Hi there. I’ve just discovered that the BMW method has little to do with the German Auto Industry but although I love german cars I nevertheless found a wonderful resource to use as an additional input in my investing journey.
I was wondering if the veteran BMWers out there could help me understand how the law of big numbers affects or gets managed by this method. For example I can see NFLX appears to be on a good opportunity to buy. Which actually many analysts out there agree but I personally wonder if hypergrowth stocks show too much of an opportunity where now the attainable CAGR is actually flatter.
Hope I could make myself clear, sort of you get the idea where I am going. So it’s about hypergrowth stocks how do they get along with BMW.
Thanks for the link, I will read in detail. My question was about that on a hypergrowth company, growth tends to become lower as they grow, say for the first years they grow at triple digits and then they grow at double digits and finally stabilize at single digits on in the teens. So on a first sight, it came to mind that the Average CAGR could show a higher opportunity than what is possible to achieve in the future, and so we could be seeing an opportunity to buy low while this could not be the case, or at least not that much. Anyway I will read in detail and eventually come back if I have any questions or if I find any insight I think could be of value to the community. Tks!!
These are not BMW Method candidates. BMWN specialized in stocks like tobacco, Altria (MO) and Krispy Kreme (DNUT). When Jim tried to apply the method to banks in 2007 it was a calamity because many did not bounce back. The BMW Method works very well with a class of companies that grow slowly with the economy and it beats market averages because it buys low and sells high but when you apply it to the wrong kinds of stocks it will fail. It might even work with index funds.
Another site that sprang up from the BMW Method is Mike Klein’s charts
I don’t think the law of large numbers is as relevant as the longevity of a given stock. Early in a company’s lifespan, momentum is a factor in valuation with the beginning of earnings, free-cash-flow and high revenue growth. The largest gains may be during the period of negative earnings. SAAS stocks are that arena right now. Attractive BMWm companies that meet the “buy low” criterion will likely be those companies that have some existential threat, increasing obsolescence or technological disruption in their sector, legal turmoil, and similar. Risk is high, so due diligence is essential. One BMWer suggested that an investment in one of these depressed stocks should be done once earnings show steady improvement and that there’s a new or renewed catalyst for growth.
A longtime, thoughtful poster at the prior boards would always suggest that you treat companies into two buckets:
Young companies with short track records and stories (limited data, earnings and public history are features)
Well established companies with earnings, reports and financial information going back decades. (suggest 10 years public as a cut off)
The BMW method is not as useful for younger companies as there is less of a baseline. With older companies, the baseline is long enough to learn how the company has done through several annual cycles and in comparison to their market opportunities.
Young companies may change direction (vision) or strategy as a result of maturing into their market opportunity, competition and internal capability. In this sense, the baseline is not as steady, nor as useful.
Companies in operation for more than a decade (and preferrably 2) have operated long enough to offer more data in their baseline and more confidence in analysis to see if they are trending up or down.
SPECIAL CAUSE VARIATION - it will render this method useless. Do not seek to apply this method where M&A, Divestitures, or where competition or technology provides a step change in operations. Note, this is quite different than black swan events which are generally short lived, intense in impact and not a consideration over decades of operation.