Don't Lose It All on a 'Mark Twain Gamble'

The Weekend Edition is pulled from the daily Stansberry Digest.

Most writers would love to be mentioned in the same breath as Mark Twain...

His The Adventures of Huckleberry Finn is among the most commonly assigned novels in American high schools, behind only William Shakespeare's Macbeth and Romeo and Juliet, according to the Center for the Learning and Teaching of Literature...

And novelist William Faulkner wasn't alone in his opinion when he said that Twain was "the father of American literature."

Twain is also endlessly quotable. One of my favorites is this one: "The difference between the right word and the almost right word is the difference between lightning and a lightning bug."

During his lifetime, Twain was rewarded for his literary achievements. He made a ton of money from his writings, as well as on the lecture circuit.

The thing is, this iconic figure in American history also lost boatloads of money...

As a writer, it would be an honor for me to be compared with Twain. But would I want to be linked in any way to his money-management skills? Heck no.

Twain was a downright terrible investor and businessman. The good news is, you can learn from his failures and apply these lessons to your own portfolio today...

The stories of Twain's financial troubles are almost as common as his famous quotes...

In his documentary Mark Twain, Ken Burns told many of the stories about Twain's unsuccessful investments in new inventions and technologies of the late 1800s.

In particular, he spent $300,000 (the equivalent of roughly $7 million in today's dollars) over about 15 years, starting in 1880, on investments in the Paige typesetting machine, which was designed to replace human typesetters. Twain once said of the machine...

It could do anything a human could, except drink, swear, and go on strike.

That is, when it worked. The Paige typesetting machine was always breaking... And it had so many parts that it was hard to fix. It never turned a profit.

Still, this was an industry Twain knew well – publishing. How could he fail?

Twain nearly sank all his money into the Paige typesetting machine...

He could have invested his fortune in any number of different investment vehicles. Mutual funds were in their infancy back then, for example. He even passed up a personal invitation from Alexander Graham Bell to invest in the telephone... missing out on possibly the biggest money-making opportunity of his life.

But he was dead-set on just this one printing project. In today's terms, Twain suffered from what we'd call a "lack of diversification," poor risk management, and ignoring smart asset allocation.

Twain went so far as to invest a good chunk of his wife's inheritance in the machine. He also borrowed against the assets of his own publishing company.

That proved to be a terrible mistake...

Much to Twain's dismay, a competitor, the Linotype machine, came along and rendered the Paige typesetter obsolete before it could be perfected and produced at scale.

In the end, only two Paige typesetters were ever made. And Twain went broke because of this "all in" gamble.

He eventually had to sell his family's home in Hartford, Connecticut, which he had built years earlier. The family packed up and moved to Europe. Depressed by the financial failure, he wrote to friends back in America, in 1890...

Merry Christmas to you. And I wish to God I could have one myself before I die.

Not only did Twain lose his money, but the upside-down investment – along with a string of health problems in the family – is considered to have sapped Twain of his trademark wit and humor.

In the years that followed, Twain traveled back to America to give speeches and started making a little bit of money again. However, in 1894, at the urging of friend Henry Rogers – then a principal of the Standard Oil Company – Twain filed for bankruptcy.

Rogers took charge of Twain's money, and eventually, he paid off all his debts. But Twain's story could have turned out much differently... if he'd only understood the mistakes he was making.

The lesson I hope you take from this is to heed some timeless guidance from our founder, Porter Stansberry...

Specifically, I'm talking about what he said in a classic essay that first appeared in the December 16, 2016 Digest. It focuses on a few of the most critical decisions any investor can make: asset allocation, position sizing, and risk management.

These words might not sound sexy, but the simple yet often taken-for-granted concepts are proven fundamentals of a lucrative long-term portfolio. As Porter wrote...

For some reason, it seems that most people don't take good investment decisions (asset allocation, position sizing, and risk management) seriously...

Likewise, it seems like some law of human nature dictates that most people will only buy investments that are extremely risky and volatile. Subscribers tend to completely ignore our best advice, which is to build a portfolio around a firm foundation of super-high-quality, low-volatility stocks.

