It’s probably too much to ask of retail investors that they factor in one-off events to their risk calculations, though surely the point is that however diligent corporations (and investors) are in terms of risk management, they can still be overtaken by events. But what if, say, you were an investor in ‘Big Tobacco’ prior to the release of research by the US Surgeon General in 1964 - the first federal government report linking smoking and specific disease categories. Now it’s generally assumed that any warnings on the health risks posed by smoking would probably have been anecdotal prior to that year. But several influential clinical surveys had been carried out previously, most notably a control study published in the British Medical Journal a decade earlier by British physicians Richard Doll and Bradford Hill. So, it would be fair to say that the health risks were known, if not widely disseminated.
Health risks aside, if you were a shareholder in the tobacco companies, should you have taken account of the earlier clinical studies? Well, 25 years after the Surgeon General’s report, major tobacco companies in the US signed a Master Settlement Agreement worth $206bn in settlement of Medicaid lawsuits against the tobacco industry. Many campaigners claim that the various fines levied on 'Big Tobacco' don’t adequately reflect the wider societal health costs, but from an investment perspective, that still looks like a pretty big number. True, many would counter that tobacco stocks have proved resilient in the face of the puritan onslaught; British American Tobacco (BATS), for instance, has delivered an average total return (dividends reinvested) of 12.2 per cent annually over the past 10 years. But the fines and additional costs levied on the tobacco companies are material to the investment case.