Читать книгу Family Capital - Curtis Gregory - Страница 14

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.

Failing to Learn and Grow

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.

Working with the Wrong Advisor

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.

Being Sold Instead of Buying

Over the decades, the bank's advisory personnel managed to sell George just about every hot new product they could dream up. Some of these products were actually useful and appropriate for the Titans, but many were not. Inside the bank, George was notorious for his willingness to buy just about anything the bank had to sell.

But a family that hopes to do well in the investment of its capital should never, ever be sold anything. The family should, instead, be an active, knowledgeable and proactive buyer of investment services and products.

The way the process should work is that a family looks at the risk and return profile of its portfolio and decides that (let's say) it needs to reduce its risk but, hopefully, without reducing its returns by a similar amount. The family will then look around for ways to accomplish this and might (for example) decide to replace some of its long equity managers with long/short hedge fund managers. The family will look for the best long/short managers in the business and engage one or two of them.

But that's not how it worked with George Titan III. Instead, George would show up at a meeting with his advisors and find that they had a new idea for him. The bank had recently purchased a hedge fund, and the advisors thought the find would be a useful addition to the family's portfolio. The advisors would walk George through reams of data showing how terrific the hedge fund's returns had been, and eventually, with George lost in the details, he would tell the advisors, sure, let's give it a try.

Maybe the family's portfolio needed a hedge fund and maybe it didn't. George would never know. Maybe this was the best hedge fund for the family and maybe it wasn't (in fact, the odds were huge that it wasn't), but, again, George would never know.

Abandoning the Equity Markets

The biggest error George Titan III made was his decision to abandon the equity markets. A wealthy family, like it or not, is in the business of managing capital, and it's a tough business to be in. Families pay taxes, they pay investment management fees, they spend money from the portfolio, and, of course, inflation constantly eats away at the value of the capital. And as if all that weren't enough, families tend to compound faster than capital does, so that even successful families will likely see their per capita wealth drop across the generations.

Given all these headwinds, it's essential that family portfolios be growth-oriented, and that means owning stocks. George's rationale for selling equities may have resonated at the time, but longer term it was a calamitous, utterly destructive act. When George sold out, the family's portfolio had already declined by about 40 %. Selling immortalized those losses. Then, with no growth assets in the portfolio, it was impossible for the family to recoup.

As noted previously, if George had simply held on for a few more months, the stock markets would have resumed their upward trend. The strong markets of 1975 and 1976 wouldn't have restored the family to its former wealth, but it would have been a nice start. Then, when the big bull market started in 1982, the family would have enjoyed 17 long years of mainly very strong markets. They would have been much wealthier in 1999 than they'd been in 1972, before the 1973–1974 bear markets.

But it wasn't to be. George Titan III's investment mistakes, and especially the devastating decision to abandon equities, destroyed his family's wealth.