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6 Major Types Of Investment Risks: Part 5

I have talked about the importance of looking out for investment risks, and also wrote about how to incorporate a stock’s risks in a properly structured investment thesis.

Through a short series of articles, I would like to list six major types of investment risks, and each major type shall be elaborated on within an article. The six types are: (i) Management; (ii) Industry and Competitive Moat; (iii) Political; (iv) Economic; (v) Social; and (vi) Legal/Regulatory.

In previous articles, I had discussed Management, Industry and Competitive Moat, Political and Economic risks. This article will discuss social risks and how this may impact a company, industry or country.

Major Social Issues

If major social issues are being debated in Parliament (i.e. the Government) or the media, investors should know about them as it can have a significant impact on their investment.

One example might be the persecution of minority races which may cause social unrest, which in turn may affect consumer demand and keep customers away from shops (due to potential violence). Another social issue is the old one-child policy in China which was recently abolished and relaxed – this would have implications for companies selling products for babies and young children as more couples may decide to have a second child.

History Of Civil Unrest

It should be immediately obvious to an investor that a country with a history of political or civil strife would make for a poor investment climate. The investor should study the country’s history with regards to social unrest to assess if the economic and political climates are suitable for long-term investment. Some countries such as Syria, Libya and Myanmar had undergone bouts of civil unrest in recent times, and companies which are invested there or have operations in such countries would be severely impacted.

Public’s Attitude Towards Equity Investing

Take note of the general sentiment of the public towards equity investing. If the mood is overly optimistic, investors may wish to step back and re-evaluate their investments to ensure they still have a margin of safety.

Role Of Social Media

The question to ask here is whether social media plays a major role in the dissemination of information and news. If yes, then the circulation of fake news or rumours may be more prevalent and may result in higher volatility in listed securities in that jurisdiction. The investor has to make sure that he has his facts right to take advantage of buying opportunities created by rumour-mongers or fake news websites.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.