capital almost entirely in one generation.
How could this be? The main problem was that George Titan III failed to consider the resilience of the American economy and the American people. He was correct that conditions were dire in the mid-1970s in America – a few years later, in 1979, President Carter would give his famous “malaise” speech in which he opined that Americans were suffering from a “crisis of confidence.”
But Americans had faced far worse challenges over the prior 200 years: fighting for their freedom against Great Britain, then the most powerful country in the world; engaging in one of the most destructive civil wars in human history; entering World War I barely in time to turn the tide; surviving the Great Depression; leading the fight in World War II, where Americans were forced to battle powerful foes on two fronts thousands of miles away. George should have been able to put the current malaise in perspective, but he didn't.
Even as George was addressing his family at the Rolling Rock Club, the bear market was coming to an end. Stock prices would continue to jump around until December 1974, but looking back it's clear that the terrible downdrafts ended in August, a few weeks after George spoke to his family.
The Dow eventually settled near 578 on December 4, 1974, but in 1975 and 1976, the stock markets snapped back, as they usually do after a bear market, closing just above 1,000 at the end of 1976. By the end of 1980 the Dow was back where it had been at its peak in 1972.
But none of this mattered to George III's branch of the Titan family, because they were no longer invested in stocks. The family had ridden the bear market all the way to the bottom, then sold out (immortalizing their losses), paid heavy capital gains taxes, and then failed to reinvest.
Missing the 1975–1976 recovery was bad enough, but most of the family remained invested entirely in bonds throughout the 1980s and 1990s. George Titan III died in 1981, but he had run the family's capital entirely on his own for a very long time, and as a result no one else had any experience investing money. If bonds were good enough for their father, bonds were good enough for them. Besides, their spending needs were very great and stocks yielded very little.
The bank that was advising them had made a few timid suggestions to the effect that it might be a good idea to get back into the stock market, but it never happened. Stocks made the family uncomfortable, and the family patriarch had made it clear before his death that owning stocks was a fool's errand.
Once it became clear that George Titan was not just exiting the stock market, which was bad enough, but that he planned to stay out indefinitely, query whether the bank shouldn't have resigned as his advisor. Note that if a lawyer's client refuses to take his advice, the lawyer may be required by the Code of Professional Responsibility to resign. A wealth advisor's ethical compass should be at least as sensitive.
In 1982, one of the great bull markets in history began, running almost uninterrupted until 1999, when investor enthusiasm slammed into the “tech bust” and prices collapsed. During those 17 years, many investors built large fortunes in the markets, but, again, the George Titan III family missed out on all of it.
Eventually, the combination of no portfolio growth and high spending made it clear even to the most unsophisticated family members that matters couldn't long continue. But by then a new generation of Titans had come along, and, while per capita spending did decline, absolute spending increased.
The end result was highly predictable: by the late 1990s, the George III branch of the family was no longer wealthy. From the end of World War II through the 1970s, that branch of the family had been one of Pittsburgh's most prominent. George III and his wife, Mary, sat on all the important boards in town and were members of all the right clubs. Everyone knew who they were and their opinions mattered. But by the end of the 1990s, the Titans were a middle-class family, struggling to avoid falling even further. No one knew who they were or cared. They had become the “poor” Titans.
The Mistakes George Made
When a family's wealth is devastated through investment errors, there is usually more than one mistake in the picture. Let's walk through some of the mistakes George Titan III made in managing his family's money.
Although George Titan III had managed his family's portfolio for more than three decades, he knew very little more about the investment process in 1974 than he'd known in 1938. If we'd asked George about this, he would have dismissed the question – after all, George had advisors whose job it was to understand these sorts of things, and he paid them high fees to do so.
George would have viewed investment advice as similar to any other kind of advice or service he might need. For example, George knew very little about how his furnaces worked, but so what? He had a contractor who handled that sort of thing. Similarly, George saw no reason to learn about investing, because he had advisors who handled that sort of thing.
What George forgot was the difference in the consequences of failure. If his furnace failed, the only consequence was that George needed to buy a new one. This might be a serious annoyance if the furnace happened to fail in January, but it would hardly be a catastrophe.
But if George's portfolio failed, that would be a family tragedy that would haunt the George Titan III family members for generations. There are big differences between furnace failures and portfolio failures, but George never picked up on this important point.
What George should have done was to learn enough about the investment process at least to be a thoughtful client, a prudent overseer of his family's wealth. He could have achieved this objective by requiring his advisors to help teach him about the investment process. He could also have attended conferences and seminars at which investment issues are discussed. He could have read books on investing or he could have joined the local Pittsburgh affinity group of family offices, which offered regular investment seminars, as well as contacts with other family offices.
Unfortunately, George did none of this. He relied as heavily on his financial advisors as he did on his furnace contractor, and the results were very unfortunate.
When the trust company that had managed the Titan portfolio was acquired by a bank, the nature of George Titan III's financial advisor changed radically. The bank was a very fundamentally different creature from the trust company and the chance that it would just happen to be appropriate for the family was very low. But George simply went along passively with the change. It's true, of course, that the trust company had been acquired by a Pittsburgh-based bank that George was somewhat familiar with and that many people he knew banked with. But George knew nothing about the bank's (rapidly evolving) money management capabilities.
As noted, the bank had decided to get into the investment business in a big way and had begun buying up money management firms and hiring scores of investment professionals. Today, in 2015, that bank manages billions of dollars for pension funds and individuals. But along the way the bank went through many difficult periods.
Building a global money management business almost from scratch is a huge undertaking. Many of the firms the bank acquired promptly produced dismal performance numbers. The investment professionals who had built those firms had just cashed out on the sale and no longer much cared about the hard work of managing money.
But since George knew nothing about the investment management business, it never occurred to him that, behind the scenes, things were not well at the bank. And since the bank was reporting on its own performance, it was usually able to sweep poor results under the rug. Those results were in the account statements somewhere, but George wasn't likely to find them on his own, and the bank had no incentive to point them out.
Over
