If you get into anybody far enough, you've got yourself a partner.

—Mark Twain

When dollars are transferred from our pocket to an investment, the expectation is that they'll be worth more in the future. But when the results disappoint, we're loath to admit we were wrong. Our natural tendency is to hold onto the losers longer than we should, because in doing so, we are deferring defeat and keeping our ego intact.

The problem with small losses is that it's easy to hold onto them as they morph into big losses. In the world of finance, nothing springs eternal like hope. We'll watch with indifference as a 5% loss becomes a 10% loss, with fear as it cascades to a 20% loss, and with utter terror as it falls any further. At this point, we become paralyzed as adrenaline rushes through the 100 billion nerve cells in our brain. The hypothalamus, our “fight or flight” system, suspends rational thinking.

“I'll get out when I'm even.” Anybody who has ever bought a stock has experienced this poisonous thought floating between their ears. The unfortunate reality about declines is that the math required to make them whole requires extraordinary acts. A 20% loss requires not a 20% gain to break even, but rather a 25% advance. The deeper the hole, the harder it is to climb out; an 80% loss requires a 400% gain to make your money back.

The hedge fund manager David Einhorn has a great line to describe the danger of holding onto losers: “What do you call a stock that's down 90%? A stock that was down 80% and then got cut in half.”¹ In other words, just because a stock fell from $100 to $20, that doesn't mean it can't easily fall to $10.

When our positions go against us, it's easy to hold on, but it's even easier to compound the problem by adding to the position. If you felt good about buying this stock at $100, chances are you'll find it even more attractive at $90. But the problem is so many stocks never come back. In fact, since 1980, 40% of stocks experienced a 70% decline from which they never recovered.² Adding to a losing position has been the downfall of many investors.

Most people know Samuel Clemens by his pen name, Mark Twain. And most people know Mark Twain as a humorist and as an author. But it was Samuel Clemens, the name he went by his whole life, who sunk Mark Twain's fortunes. In Chasing the Last Laugh, author Richard Zacks writes, “Twain was an abysmal investor, an absolute magnet for con men and fool schemes.”³ Peter Krass, author of Ignorance, Confidence, and Filthy Rich Friends, wrote, “The highest paid writer in America had succeeded in losing his entire fortune and the fortune of his coal heiress wife through appalling investments.”⁴

Twain traveled great lengths to get back to even because he never learned the about the law of holes, which says, “If you find yourself in a hole, stop digging.” He poured $170,000 – $5 million in today's dollars – into what he hoped would become a revolutionary machine.

Although his investments delivered him constant stress, they provided the world with some brilliant language:

• “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.”

Ernest Hemingway once said, “All modern American literature comes from one book by Mark Twain called Huckleberry Finn.” Twain began this project in 1876, but it would be nearly a decade until he'd finish it. This book, which he thought would take two months to write, took a back seat to more important things, like his search for riches.

Mark Twain compiled a list of failed investments longer than a pharmacy receipt. He tried his hand at gold mining, both with a shovel and with stock certificates. Jaded by the experience he said, “A mine is a hole in the ground with a liar standing next to it.”

Twain was particularly smitten with inventors. He put money into the New York Vaporizing Co., which was going to improve steam engines, except of course it didn't. Not only did it fail to accomplish its objective, but he provided an endless stream of funds to the inventor, $35 weekly. Twain recalled, “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.”⁵

Twain invested in Plasmon, a milk powder extract, a steam pulley and a start‐up insurance company called the Hartford Accident Insurance Company. He became so fed up with these money‐losing ventures that he wrote to a fellow author, “If your books tell how to exterminate inventors send me nine editions.”

He also lost plenty of money the old‐fashioned way, by buying stocks and selling at the wrong time. One of many examples was the Oregon Transcontinental Railroad, which he purchased at $78 a share and sold at $12. Of this experience, he said, “I don't wish to ever look at a stock report again.”⁶

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 wasted $42,000 on an engraving process called a kaolotype that was supposed to revolutionize illustrations (it didn't), and then decided to pass on Alexander Graham Bell's telephone. A friend of Twain's, General Joseph Roswell Hawley, owned the Hartford Courant newspaper and met with Bell. Hawley invited Twain to come to the Courant office to hear Bell's pitch to potential investors. As Twain described it, Bell “believed there was great fortune in store for it and wanted me to take some stock. I declined. I said I didn't want anything more to do with wildcat speculation. Then he offered the stock to me at twenty‐five. I said I didn't want it at any price.”⁷

When he returned from a European vacation, he saw an old clerk in town who had invested the little money he had with Bell, and became a very wealthy man. Twain came back and said, “It is strange the way the ignorant and inexperienced so often and so undeservedly succeed when the informed and the experienced fail.”⁸ 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.

Twain didn't just invest in others; he had plenty of his own ideas: an elastic strap for holding up pants, a scrapbook with preglued pages, and a portable calendar. Samuel Charles Webster, his niece's husband, once wrote, “He tried to be an Edison as well as a Shakespeare and a few other great men besides.”⁹

Twain gambled when he had very little money, and it didn't end once he acquired a great deal of it. The money he had to speculate on some of the bigger failures came from the success he found at Webster & Company, a publishing house which he started in 1885.

