How to invest like... The pair who called the Wall Street Crash

Messrs. Merrill and Lynch helped spread wealth and opportunity from elites on Wall Street to ordinary people

Charlie Merrill (left and partner Eddie Lynch (right) have been descirbed as an Odd copuple" and their work helped bring investing to the masses.

The names Merrill and Lynch are synonymous with both the best and worst of the investment world.

The modern Merrill Lynch was a high-profile casualty of the credit crisis. It had moved aggressively into “collateralised debt obligations” – one of the toxic investments whose implosion is now seen as the trigger for the crisis – and the fallout put its survival in jeopardy.

The firm, whose aggressive approach was epitomised by its bull logo and nickname of the “thundering herd”, was eventually forced into a shotgun wedding with Bank of America amid criticism and recrimination.

"“A salesman deserves no credit for any sale made on the strength of exaggerated statement "
Charles E Merrill

But those famous names began their ascent almost a century earlier and their rise is the story of how wealth and opportunity spread from elites on Wall Street to ordinary people.

Charles E Merrill had moved to New York in 1907. He witnessed, later that year, a crash in the financial markets that wiped 50pc off asset prices.

He began his first company in 1914. He had met Edmund Lynch at the YMCA in New York and they were room-mates for a while. His fledgling firm became Merrill, Lynch & Co a year later when Edmund officially joined. It was a bond house, underwriting securities and trading the debt of companies that wanted to raise money from investors. The company was an active seller of US government war bonds during the First World War.

The early philosophy of Charles Merrill was evident in an article he wrote in 1911, before the company was founded, for Leslie Illustrated Weekly. It was addressed to “Mr Average Investor” and laid out why he believed integrity was vital in the sale of investments.

Merrill (left) and Winthrop H. Smith worked on a plan to "bring Wall Street to Main Street"
Merrill (left) and Winthrop H. Smith worked on a plan to "bring Wall Street to Main Street"

He fleshed out the idea in a memo to his salesmen five years later. It read: “A salesman deserves no credit for any sale made on the strength of exaggerated statement. The thing for you to bear in mind is that if you once get a customer’s confidence in the integrity and honesty of the house, you have already paved the way for a long string of repeat orders; whereas, if you exaggerate or paint the picture too rosy on the security that you are selling at the time, you have to go through the same process when you come to sell him a second time.”

Despite the company carrying only Charles’s and Edmund’s names, there was a third crucial figure in the story of Merrill Lynch.

Winthrop H Smith joined the company in 1916 and remained involved off and on until he left his position as directing partner 42 years later.

His son, Winthrop H Smith Jnr, also became an executive and, following his retirement from the firm, chronicled its history in a book, Catching Lightning in a Bottle.

“Charlie and Eddie Lynch were an ‘odd couple’ in some ways,” he told Telegraph Money. “Charlie was the charm of the party and a great ladies’ man with a watermelon smile, while Lynch was big framed, square faced and plain spoken.

“In business dealings [Charlie] could be a table-pounder and a bully. He was parsimonious, but both were also very generous to others.”

After growing the company through the Twenties, the pair faced a critical moment.

Mr Winthrop Smith Jnr explained: “In early 1929 Merrill worried about the overleveraging [excessive borrowing] by investors and feared a market collapse. No one heeded his words and he ultimately sought counselling.

“But after a few sessions the psychiatrist told Charlie that he wasn’t crazy and that he had just sold all of his stocks. This gave Charlie the conviction he needed and he finally convinced his partners and most of their investors that they needed to deleverage and get liquid [sell their shares to raise cash and pay off borrowings].”

Merrill warned clients in a letter in 1928. It said: “We do not urge you to sell securities indiscriminately, but we advise you in no uncertain terms that you take advantage of present high prices and put your own financial house in order. We recommend that you sell enough securities to lighten your obligations, or better yet, pay them entirely.”

While Merrill Lynch helped its clients dodge the worst of the Wall Street crash, the experience led the pair to cease securities trading and they sold that part of the business.

Charlie Merrill then helped in the running of the Safeway chain of grocery stores, having previously bought the company and listed it on the stock exchange.

The two men grew apart in this period, before Eddie Lynch died in London in 1938. The families continued to have ties, however, with Charlie’s son Robert G Merrill marrying Eddie’s daughter Vernon.

After Eddie’s death, Charlie went on to develop, with Win Smith, a concept that would be his legacy to future investors: bringing “Wall Street to Main Street”.

It was the evolution in 1940 of his “Mr Average Investor” idea from 1911 and involved widespread investor education. He put his brokers through the first organised training, to have them sell investments safely.

A man walks past a sign at the entrance of Merril Lynch headquarters in New York

Then free seminars were offered across the country in order to get ordinary people investing without the relying on professionals on Wall Street. In 1949 the company placed an ad in San Francisco appealing to “women who’d like to know more about Investments” that prompted 30,000 to enrol on an eight-week course.

Merrill set up tents at agricultural fairs and converted buses into travelling “stockmobiles” to reach a wide audience. A programme that enabled people to invest as little as $40 a month was established.

For investors today, this is surely the message of the lives of Merrill and Lynch. Invest what you can, understand your investments and do not rely on the so-called professionals completely.

• Five golden rules for DIY investing

Their foreseeing of the Wall Street crash is a reminder to look out for bubbles, and to seek out companies that are living within their means.

Merrill was sceptical of mutual funds and instead extolled the virtues of investors holding shares directly.

Investors today, however, may prefer the collective approach. In which case, they could back renowned investor Terry Smith, manager of the Fundsmith Equity fund. He focuses relentless on the return a company gets from the capital it invests.

It leads him to robust businesses that naturally have low borrowing and can generate cash. His fund has a total return of 59pc and an ongoing charge of 1.1pc.

It leads him to robust businesses that naturally have low borrowing and can generate cash. His fund has achieved a total return of 59pc over three years and has an ongoing charge of 1.1pc. Alternatives include the Lindsell Train Global Equity fund and the multi-asset Murray International investment trust.

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