STREET DOGS

Two stories every investor should know. The first was told to Howard Marks by his father about a gambler who bet everything on a race with only one horse. How could he lose? But halfway around the track, the horse jumped over the fence and ran away.

The other story is about André-François Raffray as told by Bart Holland in his book “What Are the Chances?”

Raffray struck a deal with a 90-year-old widow, Jeanne Calment, who wanted to continue living in her apartment but, with no source of income, was finding it hard to do so.

Calment agreed to sell her apartment to Raffray for a monthly payment of Ff2,500. The payments would stop on her death, at which point Raffray could move in. The deal seemed mutually advantageous. Calment would have an ongoing source of cash to live on in her last years, and the lawyer would get an apartment cheaply, with no money down, in return for accepting the uncertainty as to when he would take possession.

The 90-year-old French woman had already exceeded the French life expectancy by more than 10 years. But 10 years later she celebrated her 100th birthday, and 10 years after that, as Raffray turned 67, she turned 110. It took another decade for the attorney’s long wait to come to an end.

Unfortunately, it wasn’t the end he expected. In 1995, after making payments for more than 30 years, Raffray died of cancer. While Calment lived on to 122!

As Holland says, Raffray’s expectation that it was a good deal was a reasonable one, based on typical human life spans. His mistake was in taking the statistics and applying them to an individual.

The lesson for investors: never bet the farm on a single investment (horse or old lady) no matter how certain you feel about the outcome.