Sure, we’ve identified a “Dirty Dozen” investing risks. Actually, at 13 it’s a Baker’s Dozen. But is that is all of them? Not by a long shot! Giving a name to everything that can possibly go wrong is actually good business. Corporations know that if they warn potential investors (in their Prospectus before they go public and then regularly in their annual report) of all the bad things that may happen, and one or more of these events actually occurs, the corporation will not be liable to investors who lose money. The point is that they disclosed all of the risks, investors were informed of them, and they chose to invest anyway. The more risks a corporation can identify the more immune it is from being sued.
An interesting exploration is to look at the SEC filing for the annual report (called the 10-K in SEC speak) of any publicly-held corporation. In the 10-K, search for and read the section called “Risk Factors”. There may be dozens of risks identified. Indeed, in 2010 the SEC advised corporations to improve their disclosures about how climate change would impact their businesses. Here are a few of the additional risks that didn’t make the Dirty Dozen:
Agency risk is the risk that the executives of the corporation, hired by the Board of Directors to act in the interests of the shareholders, will instead spend the corporation’s money and resources in a way that mostly benefits themselves.
Climate risk is the risk that a change in normal weather patterns may negatively impact the business. Imagine a corporation whose main factory gets washed away by a thousand-year flood.
Currency risk is the risk that between the time when you convert your US dollars into another currency to stock in a foreign corporation and the time when you sell the stock and convert your money back to US dollars, the US dollar will have fallen in value against that currency. This is part of Country risk.
Event risk is the risk that a significant event, such as a major terrorist attack, will deal a significant blow to a corporation’s ability to conduct its business. Sometimes, the timing of these events is known. An example is when we reached the year 2000, or Y2K. There was a widespread fear that older computer systems around the world, which stored only the last two digits of the year, would crash and cause widespread disruptions at those two digits went from 99 to 00.
Headline risk is the risk that a sensational story headline strikes fear into the hearts of investors, causing them to panic and sell their investments.
Industry concentration risk You love Google. Apple, too. Let’s not forget Facebook. Before you know it, your portfolio is like an All-Star line-up. The only problem is, all you have is technology stocks. If something bad was to happen, like our being hit by an electro-magnetic pulse that fried all of our electronics, the concentration of your investments would leave you very vulnerable.
Manager risk The risk that when you invest in an actively-managed mutual fund (whereby a trained manager chooses the corporations to invest in) the manager picks corporations that don’t do well.
Non-diversification risk The risk that you have placed too much of your money into the stock of too few corporations or in not enough different asset classes. This risk identifies the same issue as Industry concentration risk.