Great to Gone

Jonathan Clements

ON THIS DAY IN 1888, George Cope died at age 65. Two days later, he was buried in Anfield Cemetery in Liverpool, England, where his younger brother Thomas had been laid to rest 40 months earlier.

Together, in 1848, the two brothers had launched a successful tobacco company, which would be acquired more than a century later by Gallaher Group, then a major U.K. multinational tobacco producer. Gallaher itself would subsequently be bought by Japan Tobacco.

At the time of his death, newspapers described George Cope as one of Britain’s richest men. His estate was valued at £274,923—equal to some $47 million, based on today’s exchange rate and U.K. inflation over the intervening 132 years.

Why my interest in Cope? He was my great-great-grandfather.

George Cope, 1822-88, co-founder of tobacco producer Cope Bros.

In an alternate universe where nobody spent my great-great-grandfather’s money, and instead his estate was invested in stocks and earned seven percentage points a year more than inflation, it would today be worth some $270 billion—more than the combined net worth of Jeff Bezos and Bill Gates.

But that isn’t exactly what happened. In fact, none of my great-great-grandfather’s fortune made it into my hands and, indeed, it never reached my mother and her two brothers. Instead, it took just two generations to run through the money bequeathed by one of Britain’s richest men.

I tell this story not to elicit sympathy—in any case, I’m not sure there’s much sympathy for tobacco heirs—but to highlight a crucial notion: Success often contains the seeds of its own destruction, and not just when it comes to family fortunes. Consider four examples:

1. Successful companies eventually grow so large that not only do they become bureaucratic and sluggish, but also they attract fierce competitors angling to steal their business. Today, we’re in awe of Alphabet’s Google, Amazon, Apple, Facebook and Vanguard Group. Give it a decade or two, and we’ll likely view them as has-beens.

All this has been made worse by the pace of technological change. As companies grow ever bigger, it becomes more complicated and costly to upgrade to the latest technology—and that creates an opening for upstart competitors.

Have you noticed how clunky Facebook has become? Do you wonder why Vanguard unloaded its variable annuity business or shut down its cash management service? You can bet that thorny technology issues were a key reason. Similarly, when I was at Citi, the bankers had to know how to navigate 10 different computer systems, partly the consequence of multiple acquisitions over many years. Is it any wonder that Citi’s bankers struggle to deliver excellent customer service?

2. Economic booms are undone by the excesses they create. Robust economic growth allows marginal businesses to survive and prompts banks to loosen their lending standards. But all this can quickly unravel if growth slows or inflationary pressures drive interest rates higher. How many dubious businesses and dicey loans exist today? When the next recession rolls around, we’ll find out.

3. Investors are often victims of their own success. For instance, winning money managers attract heaps of assets from performance-chasing investors. Putting that new money to work compels them to buy more stocks, including stocks they’re less enthused about.

Almost inevitably, the results of these managers start to look more and more like the market averages—and often far worse. Why? Managers often notch handsome gains not because they’re skillful, but because their particular investment style is in vogue. But no stock-picking style stays in favor forever.

Success isn’t just poison for market-beating money managers. If investors—whether professional or amateur—are making money because of a rising market, they often imagine they know what they’re doing, even if their results are no better than the market averages. We saw this in the housing market in the early 2000s, and we’ve seen it repeatedly in the stock market.

Problem is, this ballooning self-confidence can lead folks to take ever-increasing risk. They might buy a fistful of rental properties with little or nothing down, shift more of their portfolio into stocks, purchase shares with margin debt or concentrate their bets on an ever-narrower slice of the stock market. But what happens when the market turns lower? Even if these investors aren’t panicked by tumbling prices, they may be forced to sell by their need for cash or by the leverage they took on.

4. Why do great family fortunes rarely last more than a few generations? Partly, it’s because the second and third generation, raised in affluence, don’t have the same hunger to make money.

But partly, it’s a simple matter of brutal math. For a family fortune to last in perpetuity and generate an income stream that rises with the general standard of living, the heirs face a daunting task, as I explained in a 2017 article. For starters, the heirs need to manage the money so that it earns an after-tax rate of return that’s higher than the pace of per-capita GDP growth—which is the rate at which general living standards tend to rise.

But that alone isn’t enough: To ensure the family fortune lasts in perpetuity, the heirs must also reinvest a sum each year equal to per-capita GDP growth. That annual amount might equal 4% of the fortune’s value. Problem is, if they do that, it can leave precious little to spend. To make matters worse, the annual amount available to each beneficiary will shrink if the number of heirs grows with each new generation.

How likely are the heirs to make the necessary sacrifices, so the family fortune stays intact? Have I told you about my great-great-grandfather?

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Five FreedomsHelping Them AlongJust in Time and Opening the Spigot. Jonathan’s latest books: From Here to Financial Happiness and How to Think About Money.

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