Cheaper but not cheap

According to the April 20th issue of Barron’s, the price/book ratio of the S&P Industrials is around 2.17.  This figure was well over 3 a year ago and as high as 10 back in 2000.  That said, the historical average (excluding the mega-mania of the 1990s-200s) is around 1.7 times book value.  The bear market has brought overall stock market valuations to their lowest level since the late 1980s.

I’m no longer ultra-bearish on the overall stock market, but the bear market may still be far from over.  I have NO IDEA how low valuations will drop, when the bottom will be, or how low the bottom will be.  I do recommend keeping some exposure to stocks, as the lowest valuations since the late 1980s should mean that there are now some bargains out there.

I have been intending to buy more stocks, but the two things that have been stopping me are being busy with other things in my life and my fussiness in selecting stocks.  I don’t buy based on the popular stats like PE ratios, price/book ratios, or price/sales ratios.  Before I buy a stock, I crunch through the numbers from the official financial statements, and I also think about what risks there might be that the past financial performance of the company don’t reflect.

One example that I considered but passed up is VDSI, VASCO Data Security International.  This business security systems/products company generates an enormous amount of free cash flow on very little plant/property/equipment, has more than enough cash on hand to pay off ALL liabilities, and has a management team more concerned about running the business than brown-nosing Wall Street.  The price has dropped precipitously in the face of fast AND profitable growth.   I learned from the book _The Little Book That Builds Wealth_ (a book that explains how to find companies with economic moats) that business services companies prosper due to customer switching costs.  (Switching to a competitor would be such a logistical nightmare that customers rarely do it, and that gives the company plenty of pricing power and high returns on its capital.)  However, I am concerned about the possibility
that VDSI’s technology could become obsolete as well as the possibility that one security breach could damage its reputation and allow a competitor to emerge from nowhere and take over its market share.

Another factor that I weigh heavily is something I call net liquidity – liquid assets minus ALL liabilities.  If a company has a non-negative net liquidity, that means that it could pay off all liabilities immediately without having to resort to a fire sale of assets.  A non-negative net liquidity is quite an asset given the tight credit markets, but most companies out there have negative net liquidity.  I don’t eliminate companies with a negative net liquidity, but it is a factor in my appraisal process.  Too many companies out there have an enormous negative net liquidity that dwarfs their annual free cash flow.  You can see why so many companies have been cutting back on investment.  On the other hand, a company with substantial positive net liquidity has room to grow without having to rely on borrowed money.

Model Portfolio Update: March 2009

The final contents of the Doppler Value Model Portfolio for February 2009 were:
$62,180.88 USD in the Doppler Value Treasury Money Market Fund
$80,562.17 HKD total balance in the Everbank Hong Kong Dollar CD ($10,388.82 USD)
2 shares of BRKB ($5,128.00 USD)
222 shares of DFJ ($6,671.10 USD)
103 shares of FXY ($10,508.06 USD)

At the end of February 2009, the total market value of the Doppler Value Model Portfolio was $94,876.86 USD.

The average yield of the 1-month Treasury Bill in February 2009 was .219%.  The average yield of the 3-month Treasury Bill in December 2008 was .03%.  The average of these figures is .125%, and .3% less is -.176%, our yield for March 2009.  Yes, the yield on our cash balance is negative again.

The 222 shares of DFJ paid a total dividend of $62.83 USD on March 23rd, so the balance was $62,180.88 USD from the 1st through the 23rd and $62,243.71 USD from the 24th to 31st.  -$9.40 USD of interest (about -$.30 USD/day) accrued on the cash during the month.  The cash balance increased from $62,180.88 USD to $62,234.31 USD.

The credited balance in the Everbank Hong Kong Dollar CD remained constant at $80,553.89 HKD.  With a yield of .25%, the accrued interest for the month was $17.10 HKD, bringing total accrued interest from $8.28 HKD to $25.38 HKD and the total balance from $80,562.17 HKD to $80,579.27 HKD during the month.  At a month-end exchange rate of 7.75050 HKD/USD, the total balance was $10,396.65 USD.

