Conventional value investing uses earnings or book value as a yardstick for estimating the
intrinsic business value of a stock. Doppler Value Investing uses free cash flow and net
liquidity as an alternative to earnings and book value for estimating the stock's intrinsic
What makes value investing so great?
Of all of the investment philosophies, value investing makes the most sense. All successful
businesses have an intrinsic business value, and buying such a business at a discount to this
intrinsic business value will likely lead to good investment performance. Buying even a very
successful business at a premium to intrinsic business value is likely to lead to mediocre
What's wrong with conventional value investing?
The most popular yardsticks for conventional value investing are PE ratios, price/book ratios,
price/sales ratios, return on equity, and return on assets. Unfortunately, these figures are
easily manipulated, and many of these yardsticks are biased towards capital intensive companies
with aggressive accounting practices and biased against companies that use conservative
accounting practices and don't need much capital. There is something wrong when a given PE or
price/book multiple is considered impossibly cheap for one type of company but insanely
overpriced for another type of company. Most of the stocks with the very lowest PE ratios and
price/book ratios are fake value stocks. The high quality stocks are much less likely to be
among those with the very lowest multiples.
What makes Doppler Value Investing better than conventional value investing?
Doppler Value Investing uses pre-tax free cash flow and net liquidity (liquid assets minus
total liabilities) instead of earnings, book value, or sales. The advantages are:
The arbitrary accounting practices that vary from company to company and industry to industry
have less of an effect on cash flow than on earnings. Cash flow is a function of inflows and
outflows of cash, and cash cannot be faked. Earnings are a product of accrual accounting, and
this provides more opportunities to manipulate the numbers.
There is no need to agonize over the liquidation values of receivables, inventory, or fixed
Doppler Value Investing combines the number-crunching of Benjamin Graham's philosophy with the
insights of Warren Buffett, Charlie Munger, and John Train. I fully agree on the importance of
economic moats, but the traditional valuation yardsticks do not capture these insights.
Doppler Value Investing helps you to steer clear of the clunkers that populate the lists of
stocks with the very lowest PE and price/book ratios. You'll find that most of asset value in
these companies is tied up in highly illiquid assets (such as plant/equipment), the liabilities
dwarf the liquid assets, and the free cash flow is tiny in comparison. You'll never be tempted
to buy these clunkers, because they'll make your skin crawl.
What are the limitations of Doppler Value Investing?
Doppler Value Investing only works for industrial companies and not financial companies
like banks and insurance companies. Banks and insurance companies are highly leveraged,
which means that even a slight reduction in asset value translates into a dramatic
destruction in equity value. Thus, these companies can be extremely profitable or
extremely disastrous. I prefer Berkshire Hathaway stock for banking and insurance
industry exposure, because you cannot argue with the very long and very successful track
record of the management. (DISCLAIMER: I am a Berkshire Hathaway shareholder.)
The number-crunching of Doppler Value Investing assumes that the future will be similar to
the past. This does not work for evaluating new companies or industries that constantly
You won't catch cyclical companies on the upswing.
You won't catch turnarounds.
You won't catch asset plays if the asset in question is illiquid. So if a company has lots
of New York City real estate valued at 100-year-old prices, you won't find it through
Doppler Value Investing.
Doppler Value Investing does not work for highly capital intensive companies due to the
assumption that 10% of the plant, property, and equipment must be replaced every year.
This estimated normalized capital spending is only a small portion of the cash flow of a
company with a strong moat and modest capital needs. For a capital intensive company, most
or all of the cash flow is consumed by this normalized capital spending, which may be
overestimated. For example, Doppler Value Investing does not work for utility companies.
On average, utilities deliver respectable returns to investors despite looking like rubbish
from the Doppler Value Investing point of view.