Recently Mighty River Power shares traded at $2.34 - down from their float price of $2.50. This is a good sign. It suggests that the Government and its advisers got the sale price about right. New investors should not be concerned. The worst thing they could do is sell now and confirm their losses. Mighty River shares are likely to fluctuate significantly. This is the nature of share investing.
I am an opponent of the Government's partial privatisations. I see little point in the Government selling shares that generate dividend yields of 6 to 7 per cent to avoid borrowing to fund its deficits at around 3 to 4 per cent.
But the argument that privatisations will encourage more "mum and dad" investors in the share market is also flawed. The rationale is to provide alternatives to investing in an overblown property market. The result could be to create another generation of Kiwis who see the share market as a casino run for the exclusive benefit of the financial elite. This would be a tragedy.
The hype over the Mighty River float was significant. Several people asked me if they should extend their mortgages to invest in the float because it was a "no brainer". The first rule of investment is there is no such thing. There is always a risk-return trade off. The second rule is diversification.
The Government's approach of encouraging novice share investors to put their money in a limited range of shares is strange in the extreme. Real diversification requires investing in a range of asset classes in several sectors and countries.
Last year I had the unique opportunity to teach investment principles to senior students at my school. I have been a share investor for almost 20 years. The lessons I have learned through harsh experience and extensive research have served me well.
The most important lesson is never to overrate my own ability. There is no sure thing in investing, nor is there an omnipotent guru. Warren Buffet is the most legendary share investor of our time, but his investing is not passive. He has an active say in the management of many of the businesses he invests in.
The group I worked with established a share fund investing $20,000 in a range of local shares for a significant period. The return has been around 30 per cent. While this appears wildly successful, we have largely tracked the overall market return during a large share rally in New Zealand and abroad. These rallies have been the result of record low interest rates and money printing by central banks.
We aimed to invest in a range of companies with strong market positions and cash flows, good management and a pedigree of sound returns.
Investing in shares is not rocket science. It also requires a willingness to tolerate volatility. Novice share investors often find this difficult. Many bail out when things turn negative and miss the upswings. But no one can predict this volatility. Anyone who could would have the riches of Croesus.
It is crucial that Kiwis learn about investing in alternatives to property as a means of generating personal wealth. Sadly our schooling system regards teaching our young how to handle money as a low priority. The financial sector offers advice, but this is often product sales based on vested interests which can lead to disastrous outcomes as illustrated by the finance company debacles.
Astute investment in shares should mean investing in the most productive and dynamic parts of the economy. Proper diversification means reducing the overall risk of loss while maintaining the potential for returns. A vibrant share market should be the avenue for businesses to obtain money to expand their production, create jobs and generate higher incomes. It should not be regarded as a casino.
Peter Lyons teaches economics at St Peter's College in Epsom and has authored several economics textbooks. He does not own shares in Mighty River.