Grant's memoirs was the first deal they made, and it was a massive success, breaking records with 600,000 volumes issued. Grant's family received $400,000, $12 million in today's dollars, because of an overly generous deal.¹⁰ Industry royalty standards were 10% of the cover price, but Twain offered him 70% of net profits, after printing expenses and everything. Despite the lousy business deal with the former president, Webster & Company got off to a very good start. Like most things in his life, this too would end badly and what would grind his company's success, and his life, to a screeching halt, was a loss that Twain refused to take. He kept throwing good money after bad, and it inflicted far more damage than all his other losses combined.

James Paige received a patent on his typesetter in 1874, and he envisioned the 18,000‐piece machine replacing a similar human‐operated apparatus. He met Mark Twain in 1880 and convinced him – although it's likely not much convincing was needed – to invest in what was another horribly crafted contract. Twain was entitled to profits only if he paid for all expenses until the completion of the machine, and later, to make matters worse, he promised to pay Paige $7,000 a year until the machine turned a profit. Twain was blinded by his own hubris; he called Paige “the Shakespeare of mechanical invention.”

As time went on and money went out, Twain said of Paige: “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.”¹¹ Toward the end of the nineteenth century, the country experienced its worst economic depression up until that time. During the panic of 1893, 500 banks failed and 15,000 were sent to the graveyard. Twain and Webster & Company wouldn't be spared.

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. With the help of a friend, Henry “Hell Hound” Rogers, a mega‐rich partner in John Rockefeller's Standard Oil, they took control of the typesetter business from Paige. On life support, Clemens went to look for new investors and found two in Bram Stoker, who would later go on to write Dracula, and the famous actor Henry Irving.¹²

When the typesetter failed at the Chicago Herald, there would be no more chances. Henry Rogers was a serious businessman and, unlike Twain, had no problem cutting his losses. It wasn't as easy for Twain, however, who was traveling in France when he heard of the machine's unraveling. He wrote Rogers an overly morose letter that indicated he felt connected to the machine almost as though it were a person.

On December 21, 1894, the Paige Compositor Manufacturing Company was laid to rest. In the end, only an outsider had the ability to cut Twain's losses. Without Rogers, it's entirely possible that Twain would have taken this bottomless money pit to his grave. The total loss for the typesetter is estimated to be close to $5 million in today's dollars. Twain's compulsion to keep the typesetter afloat drained his financial resources and was a major reason why Webster & Company couldn't survive the depression. Twain wrote, “I am terribly tired of business. I am by nature unfitted for it and I want to get out of it.”

The panic had reduced his stock and bond portfolio from $100,000 to virtually nothing at all. On April 18, 1894, out of options and out of money, Webster & Company declared bankruptcy.

Helen Keller said, “Sometimes it seemed as if he let loose all the artillery of Heaven against an intruding mouse.” So you can imagine how Twain felt when the newspapers started to attack him. His spectacular failings in the market produced a series of brilliantly crafted 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.”A newspaper took this line and replaced “to speculate in stocks” with “for an author to go into business.”He was getting it from all sides. The San Francisco Call wrote “Mark Twain's failure was his own fault and yet he plans to lecture the world about it.” Twain was hypersensitive of public opinion. He once said, “The public is the only critic whose judgment is worth anything at all.”Bombarded with criticism, Twain responded the only way he knew how, with his pen and a canvas:

It has been reported that I sacrificed, for the benefit of the creditors, the property of the publishing whose financial backer I was, and that I am now lecturing for my own benefit. This is an error. I intend the lectures, as well as the property, for the creditors. The law recognizes no mortgage on a man's brain, and a merchant who has given up all he has may take advantage of the rules of insolvency and start free again for himself; but I am not a business man; and honor is a harder master than the law. It cannot compromise for less than a hundred cents on the dollar, and its debts never outlaw.¹³

At the ripe age of 59, he set out to repay his debts to each and every one of his 101 creditors who made a claim in his bankruptcy filings. In order to get out of the hole, he traveled around the globe doing a standup comedy tour.

He went across the United States, to Australia, New Zealand, India, South Africa, and Europe. By 1898, he was out of debt, and more than ready for new financial adventures.

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.”

Risk and reward go together like copy and paste; there cannot be one without the other. But sometimes we receive the rewards and other time we experience only the risk. When risk arrives at our brokerage account, which it inevitably does from time to time, don't bury your head in the sand, acknowledge it. The most important thing when speculating is that you keep your losses manageable. Paper cuts sting, but they heal. Shotgun wounds on the other hand, those are tough to come back from.

The best way to avoid the catastrophic losses is to decide before you invest how much you're willing to lose, either in percentage or dollar terms. This way, your decisions will be driven by logic rather than fear—or some other emotional attachment to a position.

Just a few years removed from his bankruptcy, Twain invested $16,000, with high hopes as always, in the American Mechanical Cashier Company. After eight months with no results, after promise after promise and a feeling of déjà vu, he walked away. Lesson learned.