My objective in this blog post is to contrast the investing outcomes of an amateur investor like Samuel Clemens (Mark Twain) with the outcomes experienced by a professional investor. One type of investment where most anyone can see this difference is in venture capital, where Twain was quite active over the years even though the word had not yet been created. His performance as a venture capital investor was terrible. Why? Well, as Warren Buffett says, “risk comes from not knowing what you are doing” and Twain was often involved in businesses and investments he knew next to nothing about.
That so many people seem to think business and investing are easy is a bit of a paradox. What is simple is not necessarily easy. To illustrate, seven professional venture capital investors would never say: “Let’s perform a colonoscopy on Fred.” Well, they might if they hated Fred, but that is a special case. And yet seven doctors may say: “Let’s make this venture capital investment” without a professional lead investor also being involved in the business so they can sit in a sidecar. As I wrote in my post last weekend about the professional seed round investor Steve Anderson, it takes years to become a successful venture capital investor. Attending medical, law or pharmacy school and having a high IQ is not enough to make you a successful venture investor. There are many posts on this blog which discuss why success in venture capital requires much more than writing a check so I will not repeat that here.
Are amateur Angel investors much more likely to successfully sit in a “sidecar” when a professional venture investor is involved? Sure. As an example, in the Amazon seed round there were a few wealthy Angels involved, but there were also professionals investors participating in the round like Nick Hanauer and Tom Alberg. It is rare for an amateur Angel investor to get access to high quality seed investment opportunities like Amazon but it is surely a better alternative than investing in a startup along with with two dentists, a hardware store owner, a sociologist and a probate lawyer. How often are seed sound investments successful? I discussed that last weekend. I think the answer depends on how much you swing for the fences. Jason Calacanis said 8 of 10 of his investments are complete zeros in terms of return on capital but I suspect he is swinging harder for the 100X return than many Angels. But many people will say that 4-6 of ten seed round bets will be a total loss.
Andy Rachleff is probably the most negative person I have read on amateur Angel investing. For example, he’s written an article entitled: “Why Angel’s Don’t Make Money… And Advice for People who are Going to Do it Anyway” that I link to in the notes. How many venture investors are out there investing today who are modern day Mark Twain equivalents? It is impossible to know for sure. There is no central database of Angels. Investors at seed stage are not required to register with anyone or report results to any government agencies. Some people, including a few academics, claim to have surveyed Angels on their investing returns to obtain useful data, but this process is like asking fishing enthusiasts about the quality and size of their catch. There are lots of psychological reasons people forget about unfortunate investing results and overly enhance any successes. If someone cites an academic study on the financial returns of Angel investors, look closely at where they obtained their data and how. Self-reported data from Angels obtained as part of a survey is simply not credible. With professional venture investors who have limited partners who must file reports with government agencies, at least there is a statute or regulations requiring that the filings are accurate. The existence of this data for professional venture capitalists allows information providers like PitchBook to produce statistics on venture capital returns that are accurate and therefore useful. In contrast, there is little accurate data on amateur Angel investing returns. What is the average aggregate return of an average amateur Angel investor? The answer is: no one really knows. There are limited partners of professional Micro VCs who know what their financial returns are, but as far as I know no one has revealed those results.
That Mark Twain made loads of different mistakes in his business investments is well documented. Why does someone like Buffett learn from his mistakes and Twain never seemed to do so? Will Rogers pointed to part of the answer when he said: “There are three kinds of men. Some learn by reading. Some learn by observation. The rest of them must pee on the electric fence for themselves.” But the main driver is what Charlie Munger describes here: “Warren and I aren’t prodigies. We can’t play chess blindfolded or be concert pianists. But the results are prodigious, because we have a temperamental advantage that more than compensates for a lack of IQ points.” As the just concluded Berkshire meeting Munger said that some of success is nature and some is nurture, and the precise ratio varies in each case. He believes that having the right judgment and temperament for investing is mostly innate.
