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Sneak Peek: Charles Schwab’s New Memoir

When Charles Schwab founded the company that shares his name almost 50 years ago, he had a simple yet audacious goal: Create a different kind of brokerage. The deeper he dug into the investment world, the more he realized the deck was stacked against independent-minded investors—and he envisioned a company that was centered on helping individuals gain equal access to the markets and lower costs.

Chuck’s overriding determination and strongly held values led him to create Charles Schwab & Co., which helps empower individual investors to take control of their financial lives, free from the high costs and conflicts of traditional brokerage firms.

In his new book, Invested: Changing Forever the Way Americans Invest, Chuck provides the reader with a behind-the-scenes look into his personal and professional lives, reflecting on his triumphs, his equally important defeats, and how numerous times he had to reinvent his company in order to succeed.

Here are eight excerpts—containing eight lessons we all can learn from.
 

1. Be engaged

During his second year at Stanford Graduate School of Business, Chuck took a job at an investment firm, where he worked evenings and weekends before joining full time upon graduation. The experience gave Chuck a foundation for what he would eventually build:

So that first investing job was an eye-opener. I learned about risk, about volatility, about markets—and how they can be influenced and manipulated. I learned about speculation and greed and fear. I learned about the stories they tell on Wall Street; the better the stories, the more stocks they’d sell. The riskier the product, the more they’d get paid. I found out who was too often the winner in the broker-client relationship—and it wasn’t the client. I tested every part of the fire to see how hot it was, and I got all my fingers burned. And still I was not dissuaded. I loved what growing businesses offered. Through investing, you own a piece of that … a piece of the action. I hadn’t exactly found my place in the finance world yet, but I knew I had discovered the work I was meant to do.
 

2. Embrace change

In 1975, the federal government deregulated commissions for buying and selling shares of stocks—abolishing the fixed rates that had kept the cost of trading stocks sky-high. More than 30 New York Stock Exchange member firms would close that year alone, but Chuck remembers embracing the change:

To me, here was an opportunity to advance the cause of reform, do right by the ordinary investor, expand ownership of equities to a bigger slice of the U.S. population (which I’ve come to believe is essential to the preservation of democracy … call it skin in the game) and along the way build a substantial business.

In a real way, Charles Schwab was born of my own frustration. I was an independent investor. I was passionate about the market. I did my own stock research. I believed in taking charge of my own financial destiny. I loved the thrill of the chase. The last thing I needed was some broker’s questionable advice about what to buy, and when to buy or sell. And I resented paying for services I wasn’t using. I was also deeply frustrated. For I had come to believe that the brokerage business had a nagging problem with conflicts of interest. I knew that the big Wall Street brokerage firms that were also investment banks—despite their so-called Chinese walls—couldn’t easily put the interests of individual investors first. The same was true for commissioned salespeople, many of whom made their living by trading in and out of stocks—not by building up their clients’ portfolios. Not their fault: It was just how the system worked.
 

3. Do things differently

With the advent of Charles Schwab & Co., gone was the typical broker-customer relationship in which the broker would initiate a transaction, calling her or his client with a hot tip, or a buy or sell recommendation. Instead, Chuck took a different path:

“Good morning, you’ve reached Charles Schwab.”

“This is account number 12105002. Buy 2,000 shares of Motors, limit $57.” Click.

That’s it. Two thousand shares of General Motors at a price no higher than $57/share. Done.

Most of our customers 30 years ago didn’t even bother telling us their names. It was a radically new way of trading stocks, light years removed from the old model. Charles Merrill, founder of Merrill Lynch, used to say, “Stocks aren’t bought; they’re sold.” We came at it from exactly the opposite direction. In our case, the customer initiated the transaction, not the broker. We weren’t out there buying lunches for clients or taking them golfing. We weren’t calling anybody up with hot tips. In fact, I’d fire people if they gave stock advice. Nothing happened unless the customer asked first. Our only role was to carry out the customer’s wishes. Period. I had put a couple of ads out to publicize ourselves, and people started coming in. I had a sense that people really liked what we were doing. It started slow, 20 or 30 trades a day, and then we got to 100, and on it went.
 

4. Treat failure as an opportunity

In the 1970s, Schwab set up a telephone exchange in Reno, Nevada, to save on long-distance-call charges. One of Chuck’s trusted employees came up with the seemingly brilliant idea of selling the exchange’s services to other companies outside of Schwab’s business hours. What could possibly go wrong?

