I don’t actually plan to blog about every single chapter in Family Capital(1) – I’m hoping that at least somebody will buy the book – but I do want to highlight one additional discussion that takes place between the Titan-Wainwright branch of the family and their financial advisors. This one is called, “How to Blow a Billion Dollars.”

Carrie (the senior financial advisor, referring to George Titan III’s catastrophic investment mistake.) [I]t’s worth repeating. Families can make terrible investment mistakes… Spenser used to have a client who was worth almost a billion dollars and they managed to spend themselves into a big hole.

Geoffrey: Starting with a billion dollars?

*  *  *

Ned: This reminds me of the old joke. Do you know how to end up with a million dollars? Start with a billion dollars.(2)

[Groans around the table.]

Carrie describes her former client, a family that had sold its company and taken stock rather than cash. This looked like a great idea for a long time, as the stock in the acquiring company rose and rose, until the family had a net worth of more than $800 million.

Carrie: But along the way, the family started living like billionaires. They built staggeringly expensive homes in New York, Florida, and Spain. They bought a huge jet and hired two teams of pilots so it would always be available. They made large charitable pledges to get themselves invited onto big national boards.

Ned: Ugh. I think I see where this is headed—at some point the price of the stock collapsed.(3)

Carrie pointed out that the company had experienced a relatively minor accounting irregularity, but that this was in the aftermath of Enron and investors were very nervous about “irregularities.” The company’s stock price dropped 40% almost overnight.

Ellen: Those poor people! Now they only had six hundred million dollars!(4)

Actually, it was far worse. The stock was margined, and the family couldn’t meet the margin call. They had to sell the big houses they’d built and, because they had to sell them in a hurry, they lost money on them. Then they had to sell their jet and lay off the pilots. Finally, and most humiliating of all, they had to renege on their charitable pledges. They had to resign from those boards and one of the organizations actually filed a lawsuit against them for reneging.(5) In other words, it got really ugly.

Ned: Did the family actually have to declare personal bankruptcy?

Carrie: No, they escaped that humiliation. But the family unit was destroyed. Two of the daughters sued their own mother for mismanaging the family money. The son took the mother’s side and, let’s just say it was hideous.

*  *  *

Ned: And all because they got greedy. If they’d gradually sold off the stock they got in the sale and diversified their portfolio, they’d still be rich.(6)

I’ll let Roger – the junior financial advisor – have the last word:

Roger: And let’s don’t forget that it isn’t just that the family Carrie mentioned is no longer rich. They are also no longer happy. When money is really badly mismanaged, or when spending is out of control, often the worst consequence is the destruction of the family’s happiness.(7)

(1) You can buy the book here: http://www.amazon.com/Family-Capital-Working-Families-Generations/dp/1119094135/ref=sr_1_1?ie=UTF8&qid=1458757632&sr=8-1&keywords=family+capital.

(2) Family Capital, p. 117.

(3) Family Capital, p. 118.

(4) Ibid.

(5) Nonprofit organizations rarely file lawsuits to enforce pledges, for obvious reasons. But in some cases, where the organization has used a family’s pledge to leverage gifts from other families, the nonprofit may feel that it has no choice but to try to enforce the pledge that others relied on.

(6) Family Capital, p. 119.

(7) Ibid.

Next up: Would You Trust a Fiduciary Stockbroker?

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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.