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The BMW Method
Alternative Due Diligence

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By RaptorD
October 5, 2006

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Hi all,

A while back I posted my attempts at quantifying due diligence by taking all of those pesky objective qualifiers of a company's "investability" quality and ranking them in digital form. While unintended, I suspect I mislead some BMW fans.

http://boards.fool.com/Message.asp?mid=24318831

With all the recent questions and concerns regarding DD [due diligence] lately by newbies, intermediate and expert investors alike, I thought I would point out something that has evolved for me while 'in the trenches' as someone described it. The DD techniques I outlined previously, I use for growth company investing, usually small-cap and micro-cap stocks, which I still pursue with an incurable passion. For BMW-style companies, I quickly found it a time waster and of questionable value.

When dealing with a typical BMW candidate, we are typically talking about a large-cap stock, often one whose products and business strategy are well known to even the casual weekend investors.

The conclusion I have come to (Icy Wolf, plug your sensitive ears, and sorry I missed lunch with you in Omaha today) is that intensive DD for most of these companies can conflict with the ultimate goal of deciding to Buy/Hold/Sell or Pass. They might even become a waste of valuable time. I can hear the wolves howling already so please let me explain.

The method I described has worked very well for me thus far with itsy-bitsy high-growth wannabe companies. Look at a chart for HANS or GES for example. I am glad to own them. But these companies have to make up for all the other mini's that don't hit home runs. Intimate knowledge of these wee companies, IMO, is required to make intelligent investing decisions.

On the other hand, we're usually dealing with mid- and large-cap companies here--the ones that 'everyone' is familiar with. Let's think briefly of a large-cap company that has recently seen its CAGR plummet. Fill in the company of your choice to be sure, but just for the sake of discussion, let's just consider Corning (GLW) or General Electric (GE) as examples.

Do you really know all the products that GE researches, manufactures and promotes in their market? If you do, great! If, like most of us (in my opinion only) you don't know every detail of every product or service, does that mean you need to study their products, management team and pipeline for weeks to get a better understanding of their strategy for profit? Some will argue that yes, it is a requirement. I contend that it is not. Newer businesses can have the greatest plan, the greatest vision of new products and technology, and still fail miserably. If you doubt this, I can give you numerous examples of former THE NEXT BIG THINGS that we can all laugh about in hindsight, but maybe you can think of your own, or maybe you have even invested in them.

Back to stalwarts; back to large-cap companies. Do I do any DD? Of course I do. I look at management tenure; I chart historical earnings, earnings per share and stock prices. I compare major financial ratios, such as ROA, ROE, sales, net profit margin, etc. to the company's competitors. Almost any stock rating or information website provides these comps for us near the end of their report. Quick. Easy. Informative. I also read the recent news articles and the company's press releases. I gleam what I can from a (gasp!) quick and brief run-through of the recent 10-K and 10-Q docs.

I mentally estimate the expected value of the company's products and/or services for several years to come. Just like many sub-categories in DD, a variable level of intuition is required. While investing experience has no substitute, I maintain that decades of experience are not required and that common sense and a little business acumen are the real tools of necessity.

Just in case you haven't noticed (brand new here, huh?) there is a ton of good information right here on TMF discussion boards, including but not only the BMW board. In fact, if you read a little closer, you will often even get the actual buy/hold/sell/pass opinions of some very well-informed investors. Doesn't that boost your comfort level? It does certainly does mine.

There are other detailed, statistical, technical and analytical methods to study your investing candidate, all with merit and benefit. But with apologies to all the deep researching investors here and elsewhere, I have to ask, with well-known large-cap business icons, "Isn't this enough?"

Not all of us have the time, experience or skill to do in-depth due diligence. In a company like GE or GLW, it is the rare bird who understands every little nuance of the company dynamics. So we learn from others with a little more experience or with specific knowledge of a company's products and services. Can't you tell from reading all the great information posted right here, what the many investors think of a particular company? Buy-Sell-Hold-Pass. That's what we're here to decide.

My point is, if you think the BMWm might work for you, don't let the DD stop you from jumping in. If you don't understand a company, either pass and move on to one you do, or choose to study, read and study some more. But not too much. Bargain sales don't last forever.

Mine is just another view of that oh-so-elusive, oh-so-hard-to-define, due diligence. Don't leave home without it, but don't let it stop you either. When you finish, it's decision time. Piece of cake. Buy right, sit tight. Profit, repeat and enjoy.

Needless to say, differing views are plentiful, should be considered and are always welcome here.

Happy investing,

Dan
and then there are stocks like Doral, which I have never fully understood but own a couple thousand shares of. Ah, greed�one more emotion to tame. Do as I say, not as I (occasionally) do.


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