How lousy were Twain’s investing results? The biographer Richard Zacks wrote this summary of Twain’s business follies:
“Mark Twain was a great author—but a stupendously incompetent businessman. He lost money on an engraving process, on a magnetic telegraph, on a steam pulley, on the Fredonia Watch Company, on railroad stocks. He once turned down a chance to buy into Bell Telephone even though he had one of the nation’s first residential phones. The author eventually lost so much money that in 1891 he moved the family out of their Hartford home; Twain would sell it after twenty years for about one-sixth the amount he put into it…. [Twain] poured thousands of dollars into backing a protein powder called Plasmon, which he claimed delivered 16 times the nutritional value of steak at a cost of a penny a day; it could ‘end the famine in India.’ Plasmon was the subject of a fraud trial in 1907, in which Twain tried to recoup his $30,000 investment (about $750,000 today). At the trial, Twain said that company president Henry A. Butters should have been paid “$3 a century” and was a ‘stallion in intention, a eunuch in action.’ Twain was asked if this was the first time that he had been swindled. ‘No, I have been swindled out of more money than there is on the planet,’ he told the judge.”
The Fredonia Watch Company sounds like it was part of a Marx brothers movie. The promoters of the watchmaking scam that Twain fell for were professional sellers of patent medicine. Why was Twain such an easy mark? Some people have the idea in their head that the way to get ahead is to get rich quick with one big score. twain may have picked up this attitude from his father who was a land speculator. This approach usually leads to very painful outcomes. Twain admitted more than once that he was a born speculator. His most famous folly was:
“a new invention called the Paige Compositor.The machine was the brainchild of James Paige, a mechanic and inventor whose goal was essentially to transform the printing press (a machine that required a skilled professional to slowly prepare words to be set onto paper) to something more automatic, closer to a typewriter. Something that could print and align words quickly and cheaply.… By the time the compositor was finally completed in 1889, Twain had sunk the equivalent of $3 million in today’s currency. It wasn’t the first time he’d made a bad investment. Twain once threw money towards a project to create a hand grenade that could extinguish fires.”
According to the biographer Peter Krass, Twain was an incurable speculator and at one point stopped working on Huckleberry Finn to devote time to inventing a children’s trivia game. His other inventions included a clamp to prevent infants from kicking the sheets off their beds and a self-adhesive scrapbook.
If good judgement can be derived from bad judgement, Twain should have had plenty of material to learn from. Unfortunately, the lessons did not seen to stick in the case of Twain who repeatedly repeated mistakes. A person like Buffett learns while another person like Twain does not. How is it that someone like Twain can say and write things that are sound and seem full of wisdom and yet ignore that advice in their own decision making? How can his ability to observe human nature be so good and yet his decision making in business be so bad? The failure of someone to heed their own advice is not a new problem since proverbs like: “The cobbler’s children are always the worst-shod” or “Physician heal thyself” are very old.
One theory is that Twain’s painful business experiences made him a better writer. Twain’s business losses were perhaps literature’s gain. Stanford English professor Shelley Fisher Fishkin believes:
“It would be fair to say that he probably would not have necessarily decided to earn his living as a writer unless he had failed as a silver miner. He learned things from all of his experiences and adventures that came in handy when he wrote.”
A secondary objective of this blog post is to remind people of a few of Buffett’s more important ideas. Each Twain quote is paired with a Buffett quote for that reason. Twain often managed to get the advice right in terms of what he said or wrote, but had a hard time following his own instructions.
Before getting to the customary dozen quotes, here’s a Tom Sawyer style story from Alice Schroeder’s Warren Buffett biography Snowball that illustrates how he is similar to Mark Twain’s most famous character in some ways:
“Doing what he called his Tom Sawyer routine, Warren said to Kerlin: ‘This is your chance. We’re going to deal you in.’ We told him that we would go out at four in the morning to some golf course in Virginia, and that he would wear the gas mask in the lake and retrieve the balls, and we’d split the money three ways. “Kerlin said, ‘How do I stay down on the bottom?’ I said, ‘Oh, I’ve got that all worked out. What we will do is, you’ll strip, and you’ll be nude, but you’ll wear my Washington Post newspaper bag, and we’ll put barbell plates in the newspaper bag so that you’ll stay on the bottom.’ “So we got out there at the crack of dawn. Kerlin was stripped, and we were dressed warmly. He was totally nude with a Washington Post newspaper bag on and all these barbell plates, and he started wading into the lake. Of course, he didn’t know if he was stepping on snakes or golf balls or whatever. And then he got down and when he tugged on the rope, we pulled him back up. He said, ‘I can’t see anything.’ We said, ‘Don’t worry about seeing anything, just grope around.’ And he started to go back down. “But before his head went under, this truck came over the rise, carrying the guy that’s going to fill up sand traps in the morning. He saw us and drove up, saying, ‘What are you kids doing?’ Danly and I were thinking fast. ‘We’re conducting an experiment for our high school physics class, sir.’ Kerlin was nodding the whole time. So we had to get him out of the pond. The whole thing blew up on us.”
