Charlie Merrill, Part I
Brian Trumbore
President/Editor, StocksandNews.com

Last week I had some thoughts on the Wall Street of 1955, courtesy of a book written back then by noted business writer Martin Mayer. I mentioned Mayer's admiration for Charlie Merrill, the founder of Merrill Lynch, and I thought I'd give a brief biography of Merrill himself using Mayer's book, "Wall Street: Men and Money," as well as other sources I have here in my library. It was Merrill, after all, who brought Wall Street to Main Street.

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Charlie Merrill was born in Green Cove Springs, south of Jacksonville, FL, in 1885. The son of a doctor who operated a pharmacy on the side, Merrill was not a good student. In fact, after being sent to Worcester Academy in Massachusetts following elementary school, and then stints at Amherst College and Michigan Law School, as best as I can ascertain he never graduated. [How one could get into law school without an undergrad degree back in those days I'm not sure, but two of my sources say this was so. Maybe it was a joint program of some sort.]

Following his school experience, Merrill attempted to pursue a career as a professional baseball player but he soon realized he lacked the talent to make the big leagues. Then in 1907 his future father-in-law offered him a Wall Street related job in Manhattan, just in time for the Panic of 1907, whereupon he not only lost his job, he broke up the engagement.

In 1909 he took a job at George H. Burr & Co. and was told to establish a bond trading and sales operation. At this time Charlie Merrill began to formulate his philosophy on dealing with the retail brokerage client. In 1911 he wrote an article for Leslie's Illustrated Weekly, "Having thousands of customers scattered throughout the United States is infinitely preferable to being dependent upon the fluctuating buying power of a smaller and perhaps on the whole wealthier group of investors in any one section."

And so it was that in 1914 Charlie Merrill created Charles E. Merrill & Co. with friend Edmund Lynch, which then became Merrill Lynch & Co. [The original documents omitted the comma between the two names and it has stuck ever since.] One banker commented at the time "Merrill could imagine the possibilities; Lynch imagined what might go wrong in a malevolent world." Market historian Robert Sobel notes in "The Pursuit of Wealth":

"Naturally, Merrill hoped to do a sizeable business in an environment that became increasingly competitive after the outbreak of World War I. Even so, he was more restrained than most, hoping to attract a different kind of clientele than did most of the small houses of the period. He targeted conservative individuals, who at that time were not interested in stocks and bonds, but instead put their savings into bank accounts. Merrill was convinced this was a large, untapped market, and his advertisements of the period were geared to such people. He trained his salesmen carefully, admonishing them to consider themselves teachers and consultants more than hucksters. 'I notice a very unfortunate tendency [on the part of our salesmen] to dwell upon the profits a customer is likely to make instead of the merit of an issue as an investment,' he wrote in 1916. 'We try to be conservative and careful.' The salesmen were asked to 'bear in mind that in every sale you are either destroying or building good will [for the next sale], which is our most valuable asset.'"

Both Merrill and Lynch served stints in the Army during World War I and their firm was run by associates while they were away; once back, Charlie Merrill focused on building up the enterprise. But by early 1928 he became convinced that high stock prices bore no relation to reality and in March of that year he suggested to his clients that they lighten up their portfolios. It's kind of interesting what Merrill thought of valuations back then, in light of the constant debate on the topic in the Wall Street of today.

"The average P/E (price / earnings) ratio for stocks, which had been 9.2 in 1924, had risen to 20 in 1927 [Ed. note: 2005's P/E on the S&P 500 is about 20 as well], an unheard of level. Some spoke of a new era in which such multiples would be the norm, but Merrill was suggesting that his clients lighten their portfolios. 'Now is the time to get out of debt,' he wrote on March 21, 1928. 'We do not urge you sell securities indiscriminately, but we do advise in no uncertain terms that you take advantage of the present high prices and put your own financial house in order.'" [Robert Sobel, "The Pursuit of Wealth"]

By the way, the Dow Jones Industrial Average closed at 206 on 3/21/28 and would peak at 381 the next year so Charlie was a wee bit early. Shortly after the October 1929 Crash, however, Merrill transferred all his brokerage clients and employees to E. A. Pierce and went into semi-retirement. But Charlie was forced to spend more time in the business following the death of Lynch in 1938.

Then in 1939 Mr. Pierce had difficulties and an old associate, Winthrop Smith, urged Charlie Merrill to absorb Pierce and a smaller house, transforming it into Merrill Lynch, Pierce & Cassatt. In 1941 Merrill purchased New Orleans-based Fenner & Beane, and out of this came Merrill Lynch, Pierce, Fenner & Beane; the largest brokerage operation in the nation with 100 offices.

Charlie Merrill wasn't in the best of health, owing in large part to his enjoying the good life perhaps a bit too much, and in 1944 he suffered a heart attack, after which he was basically a part-time worker, though it was still clear who was boss, even as Winthrop Smith assumed more of the day-to-day leadership?which led to Merrill Lynch, Pierce, Fenner & Smith. Meanwhile, Charlie Merrill chose to focus his attention on the firm's sales operations and public relations. Robert Sobel comments in a different book, "The Great Boom":

"Merrill hoped to convince a public with memories of the market crash of 1929 that investment in stocks was now prudent and that brokers?could be honorable and forthright. If potential small investors were persuaded that the broker was a professional in every sense of the term, they might be induced to use his services. This was a segment of the population brokers traditionally had ignored; they had discouraged individuals with only a few hundred dollars from investing."

Charlie Merrill believed that even small investors in time could accumulate considerable assets. Merrill was hoping to do for Wall Street what chain stores had done for retailing: "make smaller profits per client but larger overall revenues through volume." [Sobel]

Back in these days, the New York Stock Exchange mandated minimum commissions and most of the Street charged far more. But Charlie Merrill was constantly campaigning for lower rates. He expanded Merrill Lynch's research operations and whereas other brokerage firms back then charged for it, Charlie Merrill's boys passed it out for free. The brokers were paid salaries, not commissions, and Merrill Lynch was aggressive in promoting this. There was to be no pressuring the client. "The interests of our customers MUST come first," was emblazoned on an early training brochure.

We'll pick up the story next week including Charlie Merrill's declaration of principles.

But I just have to add a note about last week's piece and the comment of investment adviser Major Angas: "OUR CUSTOMERS HAVE YACHTS." George L. wrote in with some great background.

"I remember Martin Mayer's book when it was first issued. In 1940 Fred Schwed had penned one under the title "Where are the Customers' Yachts?" This title was taken from an epic Wall Street wag who told the story of a 'customer's man' (that's what we used to be called) walking with a client by a riverside near the marina after a particularly weak spell in the market. As I recall it, when the broker pointed out the bankers' yachts, then the lawyers' yachts, and then the brokers' yachts, the customer is said to have asked, 'Yes, but where are the customers' yachts?'"

Thanks, George, and to all, keep those cards and letters coming.

Sources:

David Colbert, "Eyewitness to Wall Street"
John Steele Gordon, "The Great Game"
Martin Mayer, "Wall Street: Men and Money"
Robert Sobel, "The Pursuit of Wealth"
Robert Sobel, "The Great Boom"

Brian Trumbore

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