Mark Twain was a brilliant author and creator of aphorisms. "Mark Twain" was also the pen name for Samuel Clemens, a man whose financial skills were as bad as his writing skills were good.
Twain got a place in Michael Batnick’s book, “Big Mistakes: The Best Investors and Their Worst Investments,” mainly because the humorist did not recognize one of the biggest mistakes among investors: failing to cut your losses. Twain certainly would not be on anyone’s list of gurus, but he does make the list here as someone to learn from, in a negative sense.
As Batnick pointed out, making up for losses requires more than just a simple reversal. Consider these facts:
- If you lose 20%, you need a 25% gain to break even.
- If you lose 80%, you need a 400% gain to get your money back.
Hedge fund manager David Einhorn (Trades, Portfolio), quoted by Batnick, said, “What do you call a stock that's down 90%? A stock that was down 80% and then got cut in half.”
After trying and failing to make money in gold mining, both by hand and with stocks, Twain wrote, “A mine is a hole in the ground with a liar standing next to it.”
Twain loved inventors and new ideas. For example, he paid $35 a week to the man behind a company that promised to improve steam engines, a promise that turned out to be hot air. Twain observed, “He visited me every few days to report progress and I early noticed by his breath and gait that he was spending 36 dollars a week on whisky, and I could never figure out where he got the other dollar.”
In Batnick’s words, “These experiences led him to not only errors of commission but errors of omission, which perhaps burned an even deeper hole of resentment into his soul.” He lost $42,000 on an engraving process that promised to revolutionize the printing of images, but failed. Around the same time, he turned down an offer to invest in Alexander Graham Bell’s telephone.
A few years later, he met a clerk who had invested his small savings with Bell and became very wealthy. Twain griped, “It is strange the way the ignorant and inexperienced so often and so undeservedly succeed when the informed and the experienced fail.”
Batnick added:
“If this strikes you as sour grapes, that's exactly what this is. Mark Twain may have had experience with investing, but it was only with a multitude of failed investments. And to say he was informed would have taken giant liberties with the English language.”
One of Twain’s biggest failures was in the publishing house he started with Charles Webster, his niece’s husband and his business manager. It got off to a great start by publishing the memoirs of Ulysses S. Grant, the former president and Civil War general, breaking records by selling 600,000 copies. Yet, it was not a great success for the publishing company because Twain had made a deal that was far too generous.
Another of Twain’s deals was a long-term financial disaster. He committed to pay James Paige $7,000 dollars per year until Paige’s newly patented typesetter turned a profit. Looking back on the relationship, Twain wrote, “He could persuade a fish to come out and take a walk with him. When he is present I always believe him: I can't help it. When he is gone away all the belief evaporates. He is a most daring and majestic liar.”
Reflecting on that experience, Batnick wrote:
“No matter how many times Twain told himself that he was done with Paige and his excuses, he just couldn't look in the mirror and admit he was wrong. Imagine pouring everything you have, financially, mentally and emotionally, into an investment and admitting defeat. It is excruciating. Few things are harder to do in life and especially in investing than to admit you were wrong.”
Eventually a friend and successful investor, Henry “Hell Hound” Rogers, took control of the company and got it a test at the Chicago Herald, where it failed. Rogers was quick to cut his losses, which meant Twain had to get out as well, but he later reported he felt as connected to the machine as to a person. Twain’s loss is thought to have been about $5 million in today’s dollars. Webster & Co. also failed in 1894.
In the wake of these events, some newspaper began attacking him. In response, Twain composed these famous words, “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”
By this time, Twain was deeply in debt, yet opted for the honorable course. And so at age 59, he began travelling the world on a standup comedy tour to repay his 101 creditors. That he did, by travelling through the U.S., then carrying on to Australia, New Zealand, India, South Africa and Europe.
As Batnick pointed out, “Twain erased his debts, but he never lost his speculative gene. He said to his friend Rogers, who made him a great deal of money in the stock market, 'Don't leave me out; I want to be in, with the other capitalists.'”
In addition, Batnick encouraged his readers to acknowledge investing risks and take losses when they are relatively small. He also wrote that investors can avoid catastrophic losses by deciding how much they are willing to lose before they invest. With a sell target, decisions should be driven by logic and not emotion.
And perhaps Twain did learn that lesson eventually. He put $16,000 into the American Mechanical Cashier Co. and walked away after it produced no results in eight months.
Finally, here are some more of Twain’s famous aphorisms, which as we now know arose out of deep, bitter experience:
“There are two times in a man's life when he should not speculate: when he can't afford it, and when he can.”
“A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain.”
“That would have been foresight, whereas hindsight is my specialty.”
“I was seldom able to see an opportunity until it had ceased to be one.”
Read more here:
- Ă‚ Big Mistakes: Jesse Livermore
- Big Mistakes: Even the Dean of Wall Street Made Them
- Christopher Browne: Making the Case for Value Investing
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