At the end of the month, the 2 shares of BRKB had a market value of $5,640.00 USD, the 222 shares of DFJ had a market value of $7,099.56 USD, and the 103 shares of FXY had a market value of $10,353.56 USD.

The final contents of the Doppler Value Model Portfolio for March 2009 were:
$62,234.31 USD in the Doppler Value Treasury Money Market Fund
$80,579.27 HKD in the Everbank Hong Kong Dollar CD ($10,396.65 USD)
2 shares of BRKB ($5,640.00 USD)
222 shares of DFJ ($7,099.56 USD)
103 shares of FXY ($10,353.56 USD)

At the end of March 2009, the total market value of the Doppler Value Model Portfolio was $95,724.08 USD, a gain of around .9% for the month.

WHEW!  I’m finally caught up with the monthly Model Portfolio updates!

Model Portfolio Update: February 2009

The final contents of the Doppler Value Model Portfolio for January 2009 were:
$62,190.28 USD in the Doppler Value Treasury Money Market Fund
$80,525.27 HKD total balance in the Everbank Hong Kong Dollar CD ($10,382.45 USD)
2 shares of BRKB ($5,978.00 USD)
222 shares of DFJ ($7,612.38 USD)
103 shares of FXY ($11,422.70 USD)

The total market value of the Doppler Value Model Portfolio at the end of January 2009 was $97,585.81 USD.

The average yield of the 1-month Treasury Bill was .051% in January 2009, and the average yield of the 3-month Treasury Bill in November 2008 was .194%.  The average of these figures is .123%, and .3% less than this is -.178%, which is the yield of the Doppler Value Treasury Money Market Fund.  Yes, the yield on our cash balance went negative.  This illustrates why Vanguard recently closed its Treasury money market funds to new accounts and added many restrictions on deposits for existing accounts – it was having difficulty finding Treasury Bills with enough yield to cover management expenses.  As a result of the negative yield, interest accrued during February 2009 was -9.40 USD (about -$.30 USD/day).  Yes, $9.40 USD in interest was DEDUCTED from rather than added to the cash balance.  Since there were no dividends, CD redemptions, sales, or purchases during the month, the credited cash balance remained constant at $62,190.28 USD.  The total cash balance was reduced from $62,190.28 USD to $62,180.88 USD.

The Hong Kong Dollar CD began the month with a credited balance of $80,353.54 HKD and accrued interest of $171.73 HKD.
The Hong Kong Dollar CD yielded 1.00% for the first 13 days of the month, and an additional $28.62 HKD of interest (about $2.20 HKD/day) accrued before maturity.  The resulting balance of $80,553.89 HKD was rolled over into a new CD.  From the 14th to the 28th, $8.28 HKD of interest accrued in the CD.  The credited balance remained at $80,553.89 HKD while the accrued interest increased to $8.28 HKD, for a total balance at the end of the month of $80,562.17 HKD.  On the last day of the month, the average exchange rate was 7.7547 HKD/USD, and the total balance of the Hong Kong Dollar CD was $10,388.82 USD.

At the end of February 2009, the 2 shares of BRKB had a market value of $5,128.00 USD, the 222 shares of DFJ had a market value of $6,671.10 USD, and the 103 shares of FXY had a market value of $10,508.06 USD.

The final contents of the Doppler Value Model Portfolio for February 2009 were:
$62,180.88 USD in the Doppler Value Treasury Money Market Fund
$80,562.17 HKD total balance in the Everbank Hong Kong Dollar CD ($10,388.82 USD)
2 shares of BRKB ($5,128.00 USD)
222 shares of DFJ ($6,671.10 USD)
103 shares of FXY ($10,508.06 USD)

At the end of February 2009, the total market value of the Doppler Value Model Portfolio was $94,876.86 USD, a drop of 2.8% for the month.

