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How unintended consequences can affect investment returns

There is a very interesting concept surrounding unintended consequences. I’m sure many readers will have already heard of this.

One of the best examples I have heard is when 9/11 happened that understandably scared a lot of Americans from taking air travel. Why fly when there’s a risk you could die from the plane being taken over by terrorists?

But, Americans still wanted to travel around the country. There was a large drop in flights taken and a big increase in car miles travelled.

Of course, the fact is that air travel is safer than car travel. The amount of car-related deaths greatly increased in the year(s) straight after 9/11. More people likely died trying to avoid air travel than from the actual 9/11 attack.

Some commentators are also suggesting that if the Royal Commission introduces laws that are too tough it could cause the housing market to suffer, despite the intention being to avoid boom and bust cycles. This wouldn’t be good for Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB).

Unintended consequences also occur when investors see the market fall and sell their shares to protect their capital. Of course, this is the ‘best’ way of permanently destroying capital because the market will probably go back up in again in the next day, week or month.

What inspired me to write about this article was a newsletter written by Rural Funds Group’s (ASX: RFF) manager, Rural Funds Management Ltd. In the newsletter it discussed how atmospheric CO2 concentration has increased by 44% since the early 1800’s.

This isn’t a climate change point. In a 2016 report published by a team of scientists, the results of studies of long-term satellite surveillance and ten global ecosystem models were reported. The study found there is a ‘persistent and widespread increase’ of growing season leaf area index over 25% to 50% of global vegetated area.

This supported the idea tested in growing experiments – plants that were supplied with additional CO2 showed that US cotton yields increased by 60%, Australian studies showed wheat yields increased by 26% and Italian studies increased potato yields by 36% to 50%. I thought that was a very interesting side-effect. Perhaps this is going to assist agriculture stocks over time?

Foolish takeaway

I think considering unintended consequences is fairly important for investors, particularly the notion of selling to protect against losses that may end up causing losses because you miss out on the subsequent gains.

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Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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