CHARLES SCHWAB

THE CHARLES SCHWAB CORPORATION

If ever there was a natural born entrepreneur, someone who had the desire to create and build a successful enterprise in his blood, it would have to be Charles Schwab. As an eight-year-old, the person who would invent the discount brokerage business in the United States made his entrepreneurial debut by picking and selling walnuts in California, packing them into hundred-pound sacks that he sold for $5 each.

“Some other kids thought I was a little crazy, spending my free time rooting through the twigs and leaves,” he recalls. But Schwab absorbed some early lessons from his entrepreneurial instincts. “Although plenty of people didn’t want to buy, I quickly learned that if I kept at it and plowed right through the rejections, I would eventually get someone to buy my wares. If I wanted to accumulate extra spending money, I had to pick up extra walnuts. If I wasted my effort on the cheaper but more plentiful [black] walnuts, I’d earn that much less.”

He can remember at the age of ten going to high school football games gathering Coca-Cola bottles so he could turn them in for a nickel a piece. And by the time he was thirteen, he gathered up about twenty-five chickens and turned them into a money-making machine. Years later, when Schwab went to Stanford University for his MBA degree, he would quip that before he could shave, he owned a vertically integrated business that leveraged every aspect of farming chickens. “I sold the eggs,” he says. “I learned to kill and pluck fryers for market; and I developed a list of clients for my own chicken fertilizer.”

Those early entrepreneurial instincts would serve him exceptionally well, especially because he also suffered from a lifelong handicap with the written word. Unbeknownst to him until much later in life, Schwab struggled with dyslexia, the disability that makes it unusually difficult for someone to read, write, and sound