easy...you want to make some money owning it. Why would anyone buy a stock except to make some money? And, if you cannot beat the DOW Jones Average, why not just by the index fund? But, most people hate being average...they aspire to greatness.
So, why do any due diligence at all? You know the shares are priced at the lowest level in 16, 20, 25 or 30 years from the BMW Method because you drew the curves from the actual price data. You have done all of the hard work by sorting out the high priced stocks from the lower priced ones. Why not just buy the cheap stocks?
There again, the answer is simple...you are afraid you will lose money. But, you have immediately caught yourself in a perfect "Catch 22." You want to own a stock to make money, but you won't buy it because you might lose money. I was just like you until I invented the BMW Method. I needed a reason to buy a particular stock, but even after I did the due diligence, I still doubted myself. But, with the BMW Method, I merely put my faith in the market. I took myself out of the problem and turned the problem over to the real decision maker...Mr. Market. Mr. Market became my manager...he is the final decision maker because Mr. Market is in control. Once I realized this, I quit worrying about what I was going to buy. I merely take my choices to Mr. Market and let him decide whether to reward me or slap me down. To date, he has never failed to reward my good work.
First, you must sell yourself on the stock market. I did that using the BMW Method. The overall market analysis told me that there is an exponential curve to the markets that can be traced back over 200 years. Thus, being in the market is a sure money maker long-term. No one disputes that fact.
Second, the best returns come from owning individual stocks that are under-valued at the time they are bought. Due diligence is fine for ensuring that the company is viable, but the most important thing is the low price. If you pay too much, your potential gain is lower. The BMW Method spots the price that is historically the lowest.
Third, both the overall market and each individual stock in the market rebounds from their own Low CAGR line. That line is very distinct and can be determined from over 200 years of price data. Since the market is just a collection of individual stocks, each stock is rebounding at it's own pace. That is what makes the market bottoms...too many stocks are at a historically low price. The BMW Method shows this clearly.
Finally, the only way to lose in the investing game is to buy a business that is destined to fail or one that is failing to grow its stock's value. This requires some knowledge of the company books and the outlook for business in general. If the accounting is false or the management is corrupt, you cannot trust what you see on paper. Thus, you must verify to the best of your ability that you are dealing with honorable people when you make a purchase. There are shysters galore in the business world, but no stock selection method will uncover them. That requires personal judgment and you can achieve that only through experience. Caveat Emptor.
So, the decision is yours. I merely do the analysis and present the results as I see them. However, my choice is the BMW Method for selecting investments. You are paid the big money to decide if you want to accept my recommendation or not. That is your job...I have done my job by just being here today.
Thank you for sharing your time with me today. Any questions?
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Mike provided his choice of the best quote from the Berkshire annual meeting. This blew me away because I planned to talk about this exact subject today...from a different perspective.
Become a Complete Fool