Merrill Lynch’s “Bull”: Misrepresentation at Merrill Lynch

by Alexander Green, Chairman, Investment U
Monday, June 09, 2008: Issue #805

Let me tell you about the dumbest career move I ever made.

In 1999, Merrill Lynch began aggressive recruitment efforts. I really wasn’t interested. But, ironically, the more I begged off, the more money I was offered.

Unfortunately, my old firm provided the necessary nudge by informing me one day that I was prohibited from selling the shares in my pension – which had soared during the Internet mania – unless I left the firm.

Because I was one of the largest employee shareholders – and felt the technology bubble was likely to end badly – it provided a strong incentive to take Merrill Lynch’s offer.

Eventually, I did.

Big mistake. For starters, I was astonished to see that Merrill Lynch was pounding the drum for the very Internet darlings I had abandoned my old career to sell. For example, it had a “Strong Buy” on Lucent, Nortel, JDS Uniphase and Global Crossing – not to mention WorldCom, Enron and Adelphia.

I fired off a note to the analyst recommending JDS Uniphase at $150 a share. “How can you recommend a stock with such an insane valuation?”

“Valuation is only one of our metrics,” was his curt reply.

“But if that’s all wrong,” I wrote back, “what difference do the others make?”

I never heard from him again. JDS declined 99% over the next several months.

Merrill Lynch’s Unparalleled Record

Merrill Lynch also has an unparalleled record in hiring and firing chief investment strategists. In the late 90s, Charles Clough was pushed out for being too bearish. His successor Christine Callies remained stubbornly bullish throughout the bear market that followed. That led to her being replaced by Richard Bernstein, who bragged at the market bottom in 2002 that Merrill Lynch had “the lowest equity allocation on the Street.”

Despite its blue chip image and gold-embossed brochures, Merrill Lynch reminds me of the computer HAL 9000 in Stanley Kubrick’s “2001: A Space Odyssey.” Completely calm, completely rational – and totally out of control.

I’ll never forget my first day at the firm. A broker on my floor stopped by my office to welcome me. After chatting a few minutes, he told me he had a great investment idea to share.

I told him I was all ears.

“Get your clients to pull out the equity in their homes and invest it with one of our Internet and technology managers,” he said, his face beaming.

“Why would I do that?” I asked.

“Don’t you get it?” he said, looking a bit surprised. “First you get paid on the mortgage origination. Then you get paid on the assets under management every quarter. It’s brilliant.”

So brilliant, in fact, that nine years later his clients have likely paid tens of thousands of dollars in fees and lost most of the equity in their homes.

I could go on, but I’ll stop here. Merrill Lynch wasn’t my kind of place. After a few months I resigned, returning most of the big signing bonus I received.

Overall Experience at Merrill Lynch

My experience with the firm may have been atypical. I’m sure there are capable, qualified people at Merrill Lynch who are doing their best to serve their clients.

That wasn’t my experience, however. My experience was that most investors need Merrill Lynch like a fish needs a bicycle.

Of course, it’s not just Merrill Lynch. The standard line on Wall Street is that the capital markets are so complicated and your financial circumstances so unique, you can’t be trusted to run your own money. You need a professional money manager.

But do you, really? With a little education and a bit of discipline, you can run your portfolio yourself at a fraction of the cost of using a full-service broker.

And when you manage your own money, you don’t have to worry about conflicts of interest, self-serving advice, or hidden fees and expenses.

Our philosophy at Investment U is this: Educate yourself… and skip the Bull.

Good investing,

Alex

Today’s Investment U’s Crib Sheet

Our biggest obstacle to success as investors is not inflation, a down market, the tax man, or Wall Street. As Benjamin Graham wrote back in 1934, “The investor’s chief problem – and even his worst enemy – is likely to be himself.”

Here are three ways to take emotion out of the equation:

• Trailing Stops: Just Wednesday, Floyd Brown showed us how to remove emotion from your selling decisions. Here’s how trailing stops can help you lock in your profits. Full story.
• Asst Allocation: If only you had the perfect portfolio – one that grew 12% a year like clockwork without a losing year – then you’d be set for life. Here are four basic strategies that can help you do just that.Full story.
• Investing Strategy: When is the right time to buy? Here’s a strategy for active investors looking for growth stocks. It’s produced a 350% gain over a five-year period when put to the test. Full story.

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