Saturday 22 November 2014

Financial literacy

49% of Meridian shares (MELCA NZX) were released to the public by the National Government about a year ago.

The shares were valued at $1.50 each.  However, in an effort to sweeten the deal, the buyer only had to pay $1 per share initially.  In eighteen months (I think) the owners of the shares are obligated to pay the remaining 50 cents.  In the meantime the owners of the shares still receive the full dividends, so these can help offset the remaining 50 cents.

It was a good deal

Many New Zealanders who had never bought shares bought these.  They are now faced with an interesting mathematical question.  Next year they will have to pay the remaining 50 cents on each share they purchased.

There are two choices as far as I can see.

One: Pay the remaining amount out of cash reserves (savings, or whatever)
Two: Sell off existing MELCA shares to the same value as that owing.

But which is the better option? 

I have no idea...  Trying to think this through...

Lets say you own 10,000 shares.  This means you have paid $10,000 so far and you owe $5000.  The share price is currently 1.73.

Option one: If you pay the $5000 out of cash you are getting a 23 cent discount.  Right? (tell me if I'm wrong please!).  You are still only paying $1.50 for shares currently worth $1.73.  As soon as you buy them presumably the price shifts to $2.23 ($1.73 + .50).  In total you have paid $15,000 and the investment is worth $22,300.  So $22300 - $15000 = $7300 Cap gain.  Or a 48.6% increase.

Option two: You sell 2890 shares for $5000 (at the current price).  This leaves you with 7110 shares that are now worth $15855 (at 2.23).  In total you have paid $10,000 for 7110 shares and the investment is worth $15855.  So $15855 - $10000 = $5855 cap gain.  Or a 59% increase.

Option two looks better right.  But, you are actually giving up valuable shares, worth $5000 in real terms.  And, you are giving up the dividend.  And any capital gain.

Two questions: 

1.  I am making a mistake.  Can you see it? (something to do with 49% or 59% gain of what?)

2.  Where is the financial resource that New Zealanders can go to to get the answer?  (Website?) Or is this a case of 'Mum and Dad' investors not fully benefiting from the sale of Meridian because they lack financial literacy?  The political left told us not to buy (a mistake), and the right said to buy,  but then have not provided information (should they?).

Please, someone in the know feel free to enlighten us. I would really appreciate some feedback on what they think.

Financial literacy - a quick critique

Current financial literacy initiatives tend to focus on issues that were a concern of the 90's, like basic consumer skills. I find these very condescending and short sighted.  2014 presents a range of more complex financial thinking that requires a new set of skills.  Someone will say that the poor don't buy shares.  Granted, but neither does the financial literacy of yesteryear attempt to develop wealth - its focus was primarily about meeting immediate needs - not wealth creation.  Basically how to live poor but still pay all the bills.  Not good enough.  

Time to think a bit more strategically

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