Nvidia has been at the centre of the AI boom as the maker of the chips that power it. It has grown at an extraordinary pace in recent years and is now one of the largest companies in the world. It is closely scrutinised by investors and analysts alike, who pore over every chip launch, and earnings forecast.

Yet over the past few days, its share price has fallen dramatically, for reasons unrelated to business fundamentals. Rather, CEO and co-founder Jensen Huang has admitted to an affair. The relationship is under further scrutiny due to reports that the woman involved has links to Chinese intelligence (which China denies). Whilst Huang remains in post, the board has launched an independent investigation.

For investors, this is an example of “key person risk”. The uncertainty surrounding such an influential leader has been enough to unsettle investors.

This may well prove to be short-term volatility, and the share price could recover as the facts become clearer and there is more certainty on the outlook. But it’s a good reminder of why picking winners is so difficult. A CEO’s private life isn’t in any financial model. The best-resourced fund managers in the world, with direct access to management of the company and a team of analysts, arguably couldn’t have predicted a CEO affair.

Nvidia is far from the only example of an unexpected event derailing a company’s share price:

• Volkswagen: In 2015, Volkswagen was caught using software that cheated emissions tests leading to years of class-action litigation and fines. Its shares lost around a third of their value in two days.
• Boeing: The 737 MAX crashes, and later a door panel blowing out mid-flight, badly damaged its reputation and its share price.
• Silicon Valley Bank: In 2023, a run on deposits brought down the bank in under 48 hours. Its shares fell 60% in a single day before regulators closed it. It ranks as the second-largest bank failure in US history
• BP: An explosion on the Deepwater Horizon rig caused the largest marine oil spill in US history. BP’s share price roughly halved within weeks.

None of these events were predictable by investors. They weren’t hidden in the accounts or flagged in an analyst report.

Companies and markets will always surprise us. Leadership changes, litigation, regulation, geopolitics and just plain old human behaviour, can all change a company’s prospects overnight. Nobody knows in advance which surprises are coming, what the effect on the share price might be, or how long the impacts might last.

This is one of the many reasons we diversify, don’t build portfolios around a handful of individual companies, or try to predict the next “big thing.”  Diversification means no single scandal or surprise should derail your financial future. You still own the innovators and the success stories, without needing to know in advance which ones they’ll be, or when something might go wrong.