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Financial Decoder: Season 3 Episode 3


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Founder and Chairman of the Board Chuck Schwab joins Mark Riepe for a candid discussion about the decisions he made that disrupted the brokerage industry.

Charles Schwab & Co. founder and Chairman of the Board Chuck Schwab discusses the decisions that led him to create a revolutionary business model for the brokerage industry. Chuck talks about his decision to start a business, his difficulties raising capital, and even how he convinced his wife to mortgage the house to support his upstart company. He and Mark also discuss the 1983 sale of the company to Bank of America, how he bought the company back—and how Chuck framed both decisions to his employees and the board of directors.

The goal of Financial Decoder is to help listeners make better financial decisions. And while the decisions Chuck describes are in the context of his life, many of us will make decisions that may be smaller in scale but are of the same basic type: when to sell, when to change direction when things aren’t going well, when to ask for help, when to borrow money, and many others. And in the context of our own lives, these can be high-stakes decisions indeed.

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MARK RIEPE: In most episodes of this show we share evidence about biases that were investigated in big research studies that report aggregate or average results across many people. We also talk about solutions that are—again—the results of averages across people and studies.

Today’s episode is micro instead of macro, and we’re going to be talking about the decisions of one person: Chuck Schwab. He has a new book out that is a remarkably candid discussion of a lifetime of decision—some that worked and some that didn’t.

The scale of the decisions he had to make were often far beyond the scope of what most of us will ever face. Schwab disrupted a massive brokerage industry in the United States, and the board room decisions Chuck tackled directly affected thousands of employees and millions of clients.

The decisions Chuck describes are in the context of his life. And while the decisions you and I make are smaller in scale, the types of decisions are the same: when to sell, when to change direction when things aren’t going well, when to ask for help, when to borrow money, and many others.

More importantly, in the context of our own lives, the decisions we face are still high-stakes, and we think there’s a lot to learn from listening to the stories of others.

Mark: Joining me now is Chuck Schwab, the founder and chairman of the board of The Charles Schwab Corporation. He’s got a new book out this fall called Invested. It’s a really personal memoir all about creating and running an iconic business. Thanks for being here, Chuck.

CHUCK SCHWAB: Well, Mark, thanks for inviting me, and thank you, our listeners. Thank you.

MARK: On this show, we talk a lot about decisions. We’ve got episodes called “When Should You Sell a Stock?” “Are You Taking on Enough Risk?” Your whole book, what I loved about it was it’s just a series of really important decisions. And one of the first ones, the first really big important decision, was you decided you wanted to work for yourself and not work for someone else. Can you talk a little bit about that, how you came to that realization?

CHUCK: Well, it took a lot of experiences beforehand. In some ways, I knew I was better working for myself. I like to make decisions reasonably quickly. I like to, essentially, take the risk that is generally there when you’re making decisions on your own to go do things. Maybe it’s my personality, I don’t know. I’ve never gone to a psychiatrist to find out exactly why, but it’s always worked out that way that I’ve sort of found myself in sort of leadership kinds of things when I get there. And fortunately, it’s worked out reasonably well.

MARK: It certainly has. One of the early anecdotes that I really enjoyed was you going with your grandfather to Golden Gate Fields. It’s a race track, still exists. And you were interested in gambling, but at the same time, you were starting to really think about stocks. And so both involve risk, gambling and investing, but that’s where the similarity ends. They’re very different.

CHUCK: Well, that was part of my learning. I was probably only 12 when I had that experience with my grandfather, who actually was a practicing lawyer in Sacramento, California. When he drove down to San Francisco, he always had to stop by the race track. So I began learning a little bit and tried to understand, you know, “Grandpa, how do you pick a horse out of 10 horses running around that ring out there?” There’s some horses that are older and more lame than the other horses, and so you begin using some information that might help you to come to a better calculation. But I understood, gosh, that’s not very good odds. So actually, it was an initiation for me on probability studies. As an investor, you’re trying to determine the probabilities of losing or gaining an outcome. In gambling, frankly, there’s no way of knowing.

MARK: It’s one thing to take career risks, but another to take risks with your investments. What’s a good way for investors to figure out the right amount of risk to take?

CHUCK:  Certainly, at 25 years of age, you can take a lot of risk because you have a lot of time in front of you to make up the loss that you might receive by taking a bad risk. If you’re 75 and you’re trying to save money for the purpose of keeping your lifestyle the way you’ve always loved it, you want to take less risk. And so it depends on where you are in the life cycle.

