The Yellowstone Factor: Minimizing Downside Risk

Yellowstone National Park is volcanic in nature, yet not one cone or caldera is visible. In the 1960s, this mystery was finally solved: The entire park -- 2.2 million acres -- is the caldera. It's the largest active supervolcano on Earth. Yellowstone started erupting about 17 million years ago, and it has a cycle of erupting roughly every 600,000 years. The last eruption was 630,000 years ago, so it's about 30,000 years past due on the next big one.

By 1984, Yellowstone's restless magma chamber caused the entire central region of the park -- several dozen square miles -- to be lifted 3 feet higher than it was in 1924. The area subsided by 8 inches in 1985, but it appears to be rising again. Although volcanic eruptions are very hard to predict, telltale signs of a forthcoming eruption are already there. Earthquakes are a precursor to volcanic activity, and there were 1,260 of them in the park in 2002 alone.

When Yellowstone awakens from its slumber, it's unlikely any humans within 700 miles of the park would survive. An area the size of New York State would have ash 67 feet deep. The aftermath probably would be worse, with no sunlight for years throughout the planet and much farmland rendered useless under mountains of ash. Humans have no memory of living through such devastation. (Thanks to Bill Bryson's A Short History of Nearly Everything for the data.)

Outliers

Yellowstone represents just one of the many ugly outlying events that have an extremely low probability of occurring, but that does not mean the odds are zero or that they can be ignored. Even the most seemingly resilient businesses are very fragile temporary creations by their nature, and it would take a lot less than Yellowstone's eruption to wipe them out. The Yellowstone Factor alone implies that there isn't a single business on the planet whose future is assured.

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Mohnish Pabrai is the managing partner of Pabrai Investment Funds, an Illinois-based value-centric group of investment funds. At time of publication, Pabrai held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback at [e-mail]. You can access his Web site at www.pabraifunds.com.

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