How good an investor would you have to be to turn down the chance to make 20% a year?

Jim Schout believes he's uncovered a trick to finding long-term winning stocks that have temporarily stumbled -- and he needs the potential for 25% annual returns before he becomes interested in a stock.

Granted, the investing industry abounds with prophets touting "winning systems" -- for a price -- but what grabbed my attention at a recent conference was that Jim doesn't charge a penny for his system. He's happy to exploit it for his own gain.

We'll get to several stocks Jim likes -- and doesn't like -- shortly.

From its beginnings 13 years ago, Jim's "BMW" method has steadily gained adherents, blossoming into a self-propelled mini-industry of message boards (the BMW Method board is a staple of the Fool community), websites, conference calls, annual meetings, and T-shirts. Not to mention what seem to be great investing returns.

Invited to the 2007 BMW method conference to both speak and listen, I came away intrigued -- and armed with an interview from Jim Schout, the man who scoffs at 24% returns.

James Early: In a nutshell, what is the BMW method?

Jim Schout: The BMW method is about exploiting something in plain view, yet something the market seldom looks at: the really big picture. In the short run, the market may be very irrational, but the market is always correct in the long term. Like a band in formation or sports fans collectively spelling out enormous words at a stadium, investors often don't see the big picture -- but with a bird's-eye view, it's easy to spot.

I achieve this by applying lines of constant growth to a stock's long-term price data. Let's say a company's stock price has average growth of 12% annually over the past two or three decades. I might apply lines representing 10%, 11%, 12%, 13%, and 14% growth to the chart. What often jumps into view is [that] the share price continually rises after reaching the 10% CAGR line. The price tends [to] "bounce" up from that low growth line over and over again. That is the BMW method in a nutshell. It is quite simple to spot under-priced equities this way.

If a stock is presently priced at its historically low CAGR, what's wrong? I'll dig deeper here with due diligence to determine if I think the problem is temporary. It's essential to see if there has been a fundamental shift in the company's ability to add value. Maybe a law changed, or a technology became obsolete. More often, Wall Street has decided to act irrationally and undervalue the shares. I love it when that happens.

At the end of the day, if I believe that the underperformance is temporary, or it exists for reasons that make the downturn irrational from an investing sense, then I will buy that stock.

Early: Is it open only to BMW owners? That sounds exclusionary.

Schout: That's funny. The BMW method has nothing to do with the BMW automobile. My 13-year-old daughter gave me "BuildMWell" as a screen name back in 1994 when she was trying to introduce me to the computer and the Internet. I had worked at IBM for 11 years, but I was computer-illiterate. Quite honestly, I still am.

Early: How well does it work?

Schout: I would turn that question around. How can it not work? That is what I want to know. I have been trying to find a way to "break" the BMW method for 13 years. I have been writing about the method since early 2004, and hundreds of other investors at The Motley Fool have taken the BMW method for a test-drive. I have found no failures so far. Actual mileage results may vary.

Remember, the whole idea is to make returns that beat the market. My goal is a 25% return, and many of my selections have done much better than that; a couple have not done as well. I will say that the stocks that did not perform up to expectations were not typical BMW-method stocks. What I learned was to stick with the bluest of the blue chips possible. Always buy companies with a long track record, reliable financial data, and businesses that you can understand. Heck, if I can make 25% owning 3M (NYSE:MMM) for two or three years, why gamble with an unknown?

Early: One of my favorite observations of yours is that for every intelligent argument for a given stock we hear in the media, we likely stumble across an equally smart-sounding argument against it. If you had to pick, would you invest based on charts alone, or due diligence alone?

Schout: It boggles the mind to hear the talking heads argue the merits of any stock. The key for us investors is to figure out what data they used in their argument that is incorrect or misused. They do not sit there lying to us. They are merely making rational arguments based on the "facts." It is all just entertainment.

One the issue of investing based on charts alone versus due diligence alone, that is a tough one. I drink my own Kool-Aid, so I'd use the chart alone if that were my only choice. However, I think my performance improves with due diligence. I would never suggest blindly believing any BMW method chart just because the stock looks cheap.

Early: What are some of your favorite BMW stocks right now?

Schout: I have recently bought Johnson & Johnson (NYSE:JNJ), Walgreen, Wal-Mart (NYSE:WMT), and Washington Mutual (NYSE:WM). Within the last year, I was really excited about General Electric (NYSE:GE), Coca-Cola (NYSE:KO), and Lowe's. All have done quite well or are showing positive signs of recovery.

Early: Any stocks you're taking a pass on?

Schout: Yes, about 10,000 of them. The BMW method weeds out the vast majority of stocks. It weeded out Google, eBay (NASDAQ:EBAY), Global Crossing, and WorldCom. Those are not BMW stocks due to their short histories. I weed out some winners and some losers.

Early: Most people promptly begin charging for any system they even suspect may beat the market. Yet you freely share your thoughts and methodologies. Why?

Schout: Why should I charge for a system that makes me money? The BMW method is my job and my business. I need more eyes and ears out there seeking out the best companies to buy, so I share my plan with others. I just hope they will return the favor and tell me about what they uncover. So far, I have received many great buying opportunities from the folks who use the BMW method, and a number of them have developed computer programs to do the searching for us all. This has grown into a really great bunch of investors with one basic plan behind the group. You just witnessed this phenomenon in Raleigh at our third annual conference. This idea has taken on a mind of its own!

Early: Where can readers go to learn more?

Schout: The Motley Fool has a discussion board under "Investment Clubs" called "The BMW Method." Also, there is This was put together by a fellow in Venezuela who liked the method and decided to start that site with my permission. Many of us contribute to that site to assist others in learning how the BMW method actually works. The best way to learn about the simplicity of the system is to just start reading the FAQ at The Motley Fool and start drawing some BMW charts for yourself. Try it -- you might like it.

Then, give back to the community and share your ideas!

3M, Wal-Mart, and Coca-Cola are all Motley Fool Inside Value recommendations. Johnson & Johnson and Washington Mutual are Motley Fool Income Investor recommendations, and eBay is a Motley Fool Stock Advisor recommendation.

Motley Fool Income Investor co-advisor James Early does not own any shares of the companies mentioned here. The Fool's disclosure policy drives a Porsche.