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Just Ask Chuck

Searching for silver linings inside the derailed U.S. economy? They’re out there for the brave and resilient. Just ask Chuck Schwab, as investors have for more than 35 years. The stock brokerage pioneer maintains that amid the ashes of the financial crisis of 2008 exists one of the greatest entrepreneurial environments in years for those determined enough to plow forward.

“Certainly, we are in massive doldrums right now, but it’s usually in those time periods when the greatest opportunities arise,” Schwab tells SUCCESS. “It’s really the time period when entrepreneurs find and identify opportunities. Sure, it’s difficult to find money. That’s fine. They have to scratch along at first.”

Schwab compares today’s business environment to the one that existed when he borrowed $100,000 from a family member to start San Francisco-based Charles Schwab & Co. Inc., which today has 12,500 employees in 302 branch offices in 45 states, one branch in Puerto Rico and another in London.

“I look back upon 1974, and say, ‘Man, how grim was it?’” Schwab recalls. “It was very grim. Money wasn’t available for small business, but there was one heck of a lot of opportunity and lots of change going on. A huge amount of change comes out of these crises. I think entrepreneurs really survive fantastically well during periods of great change. It’s scary, but I am very optimistic. Five years from now, when we look back, we will see a lot of innovation, new risk-taking and new opportunities developed right now in 2010-11-12. It will be written up in SUCCESS magazine in 10 years.”

At 73, the maverick-with-a-cause chairman has seen it all—the booms and busts, the money rushing hungrily into stocks and money fleeing in fear. From the time his company broke ranks with the traditional brokerage industry in 1974 by pioneering the discount trade business, his immensely popular message has remained the same: The stock market should be accessible to everyone. And throughout that time, he has “never once” regretted that it was his name on the letterhead. “I have a total passion about the purpose of this company, how we really try to help the average American do better at investing and building a nest egg for their future,” he says.

Time to Make Your Moves

Schwab says that the flight of money to bonds and the reluctance to buy stocks are “the perfect measurement of the psychology of individual investors.”

“When you get in these periods of deep, almost Depression-like thinking and little hope, that’s the definition of the next great opportunity,” he says. “The natural thing is to feel really down and out, but that’s precisely the time when you’ve got to look above the fray and emotional clouds and begin making your moves.”

Schwab’s positive attitude got him through early challenges, including undiagnosed dyslexia that made his studies difficult. Even as we speak, he’s not deterred by the wailing siren below his San Francisco office that prompts a pause in our interview, or the back-to-back-to-back meetings he’s suffered on this day or a specific problem that made it necessary to remind a managerial group what the brokerage firm that bears his name represents.

Just Ask Chuck

“I had a conversation on communicating our message about an hour ago,” Schwab says between meetings. “It’s OK to admit mistakes and make things right for the client. We should always come out on the side of the client.”

Although they’ve had their share of ups and downs, Charles Schwab and the Chuck who has commanded it have consistently lived up to a credo based on innovation and high ethical standards.

Longtime Wall Street Journal Market Watch columnist and author Paul B. Farrell credits Charles Schwab’s innovation in Mutual Funds on the Net: Making Money
Online
, published in 1997 by Wiley & Sons. “When the history of Wall Street is written,” he writes, “four trends will be identified as significant in shifting the center of the financial community away from traditional Wall Street in New York City and out to the individual investors on Main Street. And all four of these trends [discount brokerage, full-service content online, one-stop mutual fund supermarkets and electronic trading tools] will be linked to Charles Schwab.”

An Attraction to Numbers

Before he was called Chuck, Schwab was known as Buddy, until he changed schools at 12 and decided he had outgrown the nickname. He grew up in a Sacramento household where money, or the limited supply of it, was a routine part of family discourse with his lawyer father.

Schwab struggled with dyslexia as a youth. Reading was difficult, but numbers made sense. By all accounts he maintained a high confidence level despite turbulent academic experiences. The nuns who taught at the parochial school he attended thought he was a slow learner. Schwab has credited classic comic books with helping him complete reading assignments.

“To be honest, I didn’t know I had a learning difference issue until I was 40, when I had my son diagnosed,” says Schwab, who is proud to be one of the first corporate executives to talk openly about his learning difficulties. “Nobody knew about it, talked about, and there was no science about it when I was a youth. So I had to tough it up and work harder. I read about half as fast as everyone in class. My language and thinking was fine. I just overcompensated for it by doing other things.”

The other things included entrepreneurial pursuits such as sacking and selling walnuts, and selling chickens and eggs. Like other kids of the time, he gathered Coca-Cola bottles and collected the nickel deposits they garnered. Instead of collecting baseball cards, he started studying stock market tables in the local paper.

“I think all those experiences helped me understand at a very young age the relationships between production and sales—how to produce a sack of walnuts and sell them, for example,” he says. “That’s the very essence of a free market system. A lot of people seem to have a tough time seeing those relationships, I guess. You create jobs in this environment by producing certain things that the customer will buy, and at the end of the day in a free market system hopefully there will be a little profit for your efforts. Then it becomes what you do with your profits. Generally, small-business men reinvest that money back into the expansion of their business and generate more profit.”

The Numbers Pay Off

Schwab’s strength in math and science helped him get into Stanford University in 1955. He failed both freshman English and French but persevered. His aptitude for economics and other business courses led him to pursue a B.A. in economics, which he earned in 1959. An experiment with law school lasted 10 days. He entered the Stanford Graduate School of Business, where he received his MBA in 1961.

In 1963, he and two partners launched Investment Indicator, an investment advisory newsletter. It proved popular, and he gained valuable industry experience.
He formed his initial brokerage firm, First Commander Corp., in 1971. Three years later, with the loan from his uncle, the country’s first discount brokerage firm was born in a newly deregulated market environment.

