Preamble
Forget about technical analysis that would probably require a certain degree of knowledge. Common sense can be a great tool in formulating an investment strategy even for dummies.
What? How it works?
Common sense: a company is worth buying if it's undervalued!
Hence, we need to compare between share value and share price. A proxy for share value is Net Asset Per Share ("NAPS") of a company whereas Share Price ("SP") refers to the quoted share price on Bursa.
Info needed:
1) NAPS - get it from financial statements
2) SP - get it from Bursa
Pro vs Con
Pro: Simple enough as we only need 2 pieces of information that is readily available for public listed companies.
Con: NAPS is a proxy which may not reflect the true share value. Accounting treatments can distort the proxy significantly giving a deviated impression. In order to mitigate this, it is advisable for user of such investment strategy to be equipped with adequate amount of accounting knowledge.
Example
DRB-Hicom Berhad is an investment holding company. The Company, through its subsidiaries, develops, assembles, and sells motor vehicles and military vehicles as well as operates in property development and construction work.
Info Needed:
NAPS: RM3.87
SP as 17.04.2015: RM1.89
(Source: i3investor)
Noted that the NAPS is more than double of its current Share Price and hence, we can safely deem this as a valuable investment opportunity. In the worse case scenario whereby liquidation takes place, investor can theoretically earn a capital gain equivalent to the portion of NAPS over and above his entry price.
The risk with this strategy is that return on equity will still depend on how DRB-Hicom can utilize its assets in generating cash flow.
Conclusion
Such strategy is a safe play but bear in mind the risks involved, i.e. distorting accounting treatments affecting the NAPS and also the risk whereby DRB-Hicom might not be able to fully utilize its assets in generating returns.
Trade at your own risk! Have fun!
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