- Twain: “There are two times in a man’s life when he should not speculate: when he can’t afford it and when he can.” “OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The other are July, January, September, April, November, May, March, June, December, August, and February.” Following the Equator, Pudd’nhead Wilson’s New Calendar.
Buffett: “The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.” “So there’s two types of assets to buy. One is where the asset itself delivers a return to you, such as, you know, rental properties, stocks, a farm. And then there’s assets that you buy where you hope somebody else pays you more later on, but the asset itself doesn’t produce anything. And those are two different games. I regard the second game as speculation.”
- Twain: “Behold the fool saith, ‘Put not all thine eggs in the one basket’ — which is but a manner of saying, ‘Scatter your money and your attention;’ but the wise man saith, ‘Put all your eggs in the one basket and –WATCH THAT BASKET.’” Pudd’nHead Wilson‘s Calender
Buffett: “We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as ‘the possibility of loss or injury.’” “[A] situation requiring wide diversification occurs when an investor who does not understand the economics of specific businesses nevertheless believes it in his interest to be a long-term owner of American industry. By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when “dumb” money acknowledges its limitations, it ceases to be dumb.”
- Twain: “Whenever you find yourself on the side of the majority, it is time to reform (or pause and reflect).” Notebook, 1904
Buffett: “You want to be greedy when others are fearful. You want to be fearful when others are greedy. It’s that simple.”
- Twain: “All my life I have stumbled upon lucky chances of large size, and whenever they were wasted it was because of my own stupidity and carelessness.” Letter to Mr. Rogers
Buffett: “During 2008 I did some dumb things in investments… I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action.”
- Twain: “A man who goes around with a prophecy-gun ought never to get discouraged: if he will keep up his heart and fire at everything he sees, he is bound to hit something by and by.” Autobiography of Mark Twain
Buffett: “I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.” ‘Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” “I don’t read economic forecasts. I don’t read the funny papers.”
- Twain: “Beautiful credit! The foundation of modern society. Who shall say that this is not the golden age of mutual trust, of unlimited reliance upon human promises? That is a peculiar condition of society which enables a whole nation to instantly recognize point and meaning in the familiar newspaper anecdote, which puts into the mouth of a distinguished speculator in lands and mines this remark: ‘I wasn’t worth a cent two years ago, and now I owe two millions of dollars.’” The Gilded Age
Buffett: “When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade — and some relearned in 2008 — any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.”
- Twain: “Money and chips are flung upon the table, and the game seems to consist in the croupier’s reaching for these things with a flexible oar, and raking them home. It appeared to be a rational enough game for him, and if I could have borrowed his oar I would have stayed, but I didn’t see where the entertainment of the others came in. This was because I saw without perceiving, and observed without understanding.” Aix, Paradise of Rheumatics
Buffett: “On my honeymoon I traveled out west. When I visited the casino and saw all these smart well-dressed people participating in a game with the odds against them, it was then that I realized I won’t have a problem getting rich!”
