Beware stealth investment risks

By Al and Mark Rosen | March 24, 2017 | Last updated on September 21, 2023
3 min read

Since Donald Trump won the U.S. election, we’ve fielded many calls from our advisor clients over how his various musings might impact different stocks. But we’ve only heard the occasional concern about other threats that, while farther down the road, we know for sure are coming.

Like the frog that slowly boils in water because it doesn’t recognize an incremental rise in temperature, our human brains are ill-equipped to process gradually warming risks.

Harvard psychologist Dan Gilbert notes that the human brain has evolved to address immediate dangers to our well-being. This has left us vulnerable to other risks. Gilbert believes insidious threats have four attributes: they are longer term; avoid the prospect of moral outrage; are gradual in movement; and lack a human face.

Stealth investment risks tick all these boxes.

Stealth risks, in many forms

Take the example of electric cars and their impact on certain industries or stocks. The advancement of e-cars has been slow and sputtering. There is nothing morally outrageous about them to incite people. The eventual impact is farther down the road. Lastly, it’s a slow technological evolution that, while advanced by people, has no obvious human instigator.

One stock that has its future firmly tied to e-cars is convenience store operator Alimentation Couche-Tard. Of the company’s corporate-owned locations, 87% sell fuel. Since electric cars have little need for gas stations specifically, what will that mean for the company’s future sales? When viewed with a wide lens, this seems like a formidable risk. Yet, it’s not the type of danger that normally sets off warning bells for investors.

A similar situation exists for package carriers like UPS and FedEx. With the continued advancement of online shopping, some large retailers are looking to carry out delivery logistics themselves. Amazon, for instance, is investing US$1.5 billion to build an air hub on 900 acres of land at the Cincinnati/Northern Kentucky airport. Amazon is aiming to have 40 planes in service within the next few years, with 16 already flying. The company is also expanding its ocean freight and road transportation investments.

The thought is that Amazon might develop shipping expertise beyond its own needs, with the ability to service third-party customers and compete with freight carriers. Just like Amazon built its server business for its own needs first, the company has acknowledged that its web services division will eventually outgrow retail in terms of revenue. Scale is one of the defining factors for success in the express package business, and Amazon has a proven history of building scale.

These are not imminent concerns for investors in Couche-Tard, UPS and FedEx. Amazon only represents around 3% of the total volume of the largest freight carriers. Likewise, electric-car market penetration is in the low single digits. But advisors could be blindsided if they ignore these risks or fail to track them over the longer term.

Forward-looking company plan is key

Amid these future risks, evaluate companies’ forward-looking plans. Are they taking steps to adapt and innovate?

Many seemingly steady industries undergo massive change without experiencing disruptive financial pain. The telco industry is a prime example, where Canada’s largest providers have adapted well to the wireless and cable choices that have usurped wireline home phones, and to the erosion of cable TV by IPTV and online providers.

Couche-Tard is also trying to keep abreast of change. It has started installing charging stations in Norway, which has the highest e-car penetration in the world. The company also engages top consultants about the expected roll-out and impact of electric, hydrogen and hybrid cars. The charging station investment will be significant over the next two decades, but should be financially manageable as the rollout impacts different countries and states with varying degrees of urgency.

Slow-moving, stealth risks are arguably more dangerous than immediate risks because they happen when everyone’s attention is diverted by more imminent concerns. It’s whether companies identify these risks, and how they plan for change, that should be most important to advisors, and the largest factor for determining longer-term success.

Al and Mark Rosen

Al and Mark Rosen run Accountability Research Corp., providing independent equity research to investment advisors across Canada. Dr. Al Rosen is FCA, FCMA, FCPA, CFE, CIP, and Mark Rosen is MBA, CFA, CFE.