How are Funds different from Jitta?

I let the fund manager of JP Morgan take a look at Jitta. Turns out that Jitta’s matrix is almost opposite from the fund’s. For example, the good Thai stocks with high Jitta Scores like BEC and BBL are overlooked by the fund. Furthermore, they’re buying stocks like PTTGC and SCC, which have low Jitta Scores. So I would like to ask your team: Why do PTTGC and SCC have low scores?

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We received a question from K. Tawan Banchuen which I think should benefit everyone and help better understand investment perspectives and Jitta itself. So here goes:

I let the fund manager of JP Morgan take a look at Jitta. Turns out that Jitta’s matrix is almost opposite from the fund’s. For example, the good Thai stocks with high Jitta Scores like BEC and BBL are overlooked by the fund. Furthermore, they’re buying stocks like PTTGC and SCC, which have low Jitta Scores. So I would like to ask your team: Why do PTTGC and SCC have low scores?

There are many parts to answering this question, which will help you understand the answer and Jitta’s investment principles.

  1. A high Jitta Score means that that company is a good company. It has good management and operations and a long-term comptitive advantage. Therefore, it will strengthen the wealth of its shareholders in the long-run. Like I always say, the Jitta Score is based on a business perspective on whether that company is good or bad, not related to what’s going on in the stock market.

So in the case of BEC and BBL, the fact that these two companies have high Jitta Scores means that they are good companies, worthy of long-term investment, because they will pass on their wealth to shareholders year after year.

As we know, BEC and BBL have been operating for more than 40 years. These are businesses that have weathered economic crises, and both were able to manage and grow their revenue and profits every year, hence their shareholders also become wealthier, especially the founding families of Maleenont and Sophonpanich who have become two of the wealthiest families in Thailand. As for PTTGC and SCC which have low Jitta Scores, (Mek Srunyu Stittri has actually addressed this but I’m going to recap it for you here again): PTTGC has just gone through IPO, and so their financial data is still very limited, making it hard to evaluate the quality and capability of the company in the long-run. And based on the financial information from 2010-2013, we can see that the company is not that competitive, because the revenue and profit have decreased greatly in some years; they were also unable to maintain their costs, in addition to having a fluctuating ROE. Holding a stock like this in the long-run will not earn investors much wealth.

In the case of SCC, it is undeniably a good company, but it is not as good as BED and BBL. In the past 10 years, we can see that from 2008-2013, while BEC and BBL manage to grow their revenues regularly, SCC has fallen short in 2008,2011, and 2012. Their Net Profit Margin and ROE fluctuated quite a lot when compared to BEC and BBL. This shows that BEC and BBL are more competitive than SCC in the past period.

If we look at the growing value of the company by looking at the true value (the increasing Jitta Line), we will see that from 2006-2013, SCC increased its company value from around 355 Baht per share to 435 Baht, an increase of around 22.53%, while BEC increased from 9.95 Baht per share to 34.12 Baht, an increase of 242%. BBL also increased from 100.07 Baht per share to 206.23 Baht, a growth of 106%. Therefore, if we look at them from solely a business perspective (without considering the stock prices in the stock market), we will see that BEC and BBL are clearly better than SCC, as their shareholders’ wealth have clearly grown much more.

If we study deeper, we will also see that from 2006-2013, SCC generated retained earnings of around 188.07 Baht per share. However, it was only able to increase its value by just 80 Baht per share. This shows that the company spent money on things that did not help increase value for shareholders, or that the company must spend a lot of money to maintain its competitiveness, hence decreasing the wealth of shareholders.

For BBL, the company’s retained earnings was at 104.1 Baht per share, and increased their value to 106.16 Baht per share. BBL is operating in an environment of high competition and they do not have an upper-hand advantage against their competitors -they were unable to use their profit in creating a competitive advantage, however, management was still able to use it to grow the wealth of their shareholders.

Meanwhile, BEC’s retained earnings from 2006-2013 was at 13.31 Baht per share and their value was at 24.17 Baht per share. This means that with every 1 Baht profit BEC made, management was able to increase the business’s value by almost 1 Baht. This shows that the company is in a thriving industry and it has a competitive advantage. They effectively used the profit to expand their business and increase their competitiveness.

Therefore, in terms of creating a long-term competitive advantage and increasing shareholder wealth from company profits (during 2006-2013), BEC is much better than BBL and SCC. This is why the Jitta Scores are ranked respectively: BEC > BBL > SCC. (Note: PTTGC has been excluded from this comparison due to lesser financial data availability)

  1. A high Jitta Score only indicates that the company is a good one, however, it does not indicate that investors should invest in it. Because investing in a good company with a high price may not be a good investment, as the returns would be lower.

