Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Allaway. My co host Joe Wisenthal is away
Speaker 1: this week. But for those of you who follow Joe
Speaker 1: on Twitter, you probably know that one of his favorite
Speaker 1: activities is to read the print edition of Barons, the
Speaker 1: financial magazine. And the reason he likes to read the
Speaker 1: print edition specifically is because he likes to look at
Speaker 1: all the ads, and most of those ads are for
Speaker 1: various financial products. So today, in honor of Joe, since
Speaker 1: he can't be here with us, uh, I thought we
Speaker 1: might take a moment to revisit the first ever financial advertisement.
Speaker 1: And it actually came later then a lot of people
Speaker 1: might think. It was written by a guy called a
Speaker 1: Angle who was working at Meryl, and it was published
Speaker 1: in nine in the New York Times, and it was
Speaker 1: really the first such financial advertisement that we've seen in
Speaker 1: the sense that it was aimed at everyday investors. And
Speaker 1: I encourage everyone, after they listen to this podcast please
Speaker 1: to go and google the ad. It's called What Everybody
Speaker 1: Ought to Know About the Stock and Bond Business, and
Speaker 1: it's basically seven thousand words of pure text explaining what
Speaker 1: stocks and bonds are to everyday investors. But this was
Speaker 1: the thing that kicked off all the ads that we
Speaker 1: see nowadays in places like Barns. And again, the reason
Speaker 1: why people like Joe find the ads really interesting is
Speaker 1: that they tell you something about where Wall Street is heading.
Speaker 1: They tell you about where Wall Street is trying to
Speaker 1: make money from every day investors like you and me.
Speaker 1: So we're gonna dive into not just that ad, but
Speaker 1: also the trajectory of Wall Street. How we got to
Speaker 1: the place today where a lot of the business is
Speaker 1: aimed at marketing products like e t f s, like
Speaker 1: mutual funds to everyday investors. And we really have the
Speaker 1: perfect person who's going to be our guest for this episode.
Speaker 1: His name is Eric Weiner. He's on my team at Bloomberg.
Speaker 1: He heads up are very, very excellent E t F
Speaker 1: coverage and he is also the author of an entire
Speaker 1: book on the history of Wall Street. It's sort of
Speaker 1: an oral history. It's called What Goes Up? The Uncensored
Speaker 1: History of Modern Wall Street as told by the bankers, brokers,
Speaker 1: c e o s, and scoundrels who made it happen. Eric,
Speaker 1: thanks so much for joining us. Thanks for having me
Speaker 1: Tracy or me um. So some of my favorite episodes
Speaker 1: that we do on All Thoughts are where we find
Speaker 1: people at Bloomberg who have interesting backgrounds, interesting backstories, and
Speaker 1: interesting accomplishments. So I was actually very pleasantly surprised to
Speaker 1: see that you had not just written one book, which
Speaker 1: we're going to talk about today, but actually two books. Uh,
Speaker 1: how did that come about? And maybe you can give
Speaker 1: us a little bit of background on your role as
Speaker 1: a financial journalist. Well, it's this book was sort of
Speaker 1: a labor of love and a product of all of
Speaker 1: the work that I had done in the ninety nineties
Speaker 1: as a journalist when I was at dow Jones UM.
Speaker 1: The idea came from really bizarrely reading a book called
Speaker 1: Please Kill Me, which is about punk rock, which is
Speaker 1: another one of my interests. But it was done in
Speaker 1: this exact style, and what I noticed was that it
Speaker 1: took something that wasn't necessarily a singular thing, singular place,
Speaker 1: a singular time, and put it in a narrative structure
Speaker 1: that made it all makes sense as if it had
Speaker 1: happened in a preordained way in the same At the
Speaker 1: same time I was watching those Ken Burns documentaries that
Speaker 1: we're all coming out, and he was doing very interesting
Speaker 1: things by using primary sourced information as well as interviews
Speaker 1: in order to tell a story. Uh, and working with
Speaker 1: a friend of mine in publishing, I came up with
Speaker 1: the idea to do this for the history of Wall Street,
Speaker 1: which I had sort of been chronicling by talking to
Speaker 1: all of these people at various different investment banks as
Speaker 1: I was reporting, and I just naturally had an interest
Speaker 1: in history, so I had asked them how things came about,
Speaker 1: and different firms had really lent the histories. Lehman Brothers
Speaker 1: had basically every document it had going back to the
Speaker 1: eighteen hundreds. H. Merrill Lynch had a library, a literal
Speaker 1: I mean the literal museum of all stuff, including the
Speaker 1: the famous Low Angle ad. So I found sort of,
Speaker 1: you know, mutual kinship, and people were remarkably open to
Speaker 1: talking to me. It took me a while to nail down.
