That was the title of a technical paper I wrote for a power magazine back in 1989. The gist of my article was that a business must know the cost of doing nothing before they can figure out the value of doing anything. Become a Complete Fool
It's funny, I was onto the BMW Method long before I figured out how I should use my knowledge for personal gain. I had not figured out that "The BuildMWell Company" was already doing business here in America in 1989. When I wrote that technical paper, I was trying to sell something to someone else. What I needed to do was to sell the BMW Method thing to myself. I needed to drink my own Kool Aid.
My paper used a typical industrial power plant as the background example. The plant burned fuel oil and natural gas to produce the steam that was needed for the plant's operation. I did a complete cost effective analysis to show that, at a given capacity, the cost of continuing to burn those fuels was very expensive. A change to coal would pay for itself in just a few years.
I received a telephone call several days after the article was published from a local textile business. They wanted me to visit their plant to go over their calculations based on the magazine article. I was glad to do it because there was a multi-million dollar equipment sale in the offing.
When I arrived, the Plant Engineer had essentially photocopied my paper and lined in his own capacity figures onto my various graphs, pulled the data forward to the final accounting sheet and totalled everything up. He had used my paper precisely as I had hoped a lot of power plant operators would use it. He had uncovered a real problem for his company.
I went over his calculations and gave him some back-up data to support the charts I had used in the paper. Overall, he had done the math correctly. The conclusion was, his company had been wasting a lot of money for a many years because they failed to understand the cost of doing nothing. Sure enough, we proved that nothing was very expensive for Pharr Yarns. They needed to buy a new coal fired power boiler ASAP. Management took my paper, went to the bank and borrowed the millions needed to buy a new power boiler.
It was five years later that I figured out I needed to take my own good advice. We are all guilty of falling into the trap of thinking that the status quo is good enough because it is what got us to where we are today. But, the key is to never allow ourselves to fall for that Catch-22. If you are standing still, you are actually backing up because of the way our free enterprise system is designed. To stay ahead of the game, we must always be moving forward AND moving at a rate that is above average.
Have I persuaded you that "Nothing is very expensive?" Think again, because doing nothing may actually be the most cost effective thing for you at any point in time. In our business, if you already own the best potential performers, the best thing to do is to sit tight and just relax. Rest on your laurels and just cool it, my friend. As someone so eloquently put it, "Don't just do something, sit there!"
The BMW Method is about understanding all of this. As you can tell from my little story, I wrote a technical paper on the BMW Method and still missed the connection to my personal situation.
Great managers know where they stand at all times. They know where their CAGR comes from and they are always trying to improve it. Once their company is rolling along and making money, the changes that are needed are rarely drastic. A tweak here a minor adjustment there...a new coal fired boiler once in while.
The BMW Method Theory says that the CAGR curves we measure result from this underlying drive by human beings to make things better all of the time. Failure to see the correct action required at a point in time will result in a decline in the CAGR. A concerted effort is then demanded to get back on top. But, people love that sort of challenge and always rise to the occasion.
Likewise, a move in the wrong direction or a false move will cause the CAGR to founder. But, recognition of the error is not devastating because there are many ways to make up for just about any mistake. The key to all of this is to know your Compound Annual Growth Rate. If you do not know that, you are not playing with a full deck.
By the way, the whole reason I wrote that paper back in 1989 was because I understood the problem of a high CAGR in business. If a business has a CAGR of 25%, they tend to look at things from a very shortsighted perspective. Change is not justified unless the pay-back is very short...like 2.5 years. Meanwhile, the plant infrastructure is not a short-term thing. Thus, the power house cannot "afford" to make needed changes unless they can justify them in under 3 years.
Unfortunately, that is just not the way it is with utilities. They are a slow growth, steady business and must be seen as such by management. I had recognized this conflict when I worked at IBM. I left there in 1977 and, by 1989, I was using that experience to sell power boilers to other businesses that were also too short-sighted. It worked like a charm because the problem was all over the place due to run-away growth in business.
I hope that I have defined the conflict that I see. I demand that high 25%+ CAGR, but I do not want to be short-sighted. I want that solid foundation but I do not want to suffer from a low personal CAGR. In other words, I want it all!
In our investing, we must never lose sight of our underlying strength. We must sacrifice a little of our high CAGR to make sure we have a solid foundation under our business. There is a trade-off that each of us must define and quantify for ourselves. The NASDAQ bubble existed because too many folks lost track of the requirement for a solid foundation. CD's exist because too many folks want such a solid foundation that they give up on growth all together. Meanwhile, us BMWers know that we can run a business with a very high CAGR while taking on almost no risk. We build our foundation on solid companies that we know will succeed. We just buy them at their historically low price. We recognize a value when we see it. Mr. Market does not possess this ability because there are millions of investors who are not playing with a full deck. Their inability to understand their own CAGR is sad, but works to our advantage. Our job is to help them to catch up with us. There is plenty of wealth to go around.
I apologize for boring you folks with my stories, but when I think about them, I write them down. You get to read them because I have no one else to share them with. Sorry for the inconvenience, but I hope they add something to our understanding of the madness behind the method.
Join the best community on the web! Becoming a full member of the Fool Community is easy, takes just a minute, and is very inexpensive.
That was the title of a technical paper I wrote for a power magazine back in 1989. The gist of my article was that a business must know the cost of doing nothing before they can figure out the value of doing anything.