The hot topic on the New Zealand investment scene right now is clearly Mighty River. It's the talk of the town, people who have never owned shares in their life and who don't necessarily know what it entails, are talking at the water cooler about whether they should become a proud owner of Mighty River shares or not.
Here are a few things to consider for new investors to the share market:
Should we be scared of market crashes?
In Australia and the USA, investing in shares is standard practice. Most people with any form of saving or investments will have exposure to the stock market of some kind. In New Zealand it's a bit different... we like our bricks and mortar and keep the rest predominately in cash investments or what we consider 'safe' investments.
We still look back with dread at the 1987 stock market crash and fear it happening again. Well, global stock markets have been through many crashes before and after '87 and there will be more again. They tend to be just temporary blips on the radar of long term investors.
The great equity investors see these blips as great opportunities to buy more and add to positions for the long term. The most money has been made in almost all asset classes (property included) by those willing to invest when times are at their worst - the exact opposite time of when the press implies is a good time!
The headlines in late 2008 during the peak of the Global Financial Crisis told us we were just moments from a meltdown of the financial world as we knew it, stock markets were doomed, cash itself was failing and no CEO or money manager could be trusted - hardly an enticement for a new investor to enter the stock market. Bottoms in markets almost always see headlines like this and since the markets made their GFC lows in early 2009, they have rallied to all-time highs - yes back above the highs of 2007 to stock market highs never seen before in most of the world.
So what if the market crashes again? Exactly, so what! If you are in for the long term then stay in for the long term but get your thinking straight and a written plan in place ahead of this happening so you know exactly what to do.
Trust me, unless you have a plan, the day you wake up to see Mighty River down 25 per cent in a heartbeat and you hear all the talk of people selling out, you will be torn to pieces about what you should do.
Investing can be an emotional game and the best way to avoid acting emotionally is to have a plan in advance of the investment, commit it to writing and stick to it! By all means that plan can include the maximum loss you are prepared to take and therefore the point you will sell out in the future if the shares decline.
Just know this point in advance rather than trying to decide in the heat of the moment. This will avoid you getting shaken out of your position too early by temporary 'blips' and will help keep emotions in check.
Capital Growth Vs Yield
Most Kiwis understand property or at least know more about the property market than the stock market. Perhaps you know an active investor in the property market or are one yourself. But, there is one big similarity between property and stocks that helps shed light on the decision process of a stock investor - both tend to buy a house or share for one major reason of either yield or capital growth. Of course getting both is a big bonus but one is usually the primary focus.
A rental property will be rented out for a certain value - known as income or yield for the investor. Not all properties make a positive yield as we know, but others do. If an investor buys a property that is not yielding positively, the chances are they expect that property to increase in value and make them a return upon sale. Why else would they buy?
In the stock market, our yield is known as our dividend. A dividend is a share of the company's profits, paid out to its owners/shareholders at set intervals throughout the year - presuming of course that the company makes a profit. As an owner of shares in a company, you will be entitled to dividends and thus you are in a position to yield some income if dividends are paid.
Not all stocks yield at all and many yield much better than others. Just like with property, some investors pick stocks predominantly for yield, others for capital growth meaning that they plan to sell their stock at a higher price than what they bought it.
What is your reason for buying Mighty River? Yield or capital growth or even both? You might want to do a bit more research to be absolutely clear and commit this to your plan. It might also be worth taking a look around at other opportunities i.e. if you are investing for yield, what other NZX companies could offer you similar or better?
The first rule of investing in the markets is to have a plan and stick to it. While this brief article by no means offers a complete plan for investing in Mighty River shares, it gives a few things to consider for anyone wanting to start committing a personal investment plan to writing.
What topics would you like covered in future articles? Ask me anything you want on the markets and I will do my best to put it into simple terms for those new to the markets.