As it happened, there was a company in Reno, National Data Corporation (NDC) that was in the business of answering tollfree calls for other companies. After leasing our lines to NDC for a while, we ended up buying their call center. So now we owned a 100seat call center in Reno. By day, we handled stock trades. By night, we answered pledge calls for KQED, provided dealer locator services for Ford, sold records and even took orders for lingerie for Frederick’s of Hollywood. It worked surprisingly well—until August 16, 1977, the day Elvis Presley died. Suddenly, our lines were swamped day and night with orders for Elvis memorabilia and records. Some of our brokerage customers could not get through to make trades. I sent Rich Arnold to Reno to clean up the mess, and we wound up selling the call center back to NDC. That ended our brief foray into thirdparty-transaction processing. Sometimes a bright idea with a bad outcome is the one that gets you back on track toward the right one.
 

5. Learn from the challenges

Just prior to October 19, 1987, Schwab had been averaging 17,000 trades a day and Chuck thought the company was doing a great job handling the volume. When Black Monday’s volume surged to over 50,000 trades in one day, however, Schwab’s systems couldn’t keep up—though Chuck now recalls that failure as a blessing:

Our speed and responsiveness simply weren’t good enough. If you’re a growth company like Schwab was, and your objective is to be the best at what you do, you’ve got to be looking further out. Anticipating what’s around the corner. Some customers never forgave us, and we lost them forever. We paid the price for years to come in their lost revenue. Worse, to my way of thinking, we had failed in the eyes of those clients. Once lost, trust is hard to regain. Ultimately that experience led us to develop stateoftheart call centers, which could handle far greater fluctuations in volume, and eventually to pioneer the development of automated systems using touchtone telephones and the internet. We learned from our shortcomings.

In many ways it was a blessing in disguise. That moment, that crisis, I think of now as the final episode in the formative stage of The Charles Schwab Corporation. In the years to come, we would emerge bigger, stronger, more resilient, more innovative, more profitable and more influential than ever before.
 

6. Play the long game

Because of his fervent belief in the benefits of long-term, diversified, low-cost investing, Chuck urges investors to learn to live with short-term uncertainty—as hard as it may be:

I don’t think human nature deals very well with the patience and strong stomach investing requires. We’re wired for fight or flight. There is a central truth about investing: Time is on your side when there’s plenty of it; it can be your worst enemy when it’s scarce. Look at a chart of the S&P 500® Index over 40 years and you see an endless series of jagged peaks and valleys. Each one of those downs and ups is a moment of panic or elation. But step back for a wider view and you see the inevitable direction is up. Stick with it and ride out the emotions and you’re an investor.

By the same token, there are seven tenets of long-term investing that he champions at every opportunity:

  • Companies are built to grow (that is management’s mandate: Perform or get replaced).
  • The U.S. and world economies will continue to grow … indefinitely, with hiccups along the way.
  • The most important factors to put in your favor are diversification, time and low costs.
  • Diversification lessens the risk that any one investment or asset class will harm you while capturing some of the growth of winning investments.
  • Time captures the economy’s tendency to grow and helps you get past the downturns and recessions that occur regularly over time.
  • Low investment costs mean more of your money is working for you.
  • Investing doesn’t have to be complicated; index investing is among the simplest ways to invest, and today there are also low-cost managed accounts that take care of all the investment decisions for you.
     

7. Turn passion into success

One question Chuck gets asked often is from people looking for career advice: What’s the key to success? Here’s how he typically responds:

What are you good at, what do you love doing, what can you talk about without even thinking about it and without tiring of it? I ask them. That’s where you should put your energy. There is tremendous power in that because it drives you forward through the ups and downs—and there will always be plenty of both. That passion and knowledge also signal to others that you are genuine, with personal ambitions, true expertise, a direction in life—the real deal. People are attracted to that and you will need the support of others.

In my case, I loved investing—everything about it: the idea that companies are meant to grow, that anyone can participate in that growth and build up their own financial independence over time. Feeling that passion and then learning that most people were missing out because the system wasn’t designed to serve the average investor … well, that became an endless opportunity and a powerful cause that others would embrace with me!
 

8. Evolve but stay true to your core

Chuck sums up Schwab’s nearly half-century history this way:

We’re a different firm from when I started out but also not so different. The dream of an integrated financial experience for individuals, from banking to brokerage to financial planning and personalized investment advice and everything in between; it’s a reality, and we’re integrating the latest technologies and amazing computing power to make it as easy and effective as possible. In many ways, 2004 to the present was the final piece of our development, by moving from being exclusively a transaction specialist to now being able to provide personal relationships. And now because of our scale, we can do it while keeping our expenses incredibly low. That puts us in a fabulous competitive position that I don’t think other players can match.

The secret sauce was building a company from a very simple and basic belief: that you view your decisions through the lens of your clients’ needs and goals. What would they think; what would make their lives better, easier, more productive; what would they believe is the right thing to do? If you do that, then everything else will follow.

Learn more

Learn more about Invested: Changing Forever the Way Americans Invest by Charles Schwab, which will be available nationwide on October 8, 2019.

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