Speaker 1: I did about three hundred interviews with some of the
Speaker 1: richest people in the world, so nailing them all down
Speaker 1: wasn't easy, but a lot of them were very willing
Speaker 1: to talk and very candid about what happened. Three hundred
Speaker 1: interviews is a pretty lofty sum. So you mentioned um
Speaker 1: the Loo angle ad uh and again for people who
Speaker 1: have never seen it before, it's definitely worth taking a
Speaker 1: look at. But your book, it's in oral history, as
Speaker 1: we've discussed, and you have a couple of people who
Speaker 1: describe the first time that they read that ad in
Speaker 1: walk us through why it was so important and what
Speaker 1: that moment of time was like for Wall Street where
Speaker 1: it was exactly Well, so, what what had happened was
Speaker 1: Charlie Meryll Merrill Lynch was one of the bigger what
Speaker 1: they called wire houses at the time. It was one
Speaker 1: of the bigger brokerage firms at the time. Charlie Meryll
Speaker 1: had built it up through the nineteen twenties and then
Speaker 1: comes along he actually really advised advises all of his
Speaker 1: investors to get out of the market. He gets out
Speaker 1: of the market and walks away from Merrill Lynch. Merrill
Speaker 1: Lynch stays as a firm, but Charlie Merrill goes off
Speaker 1: to California to his other venture Safe Way, which is,
Speaker 1: you know, the grocery store chain. After ten years, his
Speaker 1: partners are the firm is falling apart. The stock market
Speaker 1: has gone through the Great Depression, you have the new
Speaker 1: deal coming in and the partner's approach Charlie Merrill. When
Speaker 1: one partner, in particular, when Smith, who ended up running
Speaker 1: the firm himself, approaches Charlie, Marrilyn says, we need you
Speaker 1: to come back, and he says, in order to come back,
Speaker 1: we have to change our ways. We have to change
Speaker 1: the way Wall Street does things, and we need to
Speaker 1: adopt many of the ideas that are common to retailing,
Speaker 1: particularly retailing groceries. So he talked about the need that
Speaker 1: people don't want to buy loose coffee. They want to
Speaker 1: buy packages of coffee, and either they wanted in eight
Speaker 1: ounces or twelve ounces or sixteen ounces, and we want
Speaker 1: to be there to sell them those different packages of coffee.
Speaker 1: But what but what they don't want to do is
Speaker 1: just buy stuff. They wanted to sort of be set
Speaker 1: up for them. And so they started thinking about Wall
Speaker 1: Street in those terms. They started piecing together put putting
Speaker 1: UH their financial advisors on salary instead of commissions so
Speaker 1: that they would do more work in terms of putting
Speaker 1: together a portfolio for people. UH. They incentivized their staff
Speaker 1: to work directly with individuals to start marketing their services
Speaker 1: in their local towns to hold educational meetings with groups
Speaker 1: and different things, and advertising was a natural outgrowth of this. Now,
Speaker 1: the thing was that at that time Wall Street was
Speaker 1: a really closed society, and advertising, quite frankly, was considered ghosh. Uh,
Speaker 1: it just wasn't something that was done that was, you know,
Speaker 1: for grocery stores, not for you know, finance firms. So
Speaker 1: Charlie Merrill said, no, we actually need to do this.
Speaker 1: And what he proposed was what you described, which is
Speaker 1: seven thousand words explaining how stock trading, stocks and bonds works.
