Re: What did I do wrong?
Use 1 quart TCW-III per 6 gallons gasoline. Since my personal opinion is that assembly lube or fresh unheated TCW-III oil used for assembly has less lubricity than heated oil within the crankcase, do not run the engine over 3/4 throttle until this gas is used. That means you will have passed 1 quart of oil through the engine with some staying inside it.
If you want to be safe, use 12 gallons of double mix. After that, you should be fine for full throttle operation for short bursts. My personal opinion is no prolonged full throttle operation until the engine has over 10 hours on it.
As an added note, when I rebuild an engine and take it out for water trials, after about 1/2 hour (to ensure some oil is in it) I will take a very short full throttle run or two to confirm that operational timing is correct and full RPM is being developed. Then back to low RPM operation until enough oil has been run through it and rings have seated themselves to the cylinder walls. It also tells me that idle will come back to normal after a high speed run.
I consider these brief bursts harmless, a necessary diagnostic tool, and part of the rebuild.
AND: By the way: Did you check the gearcase sealing plate below the water pump? On the '89 this should be a torpedo shaped plate about 8 inches long, held on by the 4 water pump bolts plus one in the front and two in the rear.
If the center wall of this plate is corroded or worn to the point where the gasket below the stainless water pump plate will not seal it, it will short circuit water from the pump outlet to the inlet side. Sufficient water will be delivered for low speed cooling, but an insufficent quantity might be delivered at higher speeds, resulting in hot operation.
Since there is no seal between the rear of the plate and the cooling water inlet cavity, (which is massive), there is also the potential to suck air there while running on the water. Obviously, on muffs, there will be pressure and no air will enter. While I don't do it myself, I have seen numerous plates sealed with RTV silicone at this point.