THE CLIENTS*
THE CLIENTS*
THE CLIENTS*
Names Available on Request
American Express...President
American Petroleum Inst...Director
Secretary of the Army
N.W. Ayer Advertising...CEO
Babson College...President
Bankers Trust...Director
Bowater...CEO
Brown University...Chancellor
Champion International...President
Citizens Utilities...CEO
Colgate-Palmolive...Director
Combustion Engineering...CEO
Conoco...CEO(s)
Du Pont...Vice-Chairman
Dynamics Corp of America...CEO
Eaton Corp...CEO**
Electrolux...CEO
Eli Lilly...President
Emery Air Freight...CEO
Ernst & Whinney...Director
Fortune Magazine...Publisher
General Dynamics...CEO
General Electric...CFO
General Reinsurance...Director
Great Northern Nekoosa...CEO
GT&E...Director
U.S. Holocaust Foundation...Fnd Mbr
IBJ Schroder Bank...Chairman
IBM..."Buck" Rodgers
Management Asset Corp...Founder
Marketing Corp of America ...Founder
McGraw Hill...Director
Monday Night Football
J.P. Morgan...Director
NFL Hall of Fame
Norton Company...CFO
PBS...Chairman
Peoples Bank (CT)...President
PGA Tour...Chairman
RJR Nabisco...Chairman
Rockefeller, Mrs. Avery
Stanley Works…CEO
Taito Corp (Japan)...Director***
Tambrands...CEO
Tellabs...Director
Time Magazine...Publisher
Towers Perrin...CEO
Travelers...Chairman
US Tobacco...Vice Chairman
Warner Amex Cable...Director
Wausau Paper...CEO
Xerox...Vice-Chairman
***
* Certain company names have since changed due to corporate mergers.
** Personal consulting client.
Not a Merrill client.
***Japanese bond client. Frequently traded $400 million US Treasury bonds only. Could not participate in S&P strategy because of Japanese restrictions.
A STORY
THE CLIENTS*
THE CLIENTS*
After graduating from Penn State and spending a few years in the Air Force, I was interviewed, hired and mentored by Daniel P. Tully, a Merrill Lynch legend who would go on the become CEO of the firm.
That began what would be my 30-year career with Merrill.
This is just one small story from those days.
Because I was going to be located in a very affluent part of the country which had a lot of investors in high tax brackets...and who paid high state and city income taxes...I decided to deal primarily in tax-free municipal bonds.
Interest rates were high during this period, with "munis" sometimes offering double digit TAX-FREE yields. In states and cities with income taxes, these bonds were often more attractive than stocks, which historically only provided an average return of around 10%...TAXABLE.
Over the years, this specialty...and a little luck... resulted in the clientele at the left.
Occasionally, however, some of these bond clients would want to get involved in the stock market...which as a bond guy definitely wasn't my cup of tea!
There had been numerous studies and reports over the years which confirmed that the vast majority of investors...including the "pros" and their managed funds...continually failed to even match let alone beat the market!
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Standard & Poor's (S&P)/Dow Jones tracks and reports on that performance every 6 months:
Also, S&P shows that a fund doing well in one year has ALMOST NO CHANCE of remaining even in the top HALF of funds over the next 5 years.
The Danger of Listening to "Experts"
"A blindfolded monkey throwing darts at the stock listings page could assemble a portfolio that does just as well as one picked by a team of professional analysts."
...Burton Malkiel
Former Professor of Economics, Princeton University
Former Member, Council of Economic Advisors
Former President, American Finance Association
Former Dean, Yale School of Management
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Anyway, a better way had to be found if we were going to avoid losing good bond clients whenever the inevitable bear market occurred in the stock market.
Index funds weren't the answer either, because while they would beat the vast majority of stock-picking strategies, as indicated above, they would still lose in a bear market...because they ARE the market!
What was needed was a way to own the S&P 500, but without the downside risk!
This led to a strategy using TREASURY BILLS AND S&P 500 INDEX OPTIONS which could accomplish the following:
If the S&P 500 increased during the year, the client would capture most or all of that increase.
If the S&P declined, or even crashed, the client would lose little or nothing.
For example, if the client invested $100,000 in the T-Bill/option package...say $90,000 for $100,000 face amount of 1-year T-Bills** and $10,000 for the options... and the S&P 500 Index increased, say, 15% during the year, the package would be worth around $115,000 at year end.
If the S&P declined or even crashed, the package would still be worth close to the original $100,000.
The key was that the interest earned on the T-bills would cover the cost of the options, and the T-bills would mature at their face value of $100,000
Matching the S&P if it went up...
Losing nothing if it went down...
Nobody else was offering anything close to that to their clients!
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But all of that was back in the days of much higher interest rates...when the yield on the T-bills could cover the cost of the Index options. No more. Strategies trying to employ the same general idea are still around, but investors either give up some appreciation potential or take on some downside risk, or both.
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Dan Tully retired as CEO of Merrill Lynch in 1997 and I retired the following year. We had both had great careers at what was then a great firm, long before it ventured into sub-prime mortgages and had to be rescued by Bank of America!
I now hang out in a lovely retirement community in Scottsdale, AZ,... still preaching the futility of stock-picking...and creating "synthetic bonds" to beat today's low interest rates.
Guess I've been doing this stuff too long to give it up!
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** T-Bills are issued at a discount and mature at par, the difference being the stated interest.
Note: Neither Bank of America nor any of ts subsidiaries are responsible in any way for the content of this website.
Note: I am retired and no longer a registered investment advisor.
Disclaimer: All of the information above is presumed to be accurate, but cannot be guaranteed. Please don't invest using ANY strategy without consulting with your financial, legal and tax advisors.