Ignore hype when investing

MARTIN HAWES
Last updated 12:21 13/08/2012

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OPINION: I have often thought that it is a good idea to make financial decisions in a quiet space, away from the noise and hype of the markets.

At the moment no-one seems sure what will happen with Mighty River Power (MRP) and its water-rights issues. However, my guess is that fairly soon we will see the appearance of a lot of sales and public relations people who will start to hype the sale of the shares in an avalanche of sales talk.

While things are still fairly quiet, and before the arm-wavers get started, now seems a good time to work out whether to be a buyer of MRP.

I have a three-stage process when considering buying any investment, and this includes whether to buy MRP. The first is to look at my own position: where I am at financially and whether this investment suits my situation.

The second stage is to look at the quality of the investment itself.

The third stage is to consider if the price is fair.

The first stage is the most important - your own suitability. The important thing for most is whether you have a mortgage. If you do, you can almost certainly ignore MRP and its salesmen because you are not suitable for making this investment.

There is a general principle that those with mortgages and other non-tax-deductible debts should not invest but instead concentrate all their spare cash to loan repayments - the risk-adjusted return on investments is unlikely to be as good as saving interest by repaying debt. This necessarily precludes any investment in MRP and will take a large proportion of the population out of consideration for MRP shares: people with debt can simply ignore the hype and keep their hands in their pockets.

There are some other things about your personal financial position which might also stop you buying these shares: for example, you may already own enough New Zealand shares and should not add more to that asset class. In that situation, you may sell some other shares to buy MRP, but you should certainly not be over-exposed to New Zealand shares.

A good look at your situation should be the first part of answering whether you should buy MRP - and an honest look will stop many from buying, regardless of the excitement.

Assuming that your situation is suitable for buying these shares, you need to look at the investment itself. This means looking at the business: I do not think in terms of buying 'shares' but, instead, I buy businesses. In this respect, my basic rule is to ask myself: if I had enough money, would I buy all of this business? If the answer is negative - that is, if I do not much like the business - there is no reason to buy a share of it.

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I assess most businesses in terms of:

The industry it is in.

The assets it owns.

Its growth prospects.

The risks it faces.

Its finances and its balance sheet.

Its governance and senior management team.

On all of these measures, MRP comes out well. It is in a good, stable industry providing energy from renewables, but with growth prospects as it sells its expertise in thermal power to other countries. It has strong finances and very good governance and management.

Only when I have assessed and know these things would I start to think about the price. MRP will be no great bargain as the Government will not be seen to sell assets cheaply. However, for me, the dividend yield will have to be 5 per cent or better with a price/ earnings ratio of around 15. This is a very simple look at the complicated science of valuation and pricing, but they will be the main two metrics for most people.

Work through the process now - leave this for a few weeks and you will need a pair of earmuffs to get some peace and quiet to consider your decision. My first two criteria have been met: my financial situation allows me to buy and I do think it is a good business.

So, if the price is right, I will buy MRP.

Martin Hawes is an authorised financial adviser and his disclosure statement is available free at martinhawes.com. This article is of a general nature and is no substitute for personalised financial advice.

- Sunday Star Times

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