Model Portfolio Update: January 2009

The final contents of the Doppler Value Model Portfolio for December 2008 were:
$62,186.90 USD in the Doppler Value Treasury Money Market Fund
$80,457.02 HKD total balance in the Everbank Hong Kong Dollar CD ($10,380.61 USD)
2 shares of BRKB ($6,428.00 USD)
222 shares of DFJ ($8,591.40 USD)
103 shares of FXY ($11,339.27 USD)

The total market value of the Doppler Value Model Portfolio at the end of December 2008 was $98,926.18 USD.

Since there were no purchases, sales, CD redemptions, or dividends on stocks during January 2008, the credited balance in the Doppler Value Treasury Money Market Fund remained constant at $62,186.90. The average yield on the 1-month Treasury Bill in December 2008 was .030%, and the average yield on the 3-month Treasury Bill in October 2008 was .697%. The average of these two figures is .360%, and subtracting that gives us .064%, the cash yield for January 2009. $3.38 USD of interest accrued during the month, bringing the final cash balance of January 2009 to $62,190.28 USD.

The Everbank Hong Kong Dollar CD ended January 2009 with a credited balance of $80,353.54 HKD and accrued interest of $103.48 HKD. An additional $68.25 HKD of interest accrued, bringing the total accrued interest from $103.48 HKD to $171.73 HKD and the total balance of the CD to $80,525.27 HKD. At an average exchange rate of 7.75590 HKD/USD on the last day of the month, the total balance of the Hong Kong Dollar CD is $10,382.45 USD.

At the end of the month, the 2 shares of BRKB had a market value of $5,978.00 USD, the 222 shares of DFJ had a market value of $7,612.38 USD, and the 103 shares of FXY had a market value of $11,422.70 USD.

The final contents of the Doppler Value Model Portfolio for January 2009 were:
$62,190.28 USD in the Doppler Value Treasury Money Market Fund
$80,525.27 HKD total balance in the Everbank Hong Kong Dollar CD ($10,382.45 USD)
2 shares of BRKB ($5,978.00 USD)
222 shares of DFJ ($7,612.38 USD)
103 shares of FXY ($11,422.70 USD)

The total market value of the Doppler Value Model Portfolio at the end of January 2009 was $97,585.81 USD, a drop of 1.4% from the end of December 2008.

Model Portfolio: 2008 in Review

From inception on May 8th, 2008 to December 31st, 2008, the Doppler Value Model Portfolio went from a balance of $100,000.00 to $98,926.18 for a loss of 1.1%.  Although the Doppler Value Model Portfolio lost money, it overwhelmingly outperformed every major market index, such as the DJIA and S&P 500.  The Japanese yen investment (FXY, CurrencyShares Japanese Yen Trust)  did very well, and the Everbank Hong Kong Dollar CD outperformed cash (which isn’t saying much given pitifully low interest rates), but Berkshire Hathaway Class B (BRKB) and the Japanese stock investment (DFJ, WisdomTree Japan Small-Cap Dividend ETF) both took hits.

It’s only because I was having difficulty finding bargains and then too busy to look that I kept more than 60% of the portfolio in cash.  The Doppler Value Model Portfolio didn’t miss my attention.  If I had gotten around to deploying more of the cash, the portfolio would have taken a much bigger hit than a 1.1% loss.

Despite the possibility of further losses, I am determined to deploy most or all of the cash balance.  Since the stock market has much lower valuations now than was the case when I first started this blog, I should be able to find bargains in the weeks and months ahead.  Treasury Bill yields are microscopic.  The combination of Helicopter Ben, trillions of dollars in bailouts added to the already enormous national debt, and the monetization of this debt (Fed printing money in order to buy the debt securities)
threatens to jump-start hyperinflation.  In this Brave New World, US Treasury Bills are now a potential time bomb instead of a safe haven.  While we all still need cash for everyday expenses, the proverbial “rainy day” (especially in this economy), and expenses coming up in the next few years, we cannot expect our cash to hold its value.  When inflation does strike, Helicopter Ben will be slow to raise interest rates, which will quickly erode the value of cash and fuel even more inflation.

OT: update on my life

I apologize for not keeping the Doppler Value Investing blog up-to-date.  I have been busy with a number of matters in the past several months.

Last fall, I started a new job and moved to central Minnesota about 60 miles west of Minneapolis.  Hopefully, no more disasters will follow me here, such as the Cedar Rapids flood of last year, the Beltway Sniper spree of October 2002 (when I lived in northern Virginia), or the September 11th attacks (also when I lived in northern Virginia).  The current flooding along the Red River along the Minnesota/North Dakota border is a reminder of what I witnessed in Cedar Rapids, Iowa last year.  I feel like the character Sidney Prescott from the Scream trilogy.  At least I wasn’t directly affected by these disasters, but it is freaky.  Also, I’m not the same gender or as good-looking as Sidney Prescott (or Neve Campbell).

Since moving to Minnesota, I now understand the meaning of the word “cold”.  This has been the coldest winter I ever experienced in my life.  I grew up in the Chicago area, and even the legendary bitterly cold winters of the late 1970s and early 1980s weren’t this cold.  Here in central Minnesota, subzero morning temperatures in winter are common.  We even had multiple mornings with temperatures colder than -20 degrees and a mid-March morning with a temperature colder than -10 degrees.   A large number of people around here own snowmobiles, compared to just a small percentage in the Chicago area and Cedar Rapids.  Many people go ice-fishing around here, whereas nobody does that in the Chicago area or Cedar Rapids.  I learned that people use fish houses for ice fishing.  All those silly cartoons I watched as a child led me to picture ice fishing as cutting a hole in the ice and then spending the day sitting in a chair and shivering while waiting for a bite.  In reality, people sit in the comfort of an insulated and heated fish house while waiting for the fish to bite.

I have been meaning to buy stocks for both my real portfolio and model portfolio.  However, I haven’t gotten around to this.  Given the performance of the stock market since I started this blog back in May 2008, you and I should be thankful for my procrastination.

I intend to buy undervalued stocks in the weeks and months ahead.  I have NO IDEA how much lower the stock markets will drop or the timing of the market bottom.  However, bargains are much more common now than was the case when I first started this blog.  I will share some of my research here on this blog.  I will NOT wait for the market bottom to buy stocks, because I have NO IDEA when that will be.  Cash continues to be an unattractive asset class due to submicroscopic yields on Treasury Bills and the growing risk of higher inflation in the future.

I believe the risk of hyperinflation has increased since I first started this blog.  Trillions of dollars have been appropriated for bailouts, and the Fed has become more and more willing to buy various debt instruments, including Treasury Bonds.  When the central bank buys debt instruments from its own government, this is called monetizing the debt.  The US government doesn’t actually have trillions of dollars in cash lying around, so it has to borrow money buy selling Treasury Bills, Notes, and Bonds.  The Fed has announced that it is more than willing to buy these Treasuries.  So the Fed ends up printing money to bail out the greedy and careless bankers.  Printing those extra US dollars dilutes the value of each individual unit.  Buying those Treasuries means that prices are pushed up, and the yields to maturity are pushed down.  The resulting low interest rates fail to keep up with the latent inflation, which only increases the inflationary pressures further.

Although deflation seems to dominate at the moment, I believe that it will eventually give way to high inflation.  I have NO IDEA when the transition will happen.  However, I am certain that many people will become poorer in the deflation, the inflation, or both.  I am also certain that virtually nobody will time the transition accurately.  Trying to conserve capital during both the current deflation and the later inflation will be tricky.  Treasury Bonds do well in deflation but are a death trap in hyperinflation.  Commodities and metals will do well in the hyperinflation but may fare very poorly in deflation.  There really is no such thing as a safe investment anymore.