Speaker 1: And it's essentially you would never run it today. You
Speaker 1: would run it as a pamphlet or something. It's just
Speaker 1: a block of words. And the people at Meryl were
Speaker 1: dumbfounded by it. They didn't think it would work. Uh,
Speaker 1: they were willing to do it because Charlie at that
Speaker 1: point had developed sort of the cult of personality where
Speaker 1: he just did what he wanted. So everybody said brilliant,
Speaker 1: Mr Meryl, and then behind their backs were saying, I
Speaker 1: don't know about this, um, but it worked dramatically because
Speaker 1: nobody had ever spoken to people about how this stuff worked,
Speaker 1: and suddenly you had people reading this and then saying, hey,
Speaker 1: did you see this on the You know, I was
Speaker 1: reading this on the subway. Did you see this? They
Speaker 1: started calling up Merrill Lynch asking for copies. Merrilynn started
Speaker 1: giving away copies, printing and printing it up as sort
Speaker 1: of a flyer. Uh. And it really became kind of
Speaker 1: a touchstone for what can be done with reaching out
Speaker 1: to the general public, which is something that Wall Street
Speaker 1: was really reluctant to do, largely because after twenty nine
Speaker 1: it got blamed for everything, so it just didn't really
Speaker 1: Its just the organization, the institution as a whole, decided
Speaker 1: we're safer if we just don't deal with those people. Uh.
Speaker 1: And Merrilllynch said, actually, in order for us to survive,
Speaker 1: we need to deal with those people. We need to
Speaker 1: deal with them fairly, and we need for them to
Speaker 1: understand what it is that we do. Uh. And that
Speaker 1: that was Its seemingly logical today, beyond any sort of comprehension,
Speaker 1: but at that time it was this radical idea that
Speaker 1: made Charlie Meryl seemed like a complete outsider. It was
Speaker 1: Wall Street brethren, right. So I mentioned the date on
Speaker 1: that ad, which is and I don't know about anyone else,
Speaker 1: but I was kind of surprised that it was that late, because,
Speaker 1: as you mentioned, you think about the Great Depression and
Speaker 1: you think about the number of people who supposedly got
Speaker 1: burned by the stock market crash, and it feels like
Speaker 1: a retail investor event. So are you saying that retail
Speaker 1: investors were burned like en masks, they were burried or
Speaker 1: was it they were burned? Um? Although, uh, the degree
Speaker 1: to which is debated because the records are kind of sketchy.
Speaker 1: What really happened, what really got blamed was mutual funds
Speaker 1: which were sold through Goldman saxonby enough, so Goldman really
Speaker 1: took it on the chin coming out of the depression.
Speaker 1: But a lot of this, you have to realize, is
Speaker 1: an effect of the way the media understood things at
Speaker 1: the time and what they were being told. So it's
Speaker 1: really easy to run, you know, dust bowl stories. And
Speaker 1: then what happens is, you know, you go from the
Speaker 1: from the crash to to the Great Depression, which isn't
Speaker 1: necessarily linear, but one gets blamed for the other, and
Speaker 1: people be in to say that Wall Street is evil,
Speaker 1: these greedy bankers. That whole thing sort of starts cropping
Speaker 1: up as a narrative, and for Wall Street, the idea was,
Speaker 1: let's just retrench. We have a great business. Because all
Speaker 1: commissions were fixed, they basically had a license to print
Speaker 1: money if they just were left alone. So they really
Speaker 1: wanted to be left alone. It was Charlie Merrill who
Speaker 1: saw that reaching out, reaching back out to the wider world,
Speaker 1: which was what happened in the in the twenties, where
Speaker 1: you had a lot of ordinary people investing, uh, that
Speaker 1: reaching out back out to the wider world was really
Speaker 1: the only way that they were going to grow and thrive.
Speaker 1: So it's now the late nineteen forties and Mr Meryl
Speaker 1: is exporting his brand of let's say, standardized grocery store
Speaker 1: like financial products. Although as you mentioned, mutual funds had
Speaker 1: existed for some time at that point. How quickly did
Speaker 1: this take off amongst retail investors? How quickly did Wall
Speaker 1: Street regain trust after the Great Depression? And what sort
Speaker 1: of products were being Well, it's the nineteen fifties, you
Speaker 1: kind of start having a bull market, and so it
Speaker 1: was just kind of great timing on his part that
Speaker 1: people wanted to hear about this as stocks were starting
Speaker 1: to kick back up. I mean, if you figure it.