- Twain: “The lottery is a government institution & the poor its best patrons.” Notebook #17, October 1878 – February 1879
Buffett: “I get dozens of letters, almost daily from people who have financial difficulties for one reason or another. And they overwhelmingly come from three sources: One is health problems, people run into unexpected medical bills and it gets them into a tough situation. Second, they get into trouble on credit cards, frequently and a credit card is a temptation to many people. But the third thing I hear about is people who have an addiction to gambling. And they’ve used thousands and thousands or tens of thousands of dollars that the family needs and they just can’t get off the hook and they find themselves in enormous financial trouble, sometimes that interacts with the credit card situation.” “I think that for a state to essentially prey upon its citizens, create more of these addictions, create more of these letters coming in every day, I just think it’s wrong. I think it’s cynical on the part of the state to raise money from people who basically can’t afford it by promising them a dream that is not going to come true.” “There’s nothing getting developed. It’s a transfer of money. I mean, basically, if you take the losses of everybody who participates in gambling, (it’s not gaming, it’s gambling), if you take the losses, it goes three places: it will end up going to the state as taxes, to some degree, that’s not development. It will end up paying part of the operating expenses, but any place you spend money with will pay expenses of that establishment. And it will go to the owners.” “Addictions produce crime. If you have a large group of people that are addicted to drugs, you are going to have more crime. If you have a large group of people that are addicted to gambling, you are going to have more crime. People get into impossible situations when they get into positions like that.” “For every lucky person, there’s hundreds of thousands, you just keep feeding the kitty and in the end, it’s just a big loser for everyone.” “It is certainly clear that a given percentage of people will become addicted and use money they’ve got no business using and that percentage is not a small percentage.” “You’re teaching your citizens something all the time by the actions you take as legislators and as administrators of a state like this [Nebraska]. And essentially they teach you that the state is on the other side of the transaction from you, they’re trying to get you to do something dumb. I think the state ought to be trying to do something for its citizens, not do something to its citizens.”
- Twain: “The mind exercises a powerful influence over the body. From the beginning of time, the sorcerer, the interpreter of dreams, the fortune-teller, the charlatan, the quack, the wild medicine-man, the educated physician, the mesmerist, and the hypnotist have made use of the client’s imagination to help them in their work. They have all recognized the potency and availability of that force.” Christian Science
Buffett: “Decades ago, Ben Graham pinpointed the blame for investment failure, using a quote from Shakespeare: ‘The fault, dear Brutus, is not in our stars, but in ourselves.’”
- Twain: “Being rich ain’t what it’s cracked up to be. It’s just worry and worry, and sweat and sweat, and a-wishing you was dead all the time.” The Adventures of Tom Sawyer
Buffett: “Success is getting what you want. Happiness is wanting what you get.”
- Twain: “It isn’t the sum you get, it’s how much you can buy with it, that’s the important thing; and it’s that that tells whether your wages are high in fact or only high in name.” A Connecticut Yankee in King Arthur’s Court
Buffett: “The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a five per cent passbook account whether she pays 100 per cent income tax on her interest income during a period of zero inflation or pays no income taxes during years of five per cent inflation. Either way, she is ‘taxed’ in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120 per cent income tax but doesn’t seem to notice that five per cent inflation is the economic equivalent.”
- Twain: “He had discovered a great law of human action, without knowing it–namely, in order to make a man or a boy covet a thing, it is only necessary to make the thing difficult to attain.” The Adventures of Tom Sawyer
Buffett: “Charlie said of the seven deadly sins, envy is the worst. You feel miserable-but the other guy has no idea how you’re feeling. Envy-where the hell is the upside?”
Twain Quotes: http://www.twainquotes.com/Luck.html
Alice Schroeder, Snowball http://www.amazon.com/The-Snowball-Warren-Buffett-Business/dp/0553384619
The only film footage of Twain http://www.openculture.com/2014/09/the-only-footage-of-mark-twain-the-original-digitally-restored-films.html
Richard Zacks essay on Twain as an investor: http://time.com/4297572/mark-twain-bad-business/
Peter Krass book: “Ignorance, Confidence and Filthy Rich Friends: The Business Adventures of Mark Twain, Chronic Speculator and Entrepreneur.” http://www.reuters.com/article/us-books-twain-idUSN0923316520070316
Andy Rachleff: Why Angel’s Don’t Make Money… And Advice for People who are Going to Do it Anyway. http://techcrunch.com/2012/09/30/why-angel-investors-dont-make-money-and-advice-for-people-who-are-going-to-become-angels-anyway/