The highest risk, of course, is not just buying a stock. It’s starting your own company, and that’s what I did. Actually, I started a couple of them. There were some failures along the way. And fortunately, I was pretty tenacious, and I kept going at it and found a company that really did succeed. That’s when I started Schwab in 1973. But it took some starts and some fits along the way that didn’t quite work out.

MARK: One of the big breakthroughs was May 1, 1975. The brokerage industry was being deregulated. Companies could now, they really had the freedom to charge whatever they wanted to in terms of commissions. What made you confident that the price reductions you were planning were going to be enough to really capture the attention of investors?

CHUCK: Well, I didn’t know for sure, but I was very empathetic about the investors’ being gouged tremendously by these rates. If you bought 100 shares of a $20 stock, the commission was 4%. If you’re making a $2,000 investment, it was going to cost you $100. That is enormous take out of your principal. And so I thought, certainly, people would be highly interested in finding a way to save money.

MARK: Well, controlling expenses is something everybody should do.

CHUCK: And that’s something that is highly controllable. You just have to look around a little bit.

MARK:  Let’s move ahead in time a little bit to the early 1980s. You’re thinking about selling the company to Bank of America. One of the things we’ve talked about on this show is how people frame decisions to make them look as attractive as possible. How did you go about framing the decision to sell with the board and your employees?

CHUCK: Well, Mark, at the time, I had this little company that was growing like crazy, and it was always in need of more capital to grow new offices, to put in more computers, hire specialists in different areas of the company that I needed—they were not inexpensive. So the cost of capital for me was very high. Wall Street simply didn’t want to finance its competitor. So I was sort of locked out of the venture capital world because they were somewhat controlled by Wall Street. And of course, going public and those kinds of things, was very, very difficult or nearly impossible. And when you’re a growing company, you need growth capital. And the company was profitable, but not enough to allow me to do the kind of growth that I wanted to do, and to get share of market for an industry that was just beginning.

So the decision, when Bank of America first came around, I thought they were going to just lend us some money, which was wonderful. And then they got further into the details, seeing how great the company was, and then the thought became that maybe they ought to own part of the company, and then not only part of the company, they wanted to buy the whole company. So when they [said] they were going to pay $50 million for the company, at that time, in 1980, was an unbelievable amount of money. It was more money than I’d ever seen in my whole lifetime. I owned, at the time, probably about 40% of the company. I didn’t really want to do it, but boy, I thought for the benefit of my family, I should probably take that opportunity.

MARK: Then you make another decision: You buy the company back four or five years later.

CHUCK: In ’87.

MARK: For $280 million?

CHUCK: Actually, when the warrants were all put together, it was a total of about $300 million. So the bank itself got six times its money. It was a great return of capital for them in basically a four- or five-year period of time. And of course, for our shareholders, we did quite well also.

MARK: A lot of the repurchase was with borrowed money. And you talk a lot about debt throughout the book, going back to your parents, and how they lived through the Great Depression. Their personal experiences really influenced their attitude towards debt and savings. What was your attitude towards debt back then?

CHUCK: Well, fundamentally, I hated debt. And I had some experiences that really got me into some trouble early on, when I was even younger, probably 22. But I knew the power of debt and the leverage that came from it. And so once I got into debt, I wanted to get out as quickly as I possibly could. So that was always in the back of my mind. If I went into debt, I had to have an exit program right up front. In most of these cases I was able to do that.

MARK: In 1979 you spent an enormous sum of money buying a computer system to automate trades.

CHUCK: Well, at that time Mark, we were growing so quickly, and we were a paper-based business, essentially. I mean, we had some data processing but not much. The only way we were ever going to be a successful company, I thought, is to adopt technology from stem to stern. And so we searched the world, frankly, for a good basis for a technological advance for the company, so we could handle the move from paper to computers. And we found a software company in Wisconsin that had what we needed, the basis anyway. The price, at the time, was $500,000. And that was our entire net worth.

MARK: So how did you make it all work?

CHUCK: Fortunately, they let us pay it over time, but we signed the contract for 100% of our net worth of the company at the time. So it was a huge decision, but it was the only decision. If we didn’t go that way, we would never have an opportunity to sort of stay alive and survive.

MARK: Related to that, Chuck, one of the great quotes in the book is, let me read it to you exactly. You said: “You bet the company, but not because you enjoy taking risks. The entrepreneur realizes that to achieve the vision, risks must be taken, and true entrepreneurs try to control risk as much as possible.” Now to me, that sounds a lot like investing.

