Liam Dann: Much to weigh up on Mighty River

You might think, given my general exuberance about the surge in fortunes for the NZX this year, that I was a big investor in local equities.

But no - well, not yet. I have a hefty mortgage, a balanced KiwiSaver fund and share a small parcel of forlorn looking Vector stock that my wife and I picked up in the partial listing back in 2005.

The reason for this disclosure is simply that I'm one of many New Zealanders considering whether I should be buying a stake in Mighty River Power.

In short, I'm probably an ideal candidate for one of those case studies newspapers are fond of using to personalise the news.

Before I go on, here's another disclosure for these carefully regulated times - I am not an investment adviser and nothing in this column should be considered specific investment advice. It is just stuff to think about as you consider the Mighty River offer over the coming days.

The question of whether you should be investing in shares when you still have a mortgage is an interesting one. The answer depends on personal circumstances of course.

How comfortably are you making your payments? What sort of interest are you paying and what sort of return do you expect on your potential investment?

Borrowing to invest isn't inherently a bad thing to do - if you believed that it was you probably wouldn't have a mortgage in the first place.

And it is not necessarily as simple as weighing up the immediate return on the investment against the present cost of your mortgage.

Presumably your mortgage will shrink and, if you are clever, the investment may be the start of something that will grow.

So you have to look across the likely timeframe of both mortgage and investment. That depends a lot on your age and the stage of life you are at.

You also need to be honest about whether you'd really be paying down the mortgage with money you'd otherwise invest. There is no opportunity cost on an investment if in reality you would have frittered away the extra cash on treats rather than paying off an extra chunk of debt.

Making good investment decisions requires you to be honest about your behaviour. Doing the smart thing also requires being disciplined which you may or may not trust yourself to be.

If you are disciplined about it then your investment is likely to be far more valuable.

By way of example let's go back to those Vector shares I mentioned early. They haven't been a great investment but that is partly my fault.

In the initial public offer we were scaled back to 500 shares at the listing price of $2.38.

Not big bucks, but not too much less than $2000 worth the Government is guaranteeing to every Kiwi applying for Might River.

We could have sold out of Vector for a quick profit shortly after the float - the shares spiked up above $3 for a while. But we didn't and Vector went on to get whacked by the regulator on pricing and the shares slumped.

They've never really recovered to any significant extent. They closed on Friday at $2.82.

That is OK, they are really a dividend stock not a growth stock anyway.

Even our paltry 500 shares delivers an annual return of about $70 in dividends. In the eight years since listing they're almost half way to paying for themselves in dividends alone.

The problem is that $70 just disappears into the black hole of our general family bank account.

What we should have done and should be doing is setting the payments aside to be reinvested in the stock.

If we'd done that the returns would have started to compound and even off a low base we'd only be a few years away from an investment worth paying some attention to.

So, some discipline and methodology from the start is the key to this business.

If you don't trust yourself to be organised about share investment maybe it is better to stick with a fund manager.

But there is always the opportunity to get organised and perhaps that is what Mighty River Power represents. If nothing else it is an opportunity to stop and consider your options. Certainly there is no harm in pre-registering. Then it is time to take a deep breath.

Remember we are still three pieces of key information away from being able to make an informed decision on buying in.

You wouldn't buy a car without looking under the hood or knowing what the asking price was.

So we need to see the Mighty River prospectus which will unveil the full financial position and outlook for the company.

If you don't trust yourself to dissect the document be sure to read plenty of commentary about it - you can bet the likes of Brian Gaynor will have something to say on it.

And we need to know the final price - that is how many shares am I going to get for my $2000. Pretty crucial information which will be determined in the end by the level of demand for the stock.

The third thing we are waiting for is detail on how much, if at all, the Government will sweeten the deal with some kind of bonus for holding the shares long-term.

That was done by the Queensland state government when they sold down Queensland Rail as way to keep the ownership local.

Like the original KiwiSaver incentives, this could effectively be free money for those who are patient and it could be the clincher for people like me for whom the benefits are otherwise marginal.

The fairness of that incentive at a time when plenty of New Zealanders are struggling to pay their power bill, let alone invest in a power company, is another matter altogether. There is plenty more to think about before we send Bill English a cheque.

Twitter: @liamdann