It was 1928, the stock market was booming. Nothing but clear skies were on the horizon.
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For professional investors, it took courage to suggest that storm clouds lay ahead.
But Charles Merrill (1885-1956) did just that. He advised his investor clients to lighten their exposure to stocks. When the Dow Jones industrial average rose 50% in 1928, many suggested Merrill needed to see a psychiatrist.
Merrill did — and ended up helping the shrink. As Winthrop Smith, son of one of Merrill's partners, wrote in the 2013 book "Catching Lightning in a Bottle," the broker's craziness was so compelling, his psychiatrist sold all his stocks. Merrill's firm had also trimmed its exposure to equities, thanks to Charlie's sense that a market bubble was forming.
As it turned out, investors' mania, not his assessment, was crazy.
When that bubble burst in October 1929, the panic sell-off helped usher in the Great Depression. With that kind of foresight, he built his investment house — Merrill Lynch — into one of the world's largest brokerages. Now part of Bank of America (BAC), it boasts more than 17,000 financial advisors and $2.3 trillion in client assets.
Florida Start
Merrill was born to a doctor who tended to affluent patients in resort towns like Green Cove Springs, Fla. And the boy "had an entrepreneurial flair" from the start, Smith told IBD.
Charlie bet Northern tourists he could swim faster than them — which he could, thanks to the help of an underwater stream that only he knew about.
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The family was comfortable — until Charles Sr., out for an evening stroll, was beaten and robbed by two men in search of a rich target.
Charlie was a teenager and now had to work his way through his final year of high school and college. First came Amherst, then the University of Michigan, where he took classes that could be applied toward a law degree.
But he found the subject uninteresting, wrote Edwin Perkins in "Wall Street to Main Street: Charles Merrill and Middle-Class Investors." So he didn't complete enough courses for a diploma. Rather, Merrill in 1907 put into play an unusual plan for striking it rich: He'd marry into it.
Charlie's meal ticket was a young woman he'd met at Amherst whose father owned several textile mills. "Marie Sjostrom's family was hoping for an ambitious and talented son-in-law who might develop the skills to perpetuate the family fortune," Perkins wrote. "The arrangement, so to speak, seemed mutually beneficial to all parties."
A Chance Meeting
Merrill started in the textile company in 1907 at an entry-level management position. His office was in Lower Manhattan. The newly engaged young man lived in the nearby Chelsea neighborhood. For exercise, he swam at a YMCA where he met a young man named Eddie Lynch.
Merrill's hard work soon got him promoted. Within a year he was making $100 a week — the equivalent of $2,600 now — as a credit manager for six of the mills.
But the engagement to Marie didn't work out. So Merrill's career in the textile industry ended too. Yet soon he connected with a fellow Amherst alum whose firm, George H. Burr & Co., was looking to establish a bond division.
"Charlie's career on Wall Street was launched," wrote Perkins. And the seeds of Merrill's role as the champion of the individual investor were sown.
Marketing Pioneer
Merrill now inhabited a space held mostly by venerable firms, such as JPMorgan (JPM), that turned up their noses at advertising.
"Charlie decided to buck tradition. He elected to use various techniques, including advertising, to sell bonds for which he believed a market existed," wrote Perkins. "Charlie saw nothing inherently wrong with the direct solicitation of potential investors, so long as he provided accurate, up-to-date information."
Through this work, Merrill had access for the first time to the financials of mass retailers. He became a true believer in the future of American business, Perkins wrote, and invested his own money in stocks.
In 1914, frustrated by his lack of independence at Burr, Merrill struck out on his own. He opened an investment house at 7 Wall St., lured Lynch to work with him and became one of the first to target what's now called retail investors.
The eventually renamed Merrill, Lynch & Co. developed a small sales force providing superior customer service for those individual investors. The brokerage was also one of the first to emphasize getting solid returns for customers, not just preserving their capital. The new business model worked. The firm turned a small profit of $6,700 in the first four months of 1914.