I'd estimate about 90% of your actual investment results are dictated by your allocation decisions – how much capital you put into each position – not which particular stocks you buy.

It's easy to be tempted to overweight certain assets in your portfolio... or take a gamble on speculations because they just feel right...

Maybe you feel really good about the potential in emerging markets in the coming decade... or bitcoin... or the Paige typesetting machine. And maybe you've done your research.

As long as you know the risks of an investment, that's fine. But most investors don't know how to properly value a stock or a bond. Even if they think they're taking a smart risk, they might not be.

That's why it's a terrible idea to go "all in" on any one thing. And it's why we always say the most valuable thing we provide is not specific stock recommendations... even when they soar in value. It's our guidance on concepts like allocation, position sizing, and risk management that can really help determine whether you'll be a successful investor.

Several academic studies demonstrate why portfolio allocation is far more important in determining your results than simply which stocks or bonds you buy. Yale finance professor Roger Ibbotson and Morningstar Director of Research Paul Kaplan published one of the best studies on the subject in 2000...

They looked at 94 U.S. mutual funds and several asset classes... and concluded the differences in asset allocation among the funds explained essentially all of the variance in their returns. Differences in stock picks made almost no difference whatsoever to total portfolio returns.

That's why most professional investors (like the top hedge-fund managers) allow analysts to do the stock picking, while they focus almost exclusively on the core allocation decisions.

This is exactly the approach we take in Stansberry Portfolio Solutions...

We launched this suite of products in 2017, and we're really proud of them.

Each month, our director of research Austin Root picks "the best of the best" from our leading publications, including recommendations from our top gurus, Steve, Porter, and Dr. David "Doc" Eifrig. And he provides a comprehensive allocation – down to exactly how many shares of each stock you should buy.

This is the type of guidance you'd get from top hedge-fund managers. And we're not talking about just one portfolio, either. We offer a diverse set of fully allocated portfolio strategies. There's one focused on capital appreciation... another on earning income... another on defensive strategies to prepare for the next downturn... and a "total portfolio" product that covers everything.

And as regular readers know, they've beaten the broader market...

In 2019, The Capital Portfolio returned 42% – beating the broader S&P 500 Index by a little more than 11 percentage points... The Income Portfolio returned more than 27%, including nearly 5% in safe, steady income... and The Total Portfolio was up more than 32%, ahead of the S&P 500 despite being much less volatile and more safely invested.

There's simply no better way to put our recommendations into action than to subscribe to these products... And there's no better time to do it than right now.

As you may have seen, Porter, Steve, and Doc are sitting down on Tuesday night for a free online event. During this live discussion, they'll share their latest thoughts on what they expect from the markets in 2020...

And then they'll share how best to put all that information into action – in a smartly allocated portfolio. If only Twain had the opportunity to listen to this discussion back in his day... we might have a few more great American novels to enjoy.

Click here to reserve your spot for what we expect will be an exciting and informative live event. The action starts promptly at 8 p.m. Eastern time on Tuesday, January 14.

One more thing... if only Twain had as good a handle on finance as Shakespeare did...

He'd have fared much better.

At the outset of Shakespeare's Merchant of Venice, written 400 years ago, the playwright offers this advice on diversification, through the character Antonio...

Believe me, no. I thank my fortune for it —
My ventures are not in one bottom trusted,
Nor to one place, nor is my whole estate
Upon the fortune of this present year.
Therefore my merchandise makes me not sad.

We prefer plain English, but the point is nonetheless a good one.

Good investing,

Corey McLaughlin

Editor's note: Are you taking on too much risk? If you don't know the answer – or if you're just ready to finally "get there" with your investments – then don't miss this FREE special event. You'll hear our top gurus' biggest market predictions, including the single place you should put your money this year... what's next for the Melt Up... and a whole lot more.

You'll even learn each of their No. 1 favorite stocks for 2020. So be sure to tune in on Tuesday at 8 p.m. Eastern time for the details... Join the guest list here.