Market Analysis

Rooted in Rocky Soil

Flipping through history's pages, we find plenty of hard times, some far harder than today. But one thing rings true time and again—economic ashes grow innovation.

The world's going to hell in a hand basket—ask pretty much anyone. Either government will handcuff business or regulate it too lightly; we'll suffer sluggish growth or another catastrophic bubble and bust. Hard to argue with a Catch-22. But flipping through history's pages, we find plenty of hard times—some far harder than today—and one thing rings true time and again: Economic ashes grow innovation.

Take the 1940s. The Great Depression and World War II had free markets on the run. Perhaps no industry was as hard hit as the US securities business. The very symbol of capitalism's ills, over a decade of bad press had laid low the titans of Wall Street. Sluggish markets thinned the financial herd—brokers, underwriters, and dealers dwindled from 5,855 in 1940 to 4,343 in 1947.[1] This was no time to float risky ideas on Wall Street.

Playing it conservative worked for some, but not Charlie Merrill. Back from a 10-year hiatus, Merrill wanted to shake things up in 1940. The Street's problems were easy to spot. After the notoriously treacherous twenties, those who knew the stock market didn't trust it and those unfamiliar with investing had no way of learning. One famous 1939 survey showed many Americans thought the New York Stock Exchange traded cows and pigs (livestock) not stocks and bonds.[2]

Having made his first fortune buying into grocery stores and retail chains in the twenties, Merrill thought the securities business could learn a thing or two from them. Want folks to trust Wall Street again? Think full disclosure. Bring on the masses and embrace a lower margin, higher volume business. Reach out and educate folks from the cities to the suburbs. Align interests by putting brokers on salary, not commission.

Merrill spent much of the decade luring ordinary investors back to the stock market. Under the motto, "investigate, then invest," the firm's advertising campaigns doubled as public education programs. A famous example, "What Everybody Ought to Know About This Stock and Bond Business," ran in the New York Times in 1948. The ad explained the securities business in no fewer than 6,000 words. True to his grocery store background, it was an ingredients list for finance. But Merrill went one better. He didn't want consumers puzzling out tongue-twisters like "acesulfame K" or foreboding phrases like "yellow lake 5;" rather, he sought to list and define the erstwhile mysteries of investing.

"It was probably the biggest job of mass education that's ever confronted any business at any time in the history of this country," Charlie declared.[3]

A gamble to be sure. But a gamble that paid off. Merrill eclipsed the competition, quickly assuming the mantle of largest American brokerage—and not a minute too soon. The first long boom lurked. Over the next two decades, as war worries waned and the Depression got a bit more distant, hordes of new investors flocked to stocks. Hotshot mutual fund managers became popular heroes, exciting technology issues burned brightly, and returns outstripped even the great bull of the twenties. When Charlie Merrill died in 1956, Merrill Lynch dominated the investing landscape with 300,000 customers and over $500 million in assets.[4]

Few foresaw a brighter day back in 1940, let alone wanted to risk their necks on it. But as one Merrill executive later said, "To be successful in business you have to realize that a great time to do something often is when nobody else thinks it's a great time."[5] Those words are just as true today, for investors and businessmen alike.

Merrill Lynch, of course, no longer exists as it once did, having been bought out at the height of the 2008 panic by Bank of America. And, in an odd twist of fate, it may need to be spun back out again, should recent reform proposals to again separate commercial and investment banking become law. Just goes to show—there's no way of knowing what the next big opportunity is or exactly when it'll come knocking. But it will come, ready or not.

Investors can choose pessimism. Or they can doubt the darkest days' hype, secure in the knowledge that better times are almost always rooted in rocky soil.


[1] Sobel, Robert. The Big Board: A History of the New York Stock Market. The Free Press, New York, 1965. Page 321.

[2] Eric J., Weiner. What Goes Up. Little, Brown and Company, 2005. Page 16.

[3] Eric J., Weiner. What Goes Up. Little, Brown and Company, 2005. Page 17.

[4] Fisher, Ken. 100 Minds That Made the Market. Business Classics, Woodside, CA, 1993. Page 101-103.

[5] Eric J., Weiner. What Goes Up. Little, Brown and Company, 2005. Page 14.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.