Value investing is one of the most successful investment strategies but not one retail investors can easily adopt, due to the extensive time and knowledge required. This guide is aimed at educating readers what value investing is, why it makes sense as an investment strategy and the key principles associated with it. The bigger focus of the guide is to introduce Jitta, against that backdrop, to showcase how the app and web-based technology can easily resolve these issues faced by would-be modern value investors. We end with a case study with screenshots of how Jitta can aid the value investor’s investment process.
Investing is an art, not a science, which means there’s more than one way to go about it. And what you’re trying to get out of your investments will help determine which direction you go in.
If you’re happy with getting the market return – making no more or less than the broad market index – then a passive investment strategy might suit. But if you want to try and outperform the market, then you’re more likely to pick an active investment strategy – like growth, momentum, small-cap, or value investing.
While not all strategies have stood the test of time, value investing largely has. Its famous proponents – like Benjamin Graham (the father of value investing), Warren Buffett, and Seth Klarman – have all consistently outperformed the market over an extended period of time.
Value investing involves patience, discipline, and a long-term perspective: it focuses on identifying and investing in undervalued companies, with the hope that their fair value will be recognized by the market over time. And when recession comes knocking, this strategy can be a great way to weather the clouds.
There are five key principles that make up the basics of value investing:
Picking quality companies. In Warren Buffett’s words, “it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” That’s because great businesses grow over time, meaning that your investment has a lot more runway for prices to appreciate.
Understanding fair value is crucial to knowing the true worth of a company relative to its share price. This involves digging deep into a company’s financials to understand its assets, liabilities, profit margins, and cash generation abilities.
A good margin of safety comes from buying assets at a discount to their fair value. The bigger the discount, the larger the margin of safety you have to protect you from both poor decisions and market downturns.
Going against the crowd isn’t easy, so you’ll need a contrarian mindset to be able to pick up stocks that are temporarily out of favor, or facing short-term challenges. This is where having a solid understanding of fair value can really help. As Buffet says, it's best to be "fearful when others are greedy, and greedy when others are fearful."
Having a long-term perspective is important, since it takes time for the market to recognize the true value of a company. Once you’ve done your homework and made your investment, try not to be distracted by short-term price fluctuations.
Value investing might produce great returns, but that doesn’t mean it’s easy. For a start, the strategy requires a significant amount of work and a detailed understanding of each company’s drivers and financials.
To put this into context, the MSCI World Index has more than 1,500 companies, in many different sectors. So if you’re starting from scratch, you’ll need to acquire in-depth knowledge and understanding of many different firms, which will take some serious time. And when you do come across a quality company, it may well not be trading at a fair price.
And to conduct proper analysis, you’ll need access to a ton of data – both historical figures and forward-looking projections – that can set you back a few thousand dollars before you’ve even started investing.
Lastly, as with all investing, human biases can kick in – where you might oversimplify complex decisions, or be overconfident in your decision-making.
This is where value-investing platform Jitta comes in. It gives you that vast amount of financial data – for free – and much more. Jitta analyzes and condenses the data into user-friendly and intuitive tools – ones that can help you identify great companies at fair prices to invest in.
And if you’re ever stuck for ideas, you can use Jitta to screen for stocks using many different metrics: the platform covers almost 90% of global stocks, which means the world is your oyster. With the help of technology, Jitta helps you become a better modern value-investor by applying the timeless principles of value-investing in today’s markets.
The platform assigns a Jitta Score to each company based on its earnings quality, on a scale from one to ten. The scores are calculated from the company’s last ten years’ worth of financial statements, using revenue, profitability, shareholder returns, and balance sheet track record. The higher the score, the better the company.
But finding a great company isn’t enough – you need to be able to invest in it at a fair price. This is where the Jitta Line complements the Jitta Score by showing what the fair price of a company ought to be. The logic behind it is based on finding the maximum price you should pay to invest in a company to be able to break even within 10 years. And the calculations involved are based entirely on the company in question’s business rather than any relative market valuation.
To make things even easier, Jitta has a simple rule of thumb:
And if passive investing still calls, Jitta can help you with that too. The platform identifies the top 30 companies, from more than 30,000 stocks, trading at a fair price based on the Jitta Score and Jitta Line, to create the Jitta Ranking. If you’d invested in this basket of stocks in 2009, you’d have outperformed the S&P 500 by an average of 3% per year.
Jitta covers stocks from a wide range of markets. You can see the list of markets Jitta covers below.
If you’re at a loss for ideas, you can pick a market on the app and see which stocks screen most favorably on the Jitta Ranking. If you want more advanced features, you can also sort stocks by the Jitta Score or Jitta Line on Jitta's web-based tool.
Once you’ve found a stock you’re interested in, you can see how its Jitta Score and Jitta Line have changed over time by clicking on it. Both are updated quarterly every time a company reports its earnings. For the more advanced users, Jitta also gives you a ranking of the stock versus its direct peers and the market – and you’ll get a full overview of the company's historical financial statements on its web tool.
If you’re curious about the Jitta Score for a company, you can access a breakdown of what’s driving it – also known as Jitta Factors and Jitta Signs.
There is an added functionality called Jitta Wise, which explains the business model of the company and also analyzes its business quality and potential. You can find a quick three-year overview of the company’s key financial statements there as well.
You can also follow your favorite stocks and be instantly notified about any key financial updates, or if there are significant changes to its business fundamentals.
If you’re interested in modern value-investing, Jitta is a free technology available to you on both app and web. With a simple and free sign-up, you gain immediate access to detailed quality analysis and historical data on more than 30,000 stocks worldwide. So why not try it now?
This guide was produced by Finimize in partnership with Jitta.
Check out Jitta's mini-website at finimize.com.