1970s those investors woke up and realized that America had fallen behind Europe and Japan, to say nothing of a resurgent Soviet Union. Suddenly, no one wanted to own stocks.
George returned to his office and scheduled a family meeting for mid-July. That meeting would also be held at the Rolling Rock Club, a tony country club founded by Pittsburgh's Mellon family. George had reserved a secluded meeting room behind the Card Room, most easily accessed by a secret door through the bookcases. George wanted to be sure no one would hear what he had to say except his own family. His advisors at the bank weren't invited, and only one young lawyer from the family's law firm would be there to take notes.
When the family was assembled and drinks had been served, George rose to his feet and made a long and impassioned speech. That speech clocked in at 37 minutes, but we'll look at an edited version of it here. The essence of the matter was that, the very next day, George planned to instruct the bank to sell every stock in the family portfolio. Because some of the positions were large and thinly traded, it would be the end of August before the family was completely out of stocks, but after that the family would own not a single equity security.
There were a few gasps around the table when George announced this decision, but the patriarch held up his hand for silence.
“I want to be quite clear about this,” he said. “All across the world investors are dumping their stocks because of the bear market. But that's not what's driving my decision. No one likes to lose money, of course, and no one especially likes to lose money month in and month out for eighteen months.
“But long-term investors know that bear markets come and go, just as bull markets come and go. To pull out of the stock market just because stocks are going down is a very foolish thing to do. And that's not what I'm doing.
“If I continued to have confidence in American industry – indeed, in America itself – I would simply hold on, knowing that sooner or later the markets will turn and we will be making money again. But – and I say this in sadness and regret – I've lost that confidence.”
George went on to describe how American businesses had thrived after the war, and how they appeared to be continuing to thrive during the 1960s. But that was just surface momentum and investor hardheadedness. In fact, it was in the 1960s that America began to lose its way.
“I don't have to remind you what was happening on our college campuses in the Sixties,” George said, glancing pointedly at his grandchildren. “Hippies everywhere, antiwar activists blowing up buildings, administrators who should know better throwing in the towel and capitulating to the demonstrators.
“And you all know what happened to us in Vietnam. America had never lost a war before, but in Southeast Asia we cut and ran. The American public has no stomach for war anymore, and keep in mind that that's when Rome began to decline, too.
“How many of you in this room have waited in a long line to buy gas?” Hands went up. “Do you know why? Because America allowed itself to become dependent on oil from the Middle East, that's why. When we backed Israel in the Yom Kippur War, the Arabs embargoed our oil and forced us to our knees. We made Israel back down because we were desperate for oil, for oil at any price! We used to pay about three dollars a barrel for oil, but now it's twelve dollars and no end in sight.
“And what about what's going on in the White House? I voted for Nixon, and I'm sure – I hope I'm sure – that many of you did, too. But God knows what he thinks he's been doing down there in Washington. I hear he could resign any day. Imagine that! A president of the United States forced out of office for possible criminal activities! It's unbelievable!” (In fact, President Nixon resigned less than a month after George III spoke, on August 9, 1974.)
George took a long swallow of his martini, shook his head in disbelief at what had happened to his country, and then continued.
“The worst of it all is what's happened to American industry. When my grandfather – your great-grandfather and great-great-grandfather – came to America, he came because we were the greatest country in the world, a country full of opportunity. American companies were the most competitive anywhere.
“When the United States Steel Company was organized right here in Pittsburgh just after the turn of the century, it was the largest and most powerful firm in the world. Imagine! The United States of America, barely a century old, had outdone all the countries of Europe and Asia.
“But look at U.S. Steel today – it's a pathetic shell of its former self. Sure, they've built themselves a fine new building, but they're not half as good at making steel as they are at building fancy headquarters.
“In fact,” George continued, really warming to his message now, “I wouldn't even call it a company. It's more like a bureaucracy, like something you'd find in the government. There are so many layers of management at U.S. Steel they can never get anything done. No one can make a decision, and in the rare cases when a decision gets made it's impossible to know who was responsible for it.
“All U.S. Steel's management cares about is preserving labor peace, and they've bought it by selling out to the unions. Do you know that a young steelworker who's willing to work overtime can earn almost fifty thousand dollars a year? Do you know what a young lawyer, straight out of Harvard, makes a year?”
George looked around the room, but no one seemed to know the answer.
“Well, I'll tell you: twelve thousand. Yes! A Harvard-trained lawyer in Pittsburgh makes twelve thousand dollars a year, while an uneducated steelworker makes fifty thousand! How long do you think that's going to last? I predict the American steel industry'll be dead in twenty years, if not sooner. And where the steel industry goes, so goes the rest of American industry.”
George looked around the room. Everyone was riveted, staring at him. He nodded his head at them and continued.
“If I had confidence in America, in American business, I wouldn't be selling stocks. No, I'd be a buyer at these prices! I'm not selling out because of the bear market, I'm selling out because the American Century is over. We've had our day in the sun, but just like every other great civilization, we rose and now we've fallen. Some of you might remember that Russian Premier Khrushchev told us way back in 1959, ‘We will bury you!’ Well, the Russians have buried us, not by beating us in war, but by beating us in peace. And Germany and Japan have beaten us, too.
“I don't say any of this out of anything but sadness, deep and abiding sadness for the country I love, for the city I love. But it's my family I have to think of first. We've lost a lot of money over the past year and a half – nearly forty percent of our capital, in fact. But we're still rich and I want to be sure we stay that way. By the end of next month we'll be entirely out of stocks. Our wealth will be secure. Thank you.”
George set down and drained the rest of his martini, then ordered another. For a long moment there was silence around the table, but then someone started to clap. Others took up the applause and soon George Titan III was being given a standing ovation by his family.
One important thing to note here is that George Titan stated that he wasn't exiting the stock market because he was in a panic over his losses. Instead, he couched his decision in broader terms. But note that when a family panics during a bear market, there will almost always be “broader terms.” Often, the broader terms will have to do with not wanting the family's asset base to drop below a certain, usually arbitrary, point.
The extraordinary thing about this episode in the Titan family is this: George III was right – or nearly right – about almost everything he said. And yet, the decision to sell all the family's stocks proved to be an utter debacle,
