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magazine, for example, in early January 1973, predicted that 1973 was “shaping up as a gilt-edged year.”2

      But the prognosticators were badly off-target. On January 11, 1973, the Dow began a dive that would result in one of the worst bear markets in history. Over the following 699 days, through December 1974, the Dow dropped 45 %. Making matters worse, inflation, which had been just over 3 % in 1972, jumped to 12.3 % in 1974. In other words, in inflation-adjusted terms the losses were even greater. And while the market was crashing, so was the U.S. economy, where GDP growth dropped from +7.2 % in 1972 to –2.1 % in 1974. (Matters were even worse elsewhere. The London FT 30 Index, a predecessor of today's FT 100 Index, dropped 73 % during the bear market.)

      All this stunned George III who, as noted earlier, had presided over two decades of excellent returns and who had forgotten that those returns were driven mainly by strong market conditions and not by his excellent investment judgment. As the markets continued to sink throughout 1973 and into 1974, George began to raise hell with his bank investment managers.

      But those advisors believed that investors should think long term. Sure, the market was currently in a bear phase, their thinking went, but that wasn't a permanent condition. Sooner or later, the market would turn up again, and when it did, families like the Titans needed to be heavily exposed to stocks in order to take advantage of the rebound.

      But the result of this thinking was that the bank was continually “averaging down,” as George indignantly put it, selling good bonds to buy bad stocks. Whatever the bank bought, it promptly went down.

Quick Note

      Here is a case of the family's advisor giving them reasonably good advice, but not couching it in terms the family could accept. Quarter-after-quarter of “averaging down” convinced George Titan that the bank didn't know what it was doing, that it was just operating on automatic pilot.

      By the first quarter of 1974, George was getting questions from his wife and (adult) children about what was going on in the portfolio. They were naturally concerned that, as the value of their capital plummeted, their spending might have to be cut. In an effort to keep the pressure off, George III didn't cut the family's spending, but as a result, that spending grew and grew as a percentage of the capital that supported it.

      As noted earlier, at the end of the 1960s the George III branch of the family had been spending 5 % of its capital every year. This was too high, but George III was analogizing his family to the endowments of the nonprofit organizations on whose boards he served, most of which spent about 5 % per year. But George had forgotten that nonprofit endowments don't pay taxes and that, typically, they are large enough to pay much lower investment management fees than families pay. Moreover, endowed institutions have a fallback in the event of poor outcomes: they can go out and raise more money. Try that as a family.

      George's family should have been spending more like 3 % of their capital each year, even in good times. But as the value of the portfolio plummeted throughout 1973 and 1974, and as the family's spending remained constant, the percentage they were spending grew and grew, causing the capital to decline even faster. By early summer of 1974, the George III branch of the Titan family was spending more than 8 % of the portfolio's value.

      The family's account managers at the bank were alarmed by the high spending, and they would sometimes (very gently) raise the issue with George III. But the patriarch's view was that it was none of the bank's business how much the family spent, and so the conversation went nowhere.

George III Makes a Fateful Decision

      As his family's losses deepened, George III found himself losing sleep. He became difficult to live with, snapping at Mary and avoiding his friends. Finally, at the end of June 1974, George III took a room at the Rolling Rock Club, locked his door, and spent the better part of three days reviewing the performance of the family's portfolio under his management – going all the way back to World War II.

      As he worked his way forward from the war years to the present day, George noticed something he'd never focused on before. As mentioned above, immediately after the war everything went America's way. But this was because our competitors in Europe and Japan had been flattened in the war while America was hardly touched.

      By the 1960s, while things still looked good in America and while the market was still moving up, albeit not so sharply, it was obvious to George that looks were deceiving. Europe and Japan were recovering rapidly, thanks in many cases to generous help from America, and competition from those quarters was beginning to bite. Already steel from Germany and Japan was beginning to show up in the United States, and it was not only cheaper than our own steel, it was in many cases of better quality.

      American investors, lulled into somnolence by two decades of easy money, had been asleep at the switch. But in the early 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

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