Speaker 1: There was a very long uh depression and recession in stocks,
Speaker 1: So suddenly you had all of these value stocks, all
Speaker 1: these stocks that were value that you could just simply
Speaker 1: flat out and make money on because they were trading
Speaker 1: for below their book value, so they had to come
Speaker 1: back up. Basically, individuals were buying stocks. Um. The big
Speaker 1: miss on Charlie Merrill's part was that he believed that
Speaker 1: mutual funds had caused the twenty nine crash and put
Speaker 1: an edict in at Merrill Lynch that they would never
Speaker 1: do mutual funds. So that basically creates the business for
Speaker 1: Fidelity because up in Boston they had a whole different
Speaker 1: way of managing money. They've been managing money for a
Speaker 1: lot of old wealthy families for a long time, and
Speaker 1: they put their money in portfolios that they called funds
Speaker 1: and they eventually sold them as mutual funds. Fidelity was
Speaker 1: one of these firms. So if Charlie Merrill had the
Speaker 1: idea of a mutual fund, of putting together a portfolio
Speaker 1: of stocks that would do would behave a certain way,
Speaker 1: would make would have made a lot of sense to
Speaker 1: people at that time. They just weren't really readily available
Speaker 1: until the nineteen sixties when Fidelity grew. But if Merrill
Speaker 1: had decided to sell them, they probably would have taken off.
Speaker 1: But the other thing that takes off is Buffet style
Speaker 1: of investing. Buffett goes back to Uh, he'd been in
Speaker 1: New York. He goes back to Nebraska and starts his firm,
Speaker 1: and it's like the greatest rocket ride in the history
Speaker 1: of Wall Street, where there were just so many stocks
Speaker 1: that were beaten down. He called them scar butts that
Speaker 1: he could just make money by picking off stocks that
Speaker 1: we're going to have to revert to the mean. And
Speaker 1: you have this style of investing called value investing that
Speaker 1: comes along. And Fidelity then in turn creates momentum investing
Speaker 1: through its mutual funds and through a guy named Jerry Say,
Speaker 1: who basically started following all the hot stocks of the day,
Speaker 1: which from the fifties to the sixties are oddly enough,
Speaker 1: the technology stocks of the day, which are usually the
Speaker 1: hot things that are growing, and we see it today
Speaker 1: even Uh. This is what people focus on is the future.
Speaker 1: It's this technology. So at that time it was Xerox.
Speaker 1: He rode Xerox to the moon and everybody was He's
Speaker 1: showing up on Time magazine, and all of a sudden,
Speaker 1: people are following momentum and the idea of factors that
Speaker 1: we think of today, the idea of investing styles that
Speaker 1: we think of today, really originates from this nineteen late
Speaker 1: nineteen forties to nineteen sixties period where investors themselves, uh,
Speaker 1: professional investors themselves are figuring it out. So you're talking
Speaker 1: about the beginnings of passive investing essentially, you know, the
Speaker 1: idea that you can have active managers sort of taken
Speaker 1: out of the equation and people can just ride whatever
Speaker 1: is moving up. Hence the name momentum. How much tension
Speaker 1: was there on Wall Street at the time that this
Speaker 1: was invented, because nowadays you see a lot of handwringing
Speaker 1: about it. You know, we've had Alliance Bernstein talking about
Speaker 1: how e T f s and passive investing are destroying capitalism.