Innovator
A brokerage business model that demystified transactions and helped ordinary people make solid decisions laid the foundation for future money managers.
One is Clif McIntire, a founding partner of Cygnus Asset Management in Charlotte, N.C.
He started on the floor of the New York Stock Exchange in 1962 and, he told IBD, has been keenly aware of the debt he owes Merrill.
Meanwhile, Merrill Lynch served as underwriter for securities of some of the 20th century's giants: Walgreen (WBA), Safeway (SWY), J.C. Penney (JCP).
Heeded The Warnings
But as the 1920s roared, Merrill became nervous about the market.
By February 1929, frustrated with his partners' reluctance to sell equities and move into cash, he wrote to Lynch: "The financial skies are not clear; I have many reasons for this opinion. ... Anybody not 'money drunk' can read these signs if he will."
That sober assessment was spot on. When the crash came, Merrill Lynch had trimmed its exposure to equities and limited those holdings primarily to firms it had underwritten.
The brokerage also had a controlling interest in Safeway, the grocery company where Charlie turned his attention next.
Seeing that the crash meant less interest in investing, and therefore fewer fees, Merrill and Lynch divested their brokerage business in 1930. Lynch retired, and Merrill was free to try something new.
Steering Safeway Up
Trying to convince recalcitrant partners of his ideas left Merrill wanting to be firmly in charge of policy decisions, Perkins wrote. The big stake in Safeway put him involved in management decisions. Now he threw himself deeper into that role.
Through a series of mergers and acquisitions, Merrill boosted the chain from 670 stores in 1926 to 3,265 in 1933. He even dabbled in grocery minutiae, coming up with a free magazine for women lining up at the checkout counter.
Though it was financed only through advertising — in the hope the content would steer women's buying habits — Family Circle made a profit in just five years.
In 1939, a 10-year agreement for the brokerage house E.A. Pierce & Co. to take over Merrill, Lynch & Co.'s accounts was ending. Winthrop Smith Sr., who had been an unnamed partner alongside Merrill and Lynch, had been running the brokerage accounts at Pierce. It was Smith, wrote his son, who convinced Merrill to return and spend 1940 reshaping his company into the entity that would bring Wall Street to Main Street.
The Return To Investing
With Smith's help, Merrill launched the re-imagined investment firm.
One of the first changes, which Merrill later called "the single most important policy of the new Merrill Lynch," was paying the brokers a salary rather than commission, wrote Smith Jr. That made the whole firm responsible for customer satisfaction and not focused on transaction quantity.
That principle became one of the firm's most enduring identifiers, when glowing press coverage referred to Merrill's team as a "thundering herd." And it's a guiding spirit for today's successful asset managers, McIntire says.
Through the 1940s, Merrill Lynch's role as the firm bringing Wall Street to the masses proved a winner. The firm had its work cut out for it, since the market crash and Depression had left the average American skeptical of wealthy investors, says Smith.
One California branch manager organized a series of investing lectures for women, and they flocked to the event. The reserved hall was supposed to hold 50 and wasn't big enough for the 850 who responded to the ad, wrote Smith.
Despite sagging trade volumes because of World War II and a competitive disadvantage that came from being the only firm paying brokers strictly a salary and not a commission, Merrill Lynch eked out a profit as early as 1942. By the end of the war three years later, it served 250,000 new customers, Perkins wrote.
Merrill didn't live long enough to see his firm become the behemoth it is today. He died in October 1956 after a series of heart attacks.
The secret of his success, says Smith, was that he knew doing the right thing by his clients was also a profitable business model.
This Leaders & Success profile was originally published on Jan. 23, 2015.
Merrill's Keys
Overcame: Skepticism when he warned of stock market crash in 1929.
Lesson: Doing the right thing by your clients can also be profitable.
Quote: "The interests of our customers must come first."
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