In 2008, three men - Warren Buffett, Guy Spier and Mohnish Pabrai - sat down to lunch at a New York steakhouse, Smith and Wollensky. The bill that day was $650,100 - which was what Spier and Pabrai had bid in a charity auction to have lunch with Buffett.
Pabrai came to the United States in 1983 to study computer science. He worked in a number of tech companies before setting up his own company - which he sold at the height of the tech bubble in 2000. It was when he turned 30 that he first discovered Buffett. Pabrai instantly related to Buffett's investment style and his life values. Spier is a well-known investor and author who also closely follows Buffet's investment principles.
During that lunch, Spier and Pabrai were enthralled by Buffett's every word. Buffett's beliefs, his systems and his philosophies were all discussed in depth by the trio.
Pabrai has evolved Buffett's teachings and put his own twist on his theories and values. At the core of Pabrai's framework is the investment theory: "Heads I win, tails I don't lose much". In other words, an investment opportunity must have infinite upside and very little downside. This mantra is a by-product of the 'margin of safety' theory. This is a concept used by stock pickers which equates the enterprise value of a company to the price on the stock market.
Most investors don't have the time or interest to pick individual stocks. These days, it makes more practical sense to buy funds and rely on a fund manager or an index to give us that exposure to the stock market.
So what is an average investor's margin of safety? What factor ensures that "tails, I don't lose much"? It doesn't involve a checklist, talking to CEOs or spreadsheets - it's way less glamorous than that. Time is an investor's margin of safety. We know that the longer we hold equities, the higher probability of a great outcome.
US investment management firm American Century Investments examined the returns on the S&P 500 index between 1926 and 2017. It performed a study looking at the percentage of positive annual returns versus negative returns over a one-, five-, 10- and 15-year period. This period of time is useful as we see a number of boom-bust cycles and bubbles including 1929, 2000 and 2008. If investors held equities for one year during that period, they would have experienced negative returns for 26pc of the time. For five years, they would have seen negative returns for 14pc of the time and with 10 years there are negative outcomes 6pc of the time.
Finally, if an investor were to hold equities on the S&P index for a 15-year period, there were no periods of that time frame which showed any losses. This last one is intriguing - if an investor held the 500 largest US companies for any 15-year period since 1926, there are no scenarios where the investor would have lost capital.
The arguments against using this study are obvious: this is only one stock market and in one country - so it doesn't follow that all equity markets follow this pattern. Similarly, it is a historic study and cannot be relied on to predict the future. However, the trend is undeniable: the longer you hold equities, the greater probability of a good outcome.
All investment bears risk. However, when you do flip the coin, with the asset of time on your side, heads you will win, tails you won't lose much.
Will Sparks is investment manager at Quilter Cheviot (quiltercheviot.com/ie/private-client/)