About Doppler Value Investing

Doppler Value Investing is a blog dedicated to value investing in the quantitative tradition of Benjamin Graham and David Dodd but also in the qualitative tradition of Warren Buffett and Charlie Munger. Just as Doppler radar is an improvement over the older conventional radar systems in observing thunderstorms and detecting tornadoes, Doppler Value Investing (with free cash flow and net liquidity) is an improvement over conventional value investing (with earnings, book value, and dividends).

I have described my method of stock appraisal and provided a few examples at http://www.jasonhsu.com/finance.html. I use free cash flow (FCF) as a substitute for earnings and plant/property/equipment at cost (PPE) as a proxy for the amount of capital investment. The FCF for a given year divided by the PPE at the beginning of the year (or the end of the previous year) is the return on PPE. The return on PPE is my substitute for Return on Equity. I also take into account the Net Liquidity, which I define as total liquid assets minus ALL liabilities.

The Doppler Value Model Portfolio is my simulated portfolio. The rules are as follows:
1. The initial portfolio consists of $100,000 in cash and begins on May 8th, 2008.
2. In the interest of simplicity, the model portfolio is NOT subject to taxes, much like an IRA account. An identical taxable account will fare worse, but the low turnover will minimize the difference between the after-tax and pre-tax performance when compared to investment strategies that involve higher turnover.
3. Sales and purchases of stocks will take place at the close of trading at least one COMPLETE calendar day after I announce the transaction. So if I announce a trade on a Tuesday, the trade takes place at the closing price on Wednesday. If I announce a trade on a Friday or over the weekend, the trade takes place at the closing price the following Monday. If I announce a trade on a holiday, the trade takes place at the closing price the next day that the market is open.
4. The commission for all stock trades will be 4 cents per share or $40, whichever is greater. I know that there are many brokerage firms with cheaper commissions, but I’m making some conservative assumptions to balance out my aggressive consumptions elsewhere in these rules.
5. The cash balance is invested in the Doppler Value Treasury Money Market Fund, a hypothetical money market fund that invests exclusively in US Treasury Bills. It is assumed that half of the portfolio consists of 1-month Treasury Bills purchased the previous month and the other half of the portfolio consists of 3-month Treasury Bills purchased two months before that. The Doppler Value Money Market Fund yield for the current month will be the average of these yields minus a .3% expense ratio. Since 1-month Treasury Bills in April 2008 averaged 1.072% and 3-month Treasury Bills in February 2008 averaged 2.174%, the yield for May 2008 is 1.323%. On average, the fictional Doppler Value Treasury Money Market Fund will yield roughly the same as the real Vanguard Treasury Money Market Fund. However, these two yields may be substantially different at times if interest rates are rising or falling, especially if the Vanguard fund has a longer or shorter average maturity.
6. Interest accrues daily but is credited monthly. Accrued but uncredited interest does NOT earn interest.
7. Purchases of CDs will take place at the end of the day 1 week following my announcement.
8. Cash dividends are NOT reinvested but added to the cash balance.