Martin Hawes: Shares are big business

Thinking of buying some sort of commodity called shares is misguided and puts you in danger of forgetting what you are really doing - which is buying into a business.

It is a strange thing about Kiwis. We are averse to buying shares but as a nation we go into business as readily as any people I know.

We are nervous of shares mostly because the sharemarket crash of 1987 lives on in our collective memory.

Nearly every family has someone who was badly affected and has a patriarch or matriarch who still warns against shares.

And yet Kiwis have no problem with setting up their own businesses.

If anyone loses a job, gets sick of their manager or has a bright idea, they are off to their bank manager for an overdraft and to the Companies Office to set up a company as quick as you can say, "I'll be my own boss".

Kiwis have to start to think differently about shares.

Instead of thinking of them as some commodity called "shares", we need to think of them as a business. Shares are simply a vehicle to buy a part of a business.

Certainly you are buying into a big business, and you do not have the control you would have if you had started a business, but the drivers for success are the same.

The volatility of shares frightens people. However, although the share price may fluctuate a lot, the value of the underlying business you have bought into usually maintains its worth.

I think it is always a good idea for share market investors to assess the companies as if they were buying the entire enterprise.

Of course, few people reading this would have the $3.7 billion necessary to buy all of Contact Energy.

But it is a good exercise to ask yourself whether that is what you would do with your money if you had it.

If you decide this is not a business you would buy in its entirety, then you should not invest your $5000.

However, if you think you would buy the whole business, then it is worth buying a share in it.

While it is reasonable to fear the volatility of shares, remember they are simply ownership of a business and governance, management and regulation are much better now than 20 years ago ( though they are still not perfect).

Provided you are a long-term investor, you can largely afford to ignore the volatility and collect the high returns that shares give.

* Martin Hawes is a financial adviser. His disclosure document can be found at www.martinhawes.com