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, destroying his family's 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.
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