This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Fat Tails, Fires and Your Investments

NEW YORK ( TheStreet) -- It was a "boys only" weekend in our house, as my son and I enjoyed a day of baseball then headed to the Jersey Shore for more rehab work on our Hurricane Sandy-flooded cottage.

It was also a great opportunity to hit the Chinese buffet restaurant near our destination; the female contingency in our household simply won't go near it. My son and I have been talking about it for years. Of course, that was the day that the unthinkable happened; a fire forced that restaurant to close.

What are the odds of that happening, one in 100,000? It doesn't much matter; low probability events, sometimes referred to as "fat tail" events, happen in life, and they happen in investing. They may not happen to you, but you need to be cognizant of what can go wrong as an investor, even if the probability is extremely low.

In 2002 I took a small position in a small health and beauty products distributor Allou Health & Beauty Care. At the time, the company was a net/net (trading below current asset value), and a profitable one at that, that had been featured in a 2000 Business Week article as an up and comer. In 2002 the company had revenue in excess of $500 million, and the company was expected to hit $1 billion in revenue given the prospects the internet.

Then, the "fat-tail" event occurred. In September of 2002, there was a fire at Allou's Brooklyn warehouse, resulting in millions of dollars in damage. Of course, there was ample insurance to cover the damage, and the company submitted a claim for $101 million. There was just one problem here; the insurance company refused to pay the claim.

As it turned out, the fire was set by an arsonist, orchestrated by executives of the company. When the cause was ruled to be arson, the insurance companies had no responsibility to pay the claim. The efforts of two company executives to bribe a public official with $100,000 to change the cause of the fire to "accident" failed. Allou filed for bankruptcy in 2003, and when the case went to trial, it became apparent that the company was built on a web of lies and deceit.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $94.52 0.94%
FB $117.77 -0.67%
GOOG $693.17 -0.72%
YHOO $35.98 -1.50%
TSLA $233.85 -3.30%


Chart of I:DJI
DOW 17,711.39 -179.77 -1.00%
S&P 500 2,059.52 -21.91 -1.05%
NASDAQ 4,759.9470 -57.6470 -1.20%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs