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Home / Business

Damien Grant: Vultures or carrion?

By Damien Grant
Herald on Sunday·
27 Apr, 2013 05:30 PM2 mins to read

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Only predators and vultures do well by chasing the herd. Photo / Thinkstock

Only predators and vultures do well by chasing the herd. Photo / Thinkstock

Opinion

I could not tell you the difference between a caterpillar and a kilowatt and neither could the parade of pontificating pundits advising on the Mighty River float.

But I do know this: only predators and vultures do well by chasing the herd.

An important element of economics is the concept of search costs.

Every time you make an economic decision you will be aware that there is a better deal elsewhere, but if the transaction is small the time invested in finding that better deal is not worth it.

If you are buying a house you will invest a lot of time.

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The impact of making a bad decision is high.

If you are buying a chocolate bar it is not worth the time and effort to find the best and cheapest one in the city.

We use a mental shortcut that economists call heuristics: we consider the information in our heads and if we think that the cost of getting more information is greater than the savings to be made we rely on what we already know.

Investing in the sharemarket works on the same principle. The slick advertising campaign, the expert commentators and the media coverage means you know a lot more about this company than almost any other on the stock market.

So, when it comes to investing you are much more likely to invest in this than in any of the 167 other NZX opportunities available.

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This is why many people will invest in the Mighty River float.

I have no idea if they will make or lose money but I know this: there are better opportunities in the sharemarket.

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If you want to invest in one, take the time to do your own research, away from the rest of the herd.

It is possible that the Norman-led invasion of the electricity industry will scare the herd away from the float, creating arbitrage opportunity for the canny investor.

The question is not do you feel lucky, but will you be a predator, a vulture or, far more likely, carrion?

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