Speaker 1: People worry that passive investing is of course eating into
Speaker 1: active managers fees. Was that kind of conflict evident when
Speaker 1: these things were first on the rise, Not not really,
Speaker 1: because costs were kind of assumed on Wall Street. It
Speaker 1: was assumed to be an expensive business. And the other
Speaker 1: thing was the way that people kind of understood the
Speaker 1: business was through people and the individual money managers, whether
Speaker 1: it was Jerry Side to Peter Lynch. Uh, they captured
Speaker 1: much more of the attention than the products did, so
Speaker 1: you wanted to invest with. It was kind of the
Speaker 1: idea of that that best in the bright which, although
Speaker 1: it's an ironic statement, applies here, uh, where you really
Speaker 1: wanted to invest with who the market considered to be
Speaker 1: the best and the brightest guy. Along the way, Jack
Speaker 1: Bobil figures out, you know, we don't really need to
Speaker 1: do all of that stuff, and we can just put
Speaker 1: together indexes of this. And there had been indexes for
Speaker 1: a very long time, you know that the Dow Johns
Speaker 1: Industrial Index that had been there for a while, but
Speaker 1: there weren't a lot of them, and they were followed
Speaker 1: kind of just as benchmarks that you would beat as
Speaker 1: a as a mutual fund manager, but or as a
Speaker 1: asset manager or any kind of financial advisor. But as
Speaker 1: the research started to show that most of these guys
Speaker 1: don't really beat the market, the idea of tracking and
Speaker 1: index became more important. In n there was a thing
Speaker 1: called may Day where New York Stock Exchange, or actually
Speaker 1: all stock exchange commissions were fixed and it was a
Speaker 1: very complicated formula, but the point was that if you
Speaker 1: sold ten shares, one hundred shares, a thousand shares, you
Speaker 1: paid a percentage of flat percentage of that amount, of
Speaker 1: that fe of that amount as a feat. Wall Street
Speaker 1: was basically ranking raking your money hand over fist, and
Speaker 1: it was kind of behaving as a cartel, and they
Speaker 1: were forced to unfixed commissions. Now within this there was
Speaker 1: a big push on Wall Street to do this because
Speaker 1: some firms, Merrill Lynch among them, could sort of see
Speaker 1: that this would increase volume and they could pick up
Speaker 1: in volume what they would lose in commissions. But it's
Speaker 1: this moment in n where you lose commissions, you lose
Speaker 1: fixed commissions on Wall Streets. Suddenly you can have block trading.
Speaker 1: A lot of different discounting goes on, and these index
Speaker 1: funds become really cheap to operate because suddenly moving a
Speaker 1: whole bunch of stock doesn't cost nearly as much as
Speaker 1: it used to, moving a whole bunch of bond doesn't
Speaker 1: cost as much as it used to. At the same time,
Speaker 1: you're having technology catch up, so there's more automation coming on.
Speaker 1: These were kind of products that we're waiting for a moment.
Speaker 1: So at the time when they first came out, people
Speaker 1: looked at it and we're like, this is great, fine,
Speaker 1: but this isn't really solving my problem. Ten years later,
Speaker 1: fifteen years later, it suddenly starts solving a problem. And
Speaker 1: when we look at it today, and you know, E
Speaker 1: t F is what I'm what the team that I'm leading, uh,
Speaker 1: and we look at what E t F s are doing,
Speaker 1: it is exactly what the conversation is. This is an
Speaker 1: entire evolution that basically starts in the early nineteen seventies
Speaker 1: and brings us to today. We're the only thing people
Speaker 1: are talking about is cost m hm um. So it's
Speaker 1: really interesting to think that, you know, it took a
Speaker 1: while for the market infrastructure basically to catch up to
Speaker 1: the concept of these low cost funds. They used to
Speaker 1: take days off, a day off of the trading day
Speaker 1: just to catch up on paperwork. They had a whole
Speaker 1: paper crunch thing because people, I'm not not joking, Tracy.
Speaker 1: They would have be carrying cards because those computer cards.
Speaker 1: You've ever seen those, the IBM dot. Yeah, so they'd
Speaker 1: be carrying stacks of those around on the exchange in
Speaker 1: order to trade shares. You literally had runners running around
Speaker 1: with certificates, stock certificates saying, you know, I bought fifty
Speaker 1: a T and T and they would give you a
Speaker 1: certificate for fifty a T and T And you had
Speaker 1: to wait for the little guy to show up with
Speaker 1: with that pile to know that your deal had gone through.
Speaker 1: And it was a completely different world from let alone
Speaker 1: you know e trade to today where it's just you know,
Speaker 1: boom you you know, on our terminal, you can do
Speaker 1: every single thing chat uh trade it no matter what,
Speaker 1: it can all be done in one little electronic ecosystem
Speaker 1: in seconds. That took hours days. You didn't know what
Speaker 1: was exactly going on. You didn't know the final price. Um.