This is why when investing, we should look at both the Jitta Score and Jitta Line together. And if you have the opportunity, try to invest in “good businesses that have suitable prices”. This will generate good long-term returns. For example, in the case of BEC: even though the Jitta Score is higher than BBL, SCC, and PTTGC, it’s stock price is much higher than its true value. Therefore, this price might not be worth it for a long-term investment. If you want to rank stocks in terms of their attractiveness to invest, you must look at Jitta Ranking. When we compare their Jitta Ranking, we will find that the investing-attractiveness (at the closing price of the recorded date) ranks the following: SCC > BBL > BEC > PTTGC.

  1. There are many investment principles. Each person has a different style. Jitta focuses on Warren Buffet principles that are centered around good businesses. This is to prevent heavy losses and investors from spending too much time tracking stocks; and to help them invest in good businesses and let the company and stock value grow with time.

In the case of funds, investing in SCC and PTTCG is not wrong because it’s investing in stocks that have lower prices than their true value anyway. We can see from the stock prices of SCC and PTTGC, which fall below the Jitta Line. It’s just that SCC and PTTGC might not be companies that we want to hold in the long-run to generate a compounded return of more than 15%. So when the price nears or exceeds the true value, we should sell them out and invest our capital elsewhere. Therefore, in the world of investment, any method that can continuously generate good returns in the long-run are all good. For example, Walter Schloss uses the method of buying stocks with lower prices than their true value, regardless of their business quality, yet he was able to generate compounded returns of about 15.3% per year for 45 years, making him one of the legendary investors today.

  1. Funds are managed by real people, which, of course, means that they are able to predict or gain more news information than Jitta; because Jitta is calculated from the company’s financial reports.

In BBL’s case, the company is in a banking industry where there are always fluctuations in the economy, decreases in interest, and risks during an economic downturn (which Thailand is currently going through). As for BEC, it is going through its own industry’s uncertainties advertising income with the commencement of Digital TV. Fund managers may be doubtful when deciding to invest in these two industries because of all these uncertainties, while with PTTGC and SCC, the businesses might improve or the industries might come back with strong growths, making them seem more attractive to invest in.

These predictions are things that Jitta does not know. Jitta will know only whether a company is getting better or worse only when there is solid evidence from whatever that is happening in reality. This will be reflected on the financial reports, and therefore, true. No speculation involved. As Buffet says, “Don’t swing the bat if the ball hasn’t left the pitcher’s glove.”

So, Jitta might be a bit slow from waiting for the financial reports, but you can be sure whether a company is improving or worsening without any doubts and uncertainties from speculation.

  1. Unlike individual investors, funds have many terms and conditions. Each fund has its own rules and investment methods, therefore to choose to invest in a fund, one must also consider its rules and methods.

Funds have many disadvantages, mainly to do with not being able to choose to invest in good companies at reasonable prices the way investors can do so. They are concerned with making short-term returns because otherwise people would take their money and invest elsewhere, leaving the fund manager who has failed to beat their competitors in a rocky career state.

That’s why as K. Theera Piroonratana says, fund managers must try to beat the Index and not invest in ways that go against the mass opinion (especially competing funds) -because even if they fail, they won’t be fired. Just as the expression goes, “no fund manager has been fired for buying IBM shares.”

This is the reason why in the long-run, more than half the funds out there underperform compared to the Index. That’s why Warren Buffet suggests that if you don’t have any knowledge in investment, you should just purchase an Index Fund every year to gain better returns than investing in specific funds. Of course, there are many great fund managers who are able to beat the Index. If you find these managers, you should of course invest in their funds rather than the Index Fund.

Let me summarize the final points for you again:

  1. Jitta Score indicates the company’s quality, but it does not tell you whether you should or should not invest. When you are deciding, you should look at the stock price compared to the Jitta Line. Try to invest in stocks with high Jitta Scores and prices that do not exceed the Jitta Line. In the long-run, you will gain way more compounded returns than the Index.

  2. If you want to see the rankings of companies’ attractiveness to invest in, look at the Jitta Ranking.

  3. There are many methods of investment. Investors do not have to invest in the same stocks to gain higher returns than the market.

The principles that Jitta uses are from Warren Buffet’s rulebook that have been proven to successfully beat the market in the long-run. In the past year, since 2009, Jitta’s return beat SET and S&P 500 to quite an extent. You can view the stocks and their returns in each year at this following link: library.jitta.com/th/ranking

Author: Jitta

Jitta simplifies financial analysis for value investors and financial advisors alike. Our stock-analysis platform offers actionable advice to help them make better investment decisions and generate higher returns based on a simple principle: “Buy a wonderful company at a fair price.” And we do that by creating Jitta Ranking, our proprietary algorithm that ranks stocks based on their profit potential. Returns generated by Jitta Ranking since 2009 has outpaced that produced by the S&P500 index by a large margin. Jitta’s technology processes information like a human mind, assessing complicated data and digesting it into an easy-to-use and intuitive format. Its key features include Jitta Score, an indicator of a wonderful company; Jitta Line, an indicator of a company's fair price; financial statements-made-simple Jitta FactSheet; Jitta Playlist, an intelligent screener and backtest system in one; and Jitta Portfolio, a smarter investment-tracking mechanism.

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