Model Portfolio Update: December 2008

The final contents of the Doppler Value Model Portfolio for November 2008 were:
$62,056.59 USD in the Doppler Treasury Money Market Fund
$80,388.77 HKD total balance in the Everbank Hong Kong Dollar CD ($10,371.54 USD)
2 shares of BRKB ($6,998.00 USD)
222 shares of DFJ ($7,892.10 USD)
103 shares of FXY ($10,744.96 USD)

The total market value of the Doppler Value Model Portfolio at the end of November 2008 was $98,063.19 USD.

The credited balance in the Doppler Treasury Money Market Fund was $62,056.59 USD from the 1st to the 22nd. DFJ paid a dividend of $.511 USD/share on December 22nd, so the credited balance increased by $113.44 . The credited balance from the 23rd through the 31st was $62,170.03. The average credited balance for the month was $62,089.52. The 1-month Treasury Bill yielded an average of .093% in November 2008, and the 3-month Treasury Bill yielded an average of 1.147% in September 2008. The average of these two figures is .62%, and .3% less is .32%, our yield for December 2008. Accrued interest for the month was $16.87 USD (about $.54 USD/day). At the end of the month, the accrued interest was credited. Adding the month’s initial credited balance ($62,056.59), the dividends ($113.44), and the interest ($16.87) gives us the final credited balance of $62,186.90 in the Doppler Treasury Money Market Fund.

The credited balance in the Everbank Hong Kong Dollar CD remained at $80,353.54 HKD for the entire month. $68.25 HKD of interest accrued during December 2008 (about $2.20 HKD/day), bringing the accrued interest from $35.23 HKD to $103.48 HKD. This brings the total balance in the Everbank Hong Kong Dollar CD to $80,457.02 HKD. At an exchange rate of 7.7507 HKD/USD, the Hong Kong Dollar CD ended December 2008 with a market value of $10,380.61 USD.

At the close of December 2008, the 2 shares of BRKB had a market value of $6,428.00 USD, the 222 shares of DFJ had a market value of $8,591.40 USD, and the 103 shares of FXY had a market value of $11,339.27 USD.

The final contents of the Doppler Value Model Portfolio for December 2008 were
$62,186.90 USD in the Doppler Treasury Money Market Fund
$80,457.02 HKD total balance in the Everbank Hong Kong Dollar CD ($10,380.61 USD)
2 shares of BRKB ($6,428.00 USD)
222 shares of DFJ ($8,591.40 USD)
103 shares of FXY ($11,339.27 USD)

The total market value of the Doppler Value Model Portfolio at the end of December 2008 was $98,926.18 USD, a gain of around .9% compared to the end of the previous month.

Model Portfolio Update: November 2008

The final contents of the Doppler Value Model Portfolio for October 2008 were:
$62,019.79 USD in the Doppler Treasury Money Market Fund
$80,322.80 HKD in the Hong Kong Dollar CD ($10,360.49 USD)
2 shares of BRKB ($7,680.00 USD)
222 shares of DFJ ($7,594.62 USD)
103 shares of FXY ($10,399.91 USD)

The total market value of the Doppler Value Model Portfolio at the end of October 2008 was $98,054.81.

We began the month with $62,019.79 USD in the Doppler Treasury Money Market Fund. The credited balance remained constant at $62,019.79 USD. The 1-month Treasury Bill yielded an average of .292% in October 2008, and the 3-month Treasury Bill yielded an average of 1.753% in August 2008. The average of these two figures is 1.02%, and .3% less is .72%, the yield of the Doppler Treasury Money Market Fund for November 2008. $36.80 USD in interest accrued during the month, bringing the balance to $62,056.59 USD at the end of the month.

At the beginning of the month, the Hong Kong Dollar CD had a credited balance of $80,151.52 HKD and accrued interest of $171.28 HKD, for a total balance of $80,322.80 HKD. The Hong Kong Dollar CD matured on Friday, November 14th. During the first 14 days of the month, an additional $30.74 HKD of interest accrued (about $2.20 HKD/day), bringing the total accrued interest to $202.02 HKD. At maturity, the accrued interest was credited, bringing the total balance of the Hong Kong Dollar CD to $80,353.54 HKD.