CHUCK: Absolutely, it’s the same thing. And of course, I had always loved investing, and through that time period, I had very minimal investments because every dime I had, I put into the company. That was an interesting proposition. So at that moment in time, I had only one investment, and that was called Schwab.

MARK: That’s right. There’s always that tension between diversifying and putting your money in the best opportunities.

CHUCK: And that included convincing my wife that “this is such a great investment, let’s mortgage the house.” That was a real test of her commitment to our marriage.

MARK: A few months after you put in this system, things aren’t going well.

CHUCK: It was really touch and go. In fact, we were at one point almost ready to pull the plug, and a couple of the key guys, Bill Pearson, myself, and a couple others, we thought we’ve just got to give it one more try. And we got over it.

MARK: What I found interesting is that you were really willing to pull the plug on the whole thing. There are so many people, whether investing or making decisions in their personal life, who suffer from the sunk-cost fallacy. Once they made a decision, they can’t go back on it, and you were ready to pull the plug on it.

CHUCK: Well, we had to go back to the starting point and see if we could start again because the error rate was so high. We figured that we’d probably be put out of business if we didn’t back away from that and come back at it again and try to play another day.

MARK: You’ve always seemed to have a good sense as to when to reverse course. How do you keep a clear head in those situations, and what’s your kind of North Star that keeps you, ultimately, on track?

CHUCK: I think it’s just good sense. People come to a rational decision. They try to take all the input that you possibly can, and come up with the smartest decision you can. There’s nothing unique about it. We had good intellectual capacity there to make these decisions and make them right.

MARK: So you’ve got to have a clear head and clear vision, and go where the facts tell you.

CHUCK: And have a backup plan, too. And have confidence, really confidence about doing it. And we did.

MARK: I’m glad you mentioned confidence because that’s a nice lead in to another topic that we’ve talked about in a past episode, which is so many people are overconfident. I’m just going to read a passage here, “From an early age, I recognized that the world is full of people more capable than I am in a thousand different ways. Some entrepreneurs never learn that simple lesson and pay for their stubbornness with slower growth.” You’ve got a good balance between being confident but not being overconfident. How do you figure that out? Where’s the right point between the two?

CHUCK: Well, I certainly learned at an early age that I knew I wasn’t good at everything academically, and therefore there were other people that were clearly superior.

MARK: So confidence, tempered with humility.

CHUCK: Understanding that and having the sense of personal confidence that I could rely on other people, and we had a common mission. What we wanted to try to achieve, in our case, was building this company, and sharing some ownership with everybody in the company. I always believed in sharing ownership, to some degree. And having the common purpose.

MARK: Another theme in the book is that to be a successful investor, you have to ultimately be an optimist. Why is optimism so integral to a belief, for example, in equity markets?

CHUCK: Well, I connect my optimism with the very fundamental belief that I think the human race wants to do better, wants to grow. It’s all about innovation, it’s about creativity, it’s about what the human spirit, the human mind can do. Capitalism, in some ways, has been so powerful through the ages. And I have this belief that there’s no limitation, frankly, to what can be achieved by people of mutual interest, direction, and goals.

One of the examples I use in the book, I’ve been lucky to be on sort of four or five S&P 500® companies, being on the board of directors. And I’ve never seen a management come to the board and say, “We cannot grow this next year.” They would have been fired. So every management comes in with plans for the next year that will grow 5%, 10%, 50%, whatever it might be. That’s the power behind, I think, the great American experience. We have thousands of companies that every year grow, plan to grow. Some don’t make it, but it’s this competition that is wonderful. And so that’s why I’m a big believer in index funds, because you have a thousand companies in the fund, and you know that probably 70- or 80% of them are going to grow next year, maybe a handful, 20% might not grow, but you certainly are able to participate in the big growth plans of America.

MARK: Yeah maybe let’s talk a little bit about index funds. You mention diversification is essentially free, and anyone can be fully diversified. Index funds are a great way to do that. What are your thoughts?

CHUCK: On average, on average, they grow 5-, 7-, 9% per annum, it depends on the environment, and just by buying all of them, you’re going to participate in that. Now, if your goals are to have substantially higher returns than that, then you begin reducing your diversification. So these are decisions that have to be made on your own personal level, what’s comfortable for you in terms of taking risk, how much do you want to diversify.

