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Mighty River Power a mighty flop

The New Zealand government’s public listing of state-owned energy company Mighty River Power (ASX: MYT) was billed as the hottest ticket in town — a company that every Kiwi should own and that many Australians would want a slice of.

The listing, many would now argue, has been a mighty flop. The energy producer and retailer has dropped 11.4% since its opening high of $2.17 on May 10. The decline is 3.4% more than the wider drop of the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the same period of 7.96%.

The IPO was marketed heavily in New Zealand to first-time investors, many of whom will now be sitting on losses from their first foray into investing. However it will serve as a valuable lesson for many and reinforces three of the most timeless investing principles.

Keeping emotions in check

The S&P/ASX 200 Index surged 10% in the first five months this year and for a while it seemed there was no stopping it. Many investors not in the market and scared of missing the party or enticed by the potential of a large dividend, bought into Mighty River assuming it would be a one-way ticket to riches.

There was a lot of hype around the listing spurred by a large advertising campaign and extensive media coverage in New Zealand which pushed pre-registrations for the shares to 440,000. When hype reigns it’s important to keep a cool head and take a step back to ask: “But is this a good deal?”. It is always vital to keep your emotions in check and judge the company on its merits.

Do the homework

Yes, homework is boring, but some simple research on the company and industry can be very rewarding. In this article written at the time, I looked at a basic comparison to similar energy companies, including Origin Energy (ASX: ORG) and AGL Energy (ASX: AGK), as well as some of the risk factors facing Mighty River.

By comparison, Mighty River came out looking expensive with limited growth prospects and potential risks to its future earnings, even with the strong rise of the wider market at the time.

Plan to hold long-term

Energy companies often do very well over the long term, growing revenues with price increases and gradual increases in demand. Having a long term focus helps to keep emotions of fear and greed at bay when the market has sudden or unexpected movements, offering opportunities to pick up more shares at a bargain price.

Foolish takeaway

Very few investors get it right all the time. Mistakes and unforeseen events are to be expected. However having a set of simple rules in place will help to increase your chances of finding great companies at great prices and will make you a better investor.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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