Speaker 1: You know, automation has changed everything in a very very
Speaker 1: short period of time for Wall Street. Right, so you
Speaker 1: point out that at one point it was sort of
Speaker 1: about the people managing funds and investments, but now it's
Speaker 1: most definitely about the product. And if you open a
Speaker 1: publication like Barons and look at the ads like Joe
Speaker 1: likes to do so, very often you'll just see pages
Speaker 1: and pages of ads for things like you know, mutual
Speaker 1: funds ETFs uh certain portfolios, and they tend to change
Speaker 1: along with the time. So when people are searching for yield,
Speaker 1: you'll see yield enhanced investment offerings. When people are worried
Speaker 1: about rising rates, you'll see see bond e t f
Speaker 1: s that are protected from duration risk, all that sort
Speaker 1: of stuff. What's next in the evolution of that market?
Speaker 1: What's next in terms of the provision of let's say,
Speaker 1: standardized grocery like financial products. Yes, well we're still we're
Speaker 1: still packaging coffee. Um. You know, this whole thing is
Speaker 1: about the sophistication of the investor. So if Joe were here,
Speaker 1: I would challenge him to go look back at old
Speaker 1: Barrens and try to find the moment when Peter Lynch
Speaker 1: stopped appearing in fidelity ads. It used to be that
Speaker 1: every mutual fund AD had a person and it would
Speaker 1: have like their star manager John Neff whoever you know, says,
Speaker 1: you know this brilliant quote, and then here are the
Speaker 1: mutual funds that you want to invest in. Now we're
Speaker 1: talking about products, we're talking about strategies. Um, the individuals
Speaker 1: behind it don't matter. You're talking about the firms people trust. Uh,
Speaker 1: certain firms of Vanguard was Bogel. Now Vanguard is Vanguard
Speaker 1: U Bogel. You know clearly is is a face, but
Speaker 1: people trust Vanguard as the firm. So when you look
Speaker 1: at what's coming next, it is treating increasingly treating individuals
Speaker 1: like institutions and assuming that individuals have that knowledge. And
Speaker 1: that's the stication to understand beyond simply what momentum and
Speaker 1: what UH value is too various different strategies, And here's
Speaker 1: a way to hedge, you know, your the risk that
Speaker 1: the Fed is going to raise interest rates. I mean,
Speaker 1: people just didn't pay attention to things like the Federal
Speaker 1: Reserve much before Alan Greenspan came along. So the idea
Speaker 1: that like people are watching interest rates, are watching what
Speaker 1: the FED says, are looking at financial news, the idea
Speaker 1: that they're all these financial news channels and all these
Speaker 1: different ways to get financial news. There was none of
Speaker 1: that before. So you can kind of assume that it's
Speaker 1: basically the increasing sophistication of the investor will or the
Speaker 1: perceived increasing sophistication of the investor will be reflected in
Speaker 1: these ads as they get more and more complex. Perceived
Speaker 1: of course being the key word that we have had.
Speaker 1: We've had controversies crop up. Even this year, when we
Speaker 1: had a bunch of volatility related exchange traded notes and
Speaker 1: products blow up, there was a huge question mark over
Speaker 1: whether the investors that had bought them actually understood the risks. Um. Eric,
Speaker 1: I'm so sorry we're going to have to leave it there.
Speaker 1: But my entire aim at um having you on this
Speaker 1: week was really to make Joe jealous by just talking
Speaker 1: about portions of financial product advertising. So I think we've
Speaker 1: succeeded in that for sure. This is a lot of phone, Tracy,
Speaker 1: Thanks for having me, all right, So, Eric Weiner, once again,
Speaker 1: the book is What goes up, the uncensored history of
Speaker 1: modern Wall Street, as told by the banker's ceo s
Speaker 1: and scoundrels who made it happen. You can also follow
Speaker 1: Eric on Twitter. He is at Eric J Weener one.
Speaker 1: And if you're interested in learning more about passive investing
Speaker 1: or exchange traded funds, we have an entire podcast dedicated
Speaker 1: to that at Bloomberg and it's called Trillions and it
Speaker 1: is hosted by the very talented Joel Weber and Eric
Speaker 1: val Quness. This has been another edition of the All
Speaker 1: Thoughts podcast. I'm Tracy Alloway, and you can follow me
Speaker 1: on Twitter at Tracy Alloway. Thanks for listening.