MARK: How much you can afford to take risk; not everyone can take a lot.

CHUCK: I can point to many entrepreneurs that continue to be broke, and that’s certainly not a very happy life either. We each have to determine our own goals in life.

MARK: That’s right. What’s your financial capacity and what’s your emotional capacity for bearing risk? That’s probably the most important thing in investing, figuring out where that spot is.

CHUCK: Sure.

MARK: So Chuck, it’s a great book. What do you hope people take away from it when they’re done reading it?

CHUCK: Well, my first target in writing a book was I wanted to have my employees really understand the basis of the company, where we came from, why we’re doing this thing, and our purpose really in life. And then I thought, “Well, if I’m able to accomplish that, maybe my customers, my clients, would like to understand why we are what we are and why we do what we do.” And then I thought, “Well … it’s a pretty good story of an entrepreneur.”

MARK: One last question, Chuck. You were 38 years old when the big breakthrough came. The book has wonderful stories of the many jobs you were doing before that, some of which, frankly, you weren’t very good at. For the benefit of those in their 20s and 30s, how did you keep going and find your path?

CHUCK: Well, I always felt that I was learning. Whether I was driving a tractor, I was learning about agriculture, what that was all about. Whether I was working on the railroad, how transportation worked, how goods were delivered to different communities, how trains were made, how they were broken down. Then moving on to the insurance industry. I was a failure in selling insurance, that was for sure, but I learned a lot about the industry. These were all significant learning experiences. And probably the most important is dealing with people, and understanding people and understanding the differences between people. And I could figure out a way that I’d get along with almost anybody. That’s really important.

MARK: No matter what you’re doing.

CHUCK: No matter what you’re doing.

MARK: Chuck, this has been great. Most of us will never be faced with the magnitude of some of the decisions you’ve faced, but your approach to those decisions is something we can all learn from. It’s great to have you here to share those with our clients and with other listeners. So thanks for coming by.

CHUCK: Well, thanks, Mark. Thanks very much.

MARK: Chuck’s book has lots of great stories—about the company and himself, but also about how the brokerage business has changed over the last 60 years.

And as is so often the case, it’s important to hear about the past not just for the entertainment value of the stories, but because those stories deal with situations that have analogues in the decisions we all face today.

I want to wrap up today’s episode by highlighting one of my favorite features of the book. Every few chapters there’s a call-out box with a quote, and so many of them touch on themes that we’ve covered on Financial Decoder.

For example, one of them pretty much summarizes this entire show. Chuck writes that “A person’s approach to money, his or her saving and spending habits, and comfort or discomfort with risk, are all deeply ingrained, and more emotional than rational.”

Another one explains why we spend so much time talking about risk on this show. Chuck says that “With the stock market, there are no guarantees. You guarantee service, costs, quality, and certainly integrity. But you can’t guarantee performance. Risk is just part of the deal.”

We’ve covered confirmation bias many times, and that’s no accident. Chuck writes, “It’s very hard to be skeptical and smart when there’s money involved. Everybody wants to believe.” What he’s saying is that while investing requires optimism, you need to temper that optimism with a dose of realism and not jump on board every opportunity.

Many, many times we’ve encouraged people to seek out the opinions of others as a way of counteracting their own biases. This is something Chuck has done repeatedly. As he puts it: “I underscore that fact because while there are some areas where I trust my own knowledge and instincts, and never completely relinquish control, there are other areas where I’m eager to have help.”

We often preach against the dangers of overconfidence. Chuck has two nice thoughts on that subject. First he says, “If I had learned anything after years in the business, it was how little I could ever know about what the stock market would do tomorrow.”

Second, “We were all a little guilty of assuming that since things were going so well, we must be geniuses.”

And one final thought: It’s important to understand what you do and don’t control. As Chuck puts it, “You control your decisions, and you control how well you execute them; you don’t control the environment.”

There’s a lot more wisdom from Chuck that we haven’t covered, but if you’d like to read the book or learn more about it, you can go to That’s

I’ll also put a link to the book in the show notes.

That’s it for this episode. Thanks for listening.

Next time we’ll look at the liability side of your personal balance sheet and talk about personal debt.

As always, we’d like for you to leave us a rating or review on Apple Podcasts or your favorite listening app. It helps others discover the show. 

For important disclosures and a transcript, see

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Examples are hypothetical and provided for illustrative purposes only. They are not intended to represent a specific investment product.

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