Staying in Contact May Not Be Clever

By Mary Holm

Sunday 4th February 2001

Contact Energy shareholders expressed their unhappiness about their company's performance at the recent annual meeting. Now I'm going to annoy many of them further. Nobody likes to hear, "I told you so."

But, after you've read what follows, how about thinking about the lesson you've learnt? It could affect your future wealth.

The people I'm addressing are those whose only shareholding is Contact, and those with shares in just one or two other companies.

I suspect there are lots of you. When Contact shares were allocated in May 1999, the Government proudly announced that 120,000 of the 225,000 New Zealand buyers were first-time investors.

Of the first-timers who are still holding Contact, I doubt if many have since branched out and bought a wide variety of other shares. And many of the more experienced investors, if they're typical New Zealand shareholders, also won't have widely diversified share portfolios. What a pity!

Not that I blame you for going into Contact. Looking back through old papers, I find one stockbroker who said at the time, "Contact will be a very attractive issue", and an article in a major newspaper saying, "Is Contact a good buy? Yes .. Its shares are expected to do well."

Another broker warned, "There are no guarantees," but went on to recommend that people buy. And buy they did, at $3.10. As I write this column, the price is $2.88.

It's important to put this in perspective. In the period since Contact listed, the NZSE40 capital index of our biggest 40 companies has performed equally poorly. Only the small companies index has risen.

But if you had put your money in the most diversified share investment for small investors - a fund holding worldwide shares - you would have done much better.

For instance, the price of WiNZ, the only worldwide share fund listed on the New Zealand Stock Exchange, has risen almost 20 per cent since mid May 1999.

I'm certainly not saying this or any other worldwide fund will always do better than individual shares. Many shares do brilliantly - which is often what attracts people to them in the first place.

A shining example is Brierley Investments. In the mid 1980s, its price was soaring, and thousands of people made it their only share investment.

I got a sad letter recently from a reader whose family had invested in Brierley "when they were expensive, because we were advised they were a very good investment."

She goes on to say, "My two boys have had to sell a lot of theirs, and of course lost a lot of money."

I'm also not saying that high flyers always fall flat. Some shares go up and, with a few fluctuations, keep on going up.

The trouble is that nobody can pick the winners in advance. If you go with just one share, there's too big a chance it will be a dud. Or, to put it more formally, you are taking unnecessary risk.

Normally, return is related to risk. If you're willing to take on risky investments, there's a pretty good chance you'll receive higher rewards.

But when you invest in just one or a few shares, you take on extra risk. Because investors can easily get rid of that extra risk - by diversifying into a wider range of shares - the market doesn't reward you for taking it.

That's why the people who invest big sums of money for companies and institutions all spread their money over many shares. Small investors are wise to join them.

Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached by E-mail at maryh@journalist.com. Sorry, but she cannot respond directly to readers.

Comments from our readers

No comments yet