The $80,353.54 HKD from the old CD was rolled over into a new Hong Kong Dollar CD at an interest rate of 1.00% and a maturity date of Friday February 13th, 2009. From the 15th to the 30th, $35.23 HKD in interest accrued (about $2.20 HKD/day) while the credited balance remained at $80,353.54 HKD. This brought the total balance in the Hong Kong Dollar CD to $80,388.77 HKD. The average exchange rate for November 30th was 7.75090 HKD/USD. The total balance in the Hong Kong Dollar CD at the end of the month was $10,371.54 USD.

At the close of November 2008, the 2 shares of BRKB had a market value of $6,998.00 USD, the 222 shares of DFJ had a market value of $7,892.10 USD, and the 103 shares of FXY had a market value of $10,744.96 USD.

The final contents of the Doppler Value Model Portfolio for November 2008 were:
$62,056.59 USD in the Doppler Treasury Money Market Fund
$80,388.77 HKD total balance in the Hong Kong Dollar CD ($10,371.54 USD)
2 shares of BRKB ($6,998.00 USD)
222 shares of DFJ ($7,892.10 USD)
103 shares of FXY ($10,744.96 USD)

The total market value of the Doppler Value Model Portfolio at the end of November 2008 was $98,063.19 USD, virtually unchanged compared to $98,054.81 USD at the end of the previous month.

Model Portofolio Update: October 2008

The final contents of the Doppler Value Model Portfolio for September 2008 were:
$61,968.69 USD in the Doppler Treasury Money Market Fund
$80,254.73 HKD in the Everbank Hong Kong Dollar CD ($10,328.66 USD)
2 shares of BRKB ($8,790.00 USD)
222 shares of DFJ ($8,455.54 USD)
103 shares of FXY ($9,669.95 USD)

The total market value of the Doppler Value Model Portfolio at the end of September 2008 was $99,212.84 USD.

Since there were no purchases or sales during October 2008, the credited balance in the Doppler Treasury Money Market Fund remained at $61,968.69 USD for the entire month.  The 1-month Treasury Bill averaged a yield of .886% in September 2008, and the 3-month Treasury Bill averaged a yield of 1.655% in July 2008.  The average of these two figures is 1.271%, and subtracting .3% gives us .971%, the yield in the Doppler Treasury Money Market Fund for October 2008.  The total accrued interest on this cash for the month was $51.10 USD (about $1.65/day).  The total cash balance at the end of the month was $62,019.79 USD.

The credited balance in the Hong Kong Dollar CD remained at $80151.52 HKD for the entire month.  We started the month with $103.21 HKD in accrued interest.  At a 1% yield, we accrued an additional $68.07 HKD in interest during the month (about $2.20 HKD/day), bringing the total accrued interest at the end of the month to $171.28 HKD.  The total balance of the Hong Kong Dollar CD was $80,322.80 HKD at the end of the month.  At an exchange rate of 7.7528 HKD/USD, the total balance of the Hong Kong Dollar CD ended the month at $10,360.49 USD.

At the end of October 2008, the 2 shares of BRKB had a market value of $7,680.00 USD, the 222 shares of DFJ had a market value of $7,594.62 USD, and the 103 shares of FXY had a market value of $10,399.91 USD.

The final contents of the Doppler Value Model Portfolio for October 2008 were:
$62,019.79 USD in the Doppler Treasury Money Market Fund
$80,322.80 HKD in the Hong Kong Dollar CD ($10,360.49 USD)
2 shares of BRKB ($7,680.00 USD)
222 shares of DFJ ($7,594.62 USD)
103 shares of FXY ($10,399.91 USD)

The total market value of the Doppler Value Model Portfolio at the end of October 2008 was $98,054.81, down by about 1.2% for the month.