Stephen Mauzy, CFA

The Hidden Risk You Haven't Considered

The recent Chinese travails of Australian mining giant Rio Tinto (NYSE: RTP  ) underscore a serious investment risk that many newbie investors tend to ignore.

Sure, financial risk grabs the headlines -- as well it should, when vertigo-inducing leverage levels can sink a company, not to mention an economy, faster than a battleship could sink a jetski. But political risk is nearly as widespread, and no less dangerous.

We're all too familiar with Venezuela's Hugo Chavez's covetous ways, which have left American oil giants ExxonMobil (NYSE: XOM  ) and ConocoPhillips (NYSE: COP  ) seeking billions of dollars in restitution in various world courts. If you have a longer memory, you'll recall Royal Dutch Shell (NYSE: RDS-A  ) ceding control of the $22 billion Russian Sakhalin-2 project to state gas monopoly Gazprom back in 2006, after months of political pressure.

Political risk isn't the sole domain of emerging economies, totalitarian regimes, or banana republics; it's a very real danger in first-world economies as well. The European Union has already shaken down Microsoft (Nasdaq: MSFT  ) for roughly $2 billion in antitrust charges related to its Internet Explorer browser. What's more, there are rumblings the EU is probing similar antitrust cases related to Mr. Softy's Word and Excel programs.

A billion here and a billion there, and soon we're talking about real damage to a company's bottom line. This past Tuesday, Intel (Nasdaq: INTC  ) , the world's biggest chipmaker, booked its first loss in more than 20 years, thanks to a $1.45 billion charge related to an EU antitrust fine. In May, the EU fined Intel for allegedly using illegal rebates to thwart competitors, most notably Advanced Micro Devices (NYSE: AMD  ) . Intel has vowed to appeal, but for now, the financial damage has been done.

Investors could reason that political risk is simply a cost of being big and successful, and doing business abroad. Unfortunately, they'd be wrong. U.S., state, and local governments might be less rapacious than their European and third-world counterparts, but they're not above extracting their own pounds of flesh, if doing so seems politically feasible. Consider the tribulations of the very legitimate, and formerly very profitable, payday lending business. It's now being slowly strangled to death, state by state, with untenable restrictions on interest charges and fees.

Standard financial risk measures should be an essential part of every investor's due diligence. But Fools should never neglect the very real, but difficult-to-quantify, financial risk posed by politicians and bureaucrats, either.

Fool contributor Stephen Mauzy, CFA does not hold positions in any of the stocks mentioned above. He's the author of the upcoming book, The Wealth Portfolio, available this fall from Prentice Hall. Intel and Microsoft are Motley Fool Inside Value recommendations. The Fool's disclosure policy regulates all Fool commentaries.


Read/Post Comments (5) | Recommend This Article (16)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 20, 2009, at 5:01 PM, dgmennie wrote:

    FROM THIS ARTICLE: "Consider the tribulations of the very legitimate, and formerly very profitable, payday lending business. It's now being slowly strangled to death, state by state, with untenable restrictions on interest charges and fees."

    There are no companies making so-called 'payday loans' that deserve compassion from anyone. These predatory beasts have earned every regulation on the books and then some. You want to run a loanshark business? Then take the contempt that comes with it. When your only real competition is the mob, a 'legitimate' image has got to be the least of your concerns.

    OK, Stephen Mauzy, CFA - when you next borrow $100,000 at 10% per week vig, please write again and tell us how good it feels. Such a bargain! Maybe you ought to be paying 20%? Debt without 'untenable restrictions on interest charges and fees' is such a kick!

  • Report this Comment On July 20, 2009, at 7:02 PM, dbbfool63 wrote:

    I would have to say it's the companies that are not considering any risk.

    The hidden risk to the investor is being lied to by the companies and using the media to make us look like the fools.

    Another thing, how much is enough when it comes to the greed. These so called payday loan companies that "dgmennie" spoke about are not even good enough to be called loan sharks.

    The mob looks like a great government giving stimulus checks compared to these so called "payday loans".

    I would deal with the Mob or a Loan Shark any day before I would even walk in to a "Payday Loans" business.

    I feel the same about AG Edwards and any others who entice people to give up a huge amount of their money owed to them but being paid out in payments from a Litigation.

    You also have the Law Firms taking 35% to 40% of an individuals back pay money that has to appeal for Disability. It's bad enough that Disability is as low as it is, especially when they deduct around $96 a month for Medicare and that don't cover Prescriptions unless you want to pay more for a prescription plan, it don't cover dental and every year you have to pay a deductible of around $135 before Medicare starts paying 80/20.

    God Help Us!!!!!!!

  • Report this Comment On July 20, 2009, at 8:39 PM, solarfool314 wrote:

    If I had the stomach for it I wouldn't bother investing, I would start a paycheck loan shop. 10 % /weeks interest compounded for 52 weeks would become 14,200% annual interest.

    The industry deserves every regulation they end up with. It earned the regulation along with all the interest

    they collected.

  • Report this Comment On July 21, 2009, at 12:25 PM, AJ30 wrote:

    If your kid is arrested, and you need $1000.00 for bail money, its a payday loan or the kid has a chance of getting raped in the "cooler", where do you go? These guys came in to drive out, or at least cut back on the Mob juice racket and it has helped, but its like anythiong else in a "free society", some idiots screw it up. It also is highly regulated and above board in most cases.

  • Report this Comment On July 21, 2009, at 4:09 PM, name7865 wrote:

    Since when is breaking the law, and getting fined accordingly, "political risk"?

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