Traders work on the floor of the New York Stock Exchange during morning trading on Wednesday.Michael M. Santiago/Getty Images
In his book Upstream, Dan Heath opens with a simple parable. Two friends are walking along a river when they spot a child drowning. They dive in, pull the child to shore and begin CPR. Before they can catch their breath, another child floats past. Then another. One friend keeps wading in, pulling children from the current. The other turns and starts walking briskly upstream.
“Where are you going?” the first friend shouts.
“I’m going to find out who’s throwing kids in the river.”
It’s a striking image – and not just for leaders. It describes, with uncomfortable precision, how most investors respond to market shocks. They wade in. They react to the drowning child in front of them. They rarely ask what happened upstream. Or, more importantly, what’s about to come downstream.
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When the Strait of Hormuz effectively closed in early March, the headlines were swift and predictable. Oil prices spiked. Brent crude surged past US$100 a barrel. Gasoline prices climbed. Markets gyrated. Investors reached for their phones to check their portfolios.
And then, for many, the story ended there.
But the real story – with lasting consequences for investors and consumers alike – was only just beginning. Because what happens next unfolded across fertilizer markets, grain prices, grocery aisles and eventually investment portfolios. The Hormuz closing wasn’t just an energy shock. It was the first step in a cascade that most investors may not see coming because they stopped asking questions too soon.
This tendency has a name in behavioural finance: myopic loss aversion – the human inclination to focus intensely on the immediate, visible threat while remaining blind to the slower-moving consequences accumulating just out of sight. When markets drop sharply, investors fixate on that drop. When gas prices rise, consumers feel it at the pump. What they don’t feel – not yet – is the chain reaction coming downstream.
And despite the agreement to reopen the strait reached late Tuesday (whose fate remains uncertain), consider what the Hormuz closing actually set in motion. Roughly one-third of all globally traded fertilizer travels through that narrow waterway, and within weeks of its closing, prices for urea – a key component of fertilizer – had risen more than 28 per cent. The question shifted rapidly from whether input costs would rise to whether farmers would plant less. And if they plant less, crop yields fall. And when crop yields fall, food prices rise – not immediately, but inevitably, arriving in grocery stores months after the original event has faded from memory. The OECD-FAO estimates that a single year of synthetic fertilizer disruption could push the global food price index up by 6 per cent by 2028.
The stock market has a history of missing the shock in plain sight
Markets are extraordinarily good at processing the obvious. It is the second- and third-order consequences that tend to arrive as surprises. History offers no shortage of examples. Kodak invented the digital camera in 1975 and, focused on protecting its profitable film business, failed to pursue it. The immediate logic was sound. But the downstream consequence of not developing that market was bankruptcy in 2012.
For everyday investors, the practical implication is that the shock you see today is rarely the whole story. When a geopolitical event drives oil higher, the obvious trade – energy stocks – gets made almost instantly. What is less obvious is how that same event ripples into agricultural commodities, freight costs, consumer discretionary spending, and eventually corporate earnings in sectors that appear entirely unrelated to the original disruption.
This is not an argument for panic or wholesale portfolio repositioning every time a shipping lane closes or a central bank meets. It is, rather, an argument for asking one more question than feels comfortable. Not just “what does this mean for energy prices?” but “what do rising energy costs mean for fertilizer costs,” and “what does that mean for food prices six months from now?,” and “what does persistent food inflation mean for consumer confidence and retail earnings?” Each additional question reveals a layer of consequence that the market may not have fully priced in.
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Practically, investors can build this kind of thinking into their process in three ways. When a major macro event occurs, resist the temptation to react immediately to the obvious shock; the second- and third-order effects will begin surfacing in commodity markets, shipping data and supply chain reports in the weeks that follow. Stress-test portfolios not just against the obvious risks but against the downstream consequences of those risks; a portfolio well-positioned for an oil spike may be poorly positioned for the food inflation that follows. And hold some financial slack in cash or low-volatility assets. When the cascade arrives, the investor with flexibility can respond thoughtfully. The one already fully invested cannot.
Mr. Heath’s parable ends with one friend still waist-deep in the river, exhausted, pulling children from the current one by one. The other has already walked upstream to address the source. In investing, the equivalent of walking upstream is asking, calmly and deliberately, what comes next – and then what comes after that. Markets reward the patient and the curious far more reliably than the reactive.
Sam Sivarajan is a speaker, independent consultant and author of three books on investing and decision-making. He writes two free Substack publications on decision-making and the good life: theuncertaintyedge.com and thegoodhumanpractice.com