How the Chairman of Merrill Lynch Invests
To millions of Americans, Wall Street is more than a narrow lane through downtown Manhattan. It is the Yellow Brick Road leading to the Emerald City — the good life, college for the kids, a house in the country, an old age free of money worries. Much of the credit for spreading that faith must go to Merrill Lynch, Pierce, Fenner & Smith, Inc., the largest stock-brokerage house in the world. While it now leads the industry in underwriting and probably runs second in institutional business, Merrill Lynch has always made a special point of cultivating the country’s legion of small investors. Much of the company’s success has come from its willingness to court them as avidly as Wall Street’s other big money managers woo multimillion-dollar pension funds.
There is no tougher or more successful evangelist of capitalism for the little man than the head of the vast Merrill Lynch empire: Donald T. Regan, chairman of the board, a craggy, forceful man of 53 who strongly resembles Kirk Douglas. Regan’s frequent public appearances as an advocate of the stocks-and- bonds route to riches have made him seem a spokesman for all of Wall Street. He turns up on television talk shows and before congressional committees, arguing for reforms that might make the market attractive to still greater numbers of small investors — the so-called odd lotters, who trade in blocks of less than 100 shares. Regan’s recently published history of the 1970 stock market disaster, A View from the Street, is among other things a paean to the power of small investors to shape the nation’s financial future.
Regan seems the embodiment of self-made Wall Street success. From modest beginnings as a Merrill Lynch sales trainee, in two and a half decades he has built a personal fortune he himself estimates at well over $10 million. It might plausibly be assumed that most of his wealth has been generated by the kind of informed trading of common stocks that would seem appropriate to the trail boss of Wall Street’s thundering herd. But the assumption would be wrong.
Donald T. Regan has minimized brokerage fees on his own multimillion-dollar portfolio mostly by buying and holding shares in a single good company — his own.
To be sure, Regan has shared some of the odd lotter’s most dramatic ups and downs. In 1953 he bought a hefty chunk of an obscure over-the-counter issue called Haloid Corp.; eight years later, to his portfolio’s great profit, Haloid became Xerox, the wonder stock of the 1960s. Later, however, Regan caught computeritis and bought 2,500 shares (at $10) of Com Comp Corp., a Long Island software company that soon went bankrupt. He invested still more thousands in a plan to computerize hospital inventories of medical supplies; that was such a memorable flop that even now Regan refuses to discuss it.
Over the long haul, Regan has done enviably well in the market. By his estimate, his holdings have probably grown in value by 500% since the early 1950s. Even so, the way Regan made his fortune is far more typical of the fortunate businessman than of the skillful Wall Street wheeler-dealer. Like many successful executives of his Depression-scarred generation, Regan confined his investing during much of the postwar period almost completely to increasing his equity in his own company. Merrill Lynch brokers regularly advise their customers to put their eggs in several baskets; Regan plunked nearly all of his into one.
Until he was 34, Regan could hardly call himself an investor at all. “The simple truth is that I couldn’t afford it,” he says frankly. The world’s best-known stockbroker plainly feels that a would-be investor should be on solid financial ground prior to embarking on a fling in the market. Before he would even begin to think about bulls and bears and margin calls, Regan wanted a house of his own, a savings account nest egg that would cover six months’ expenses, and a life insurance policy. Getting those things in order was not easy. Mustered out of the Marine Corps in 1946 as a lieutenant colonel, he joined Merrill Lynch as a trainee — and promptly took a one-third cut in pay, to $3,600 a year.
After six years with Merrill Lynch, Regan was invited to join the firm as a junior partner. It was obviously tempting. If he accepted, it would mean a healthy rise in income: he would get a share of the firm’s profits as well as his sales commissions and salary. But there was a price. To join he would have to contribute an investment of $10,000 to the partnership’s working capital. That would mean emptying his savings account or taking out a second mortgage on his house.
To the type of Wall Street swinger who would not flinch at taking out a second mortgage just to buy into a hot stock, Regan’s remembered hesitation may seem absurd. But to Regan the dilemma was painful. “Never in my life had I anted up my home or my savings on an investment bet,” he says. “I felt a good deal of anxiety about it. In fact, I didn’t really know whether accepting would be the responsible thing to do.” Despite his misgivings, he went ahead and put his savings into the partnership — a decision made a good deal easier by a loan for part of the $10,000 from Charles Merrill, the senior partner.
As Merrill Lynch operations grew, Regan increased his partnership interest. By the mid-1960s, fully 95% of his portfolio consisted of his ever-expanding share of Merrill Lynch. In 1971 that accumulated stake paid off in the way that has made rich men of the executives of many other burgeoning concerns. His company went public. In exchange for his partnership contributions, Regan got 167,130 shares of Merrill Lynch common stock, 4.2% of the initial issue. Those shares, plus another 65,520 he has since acquired, recently had a market value of nearly $7 million — many times Regan’s investment over the years. Dividends from his Merrill Lynch stock amounted last year to nearly $70,000. On top of that are Regan’s Merrill Lynch salary, $293,000, additional Merrill Lynch stock options and retirement benefits, plus dividends from his other securities holdings.
Now comfortably ensconced in the ranks of Wall Street’s millionaires, Regan continues to show a deep-rooted preference for investments over which he can exercise close-in, direct control. Most large brokerage houses, including Merrill Lynch, offer clients a variety of ways to invest in real estate, including investment trusts and public limited partnerships (see the article on page 40), but Regan has shunned them because they would hand control over his money to other people. He prefers instead private syndications of individual investors. In this way he has helped finance a large apartment complex in Phoenix, a commercial center in booming Fairfield County, Conn., and a shopping center, office and apartment development in Atlanta.
As well as building above ground, Regan’s money is at work below it: oil and gas explorations that he has backed have paid off in Oklahoma, Texas, Colorado, Wyoming and in Canada. Like other wealthy men, he has found that in investments of this kind he stands to win even if he loses. Because of the large tax write-offs available to top-bracket taxpayers who finance oil exploration, money lost on dry holes can often be used to offset taxes due on totally unrelated income. Says Regan: “If you know what to look for, some of the best investment advice you’ll ever find comes from the Internal Revenue Code.” That kind of advice, though, is more for millionaires than for the Merrill Lynch odd lotters whose commissions helped make Regan rich. — Christopher Byron