Schwab admits he didn’t fully realize what he was taking on when he decided to buck the existing brokerage landscape.

“Of course, I knew what I was doing would not be popular with the general brokerage community,” he says. “We were bucking 200 years of fixed prices. This maverick was out there underpricing them. I was ridiculed at the time [by] people saying I was hurting the industry. It was a bigger trend going on, as far as free trade. Retail was opening up. Price controls were loosening. The activity happened in many different industries. We were becoming a much freer economic society. That trend is still going. The Internet has added a whole new dimension to pricing.”

Back in 1971, participating in the stock market was limited to the top 10 percent of Americans, according to historical records. Schwab’s innovative changes, and the ripple effects they caused, opened up stock availability to working class adults, about half of whom are estimated to own stocks today.

“Chuck considered all the commissions, front-end loads, margin interest, markups, fees and other ‘impairments of capital’ as conspiracies against the public,” author John Kador wrote in Charles Schwab: How One Company Beat Wall Street and Reinvented the Brokerage Industry, published in 2002 by Wiley & Sons. “He swore eternal hostility to every form of swindle of investors.”

Conquering the Ups and Downs

Schwab’s career has had its share of challenges, missteps and victories. Many, but not all, occurred in the early years. “There are so many different chapters in my life that involved setbacks,” he says. “From a business sense, the most difficult days of my life involved facing some of those payrolls in the early years of developing this business, and then in the late 1980s when Bank of America owned our business for a short time and I thought it was going to be sold to someone else.”

Schwab’s company passed the half-million-customer mark in 1983, which attracted Bank of America’s attention; BofA acquired it for $55 million that year. It was a generally successful but unhappy union. Schwab arranged a $280 million employee buyout, and the company regained its independence.
“The best day of my life could be when we put together a buyback plan from BofA by the employees and myself on March 31, 1987,” Schwab says. “That was a great moment of elation, followed by the roll we’ve had since, with all the innovations we’ve introduced to the industry. It’s never been boring. Entrepreneurs have to figure out how to morph themselves into something better. You can’t sit on your laurels on any component of your business life.”

While continuously serving as chairman and as a director of the Charles Schwab Corp. since its incorporation in 1986, Schwab resigned his position as CEO in 1999 to pursue more time with his other passion, golf. “Golf provides one of the great analogies to life: It has a set of rules, has many fleeting moments of uncertainty, disappointment and great glory,” he says. “The goal is to enjoy it all, and I do.” But Schwab’s free time on the links would be shortlived. The market meltdown in the early 2000s set the table for perhaps Schwab’s most impressive business achievement: rebuilding his battered and hemorrhaging namesake. In 2004, he reassumed CEO duties. At the time, he felt he had to make some bold decisions, scary and risky ones that perhaps only the business founder could. He cut commissions, returned to 24-hour phone lines, and set out to re-brand the company, using its strengths from its 1998 migration to the Internet as a
building block. It returned to the “Chuck” marketing theme of the past to reinforce that there was somebody there who cared and took responsibility for what the company did every day.

A Legacy of Success

Millions of Americans have benefited from that familiar guy in other ways as well. Among his many books, best- sellers have included Charles Schwab’s Guide to Financial Independence, first published by Three Rivers Press in 1998 and updated in 2004, and You’re Fifty—Now What?, published in 2002, also by Three Rivers Press.

The Schwab ship was righted, allowing him to step down as CEO again in the fall of 2008. He remains an active chairman.

Schwab firmly believes in philanthropy and the good it can do in society. The Charles Schwab Foundation makes average annual contributions of $4 million to more than 2,300 nonprofit organizations. Schwab and his wife Helen co-founded the Charles and Helen Schwab Foundation in the 1980s. The nonprofit focuses on helping children with learning disabilities nationwide and also focuses on supporting low-income families through initiatives in poverty prevention, homelessness and substance abuse.

Schwab allows that at 73 and with the success he’s had, there is not much left for him to prove. “I hope that I can impart some of my experience to younger people along the way,” says the father of five. “I think it’s pretty exciting when I look at the environment today, because the environment is similar to my youth. We were still suffering from the remnants of the Great Depression in the 1950s, and money was tight for a lot of families. The economy was growing, but the middle class hadn’t developed much. Communication was still at a premium, where today it’s available to everyone. I see more concern about the principles of finance today— the acknowledgement of a need to be more fi nancially disciplined. You can see it, whether it is in retail sales, car sales or financial services sales.”

Making the First Critical Investment

After all his experience with financial investments, Schwab admits he has a “terrible bias” about where people should make their initial investment.

“I really think people should make their first investment in themselves, particularly in education and their health,” he says. “Then, when they get their business going or their job established and they start having some excess money, that’s when they should start investing in the markets in an intelligent way. You start with yourself, however, because that’s where you are going to have your highest returns ever. If you have the opportunity to start a small business on your own or with a small group of people, it’s so much fun, and the returns can be rewarding.”

That’s not to say that fi nancial planning shouldn’t start at a young age—“but if they don’t, they should get in the game when they can,” he says. “The worst thing
you can do is never talk about money with your family. The best thing a parent—or a marriage partner, for that matter—can do is say that it is OK to talk about money: how to handle it, manage it, save it, budget it. And we are living so much longer, you can start at about any time and see some impact.”

He talks of a recent meeting he had with 18 college seniors in a finance course down at Stanford as reason for hope for the future. “It was interesting for me to reflect back when I was at Stanford,” he explains. “Back then, there was no finance course. I wish I had had one. These kids were bright-eyed, alert and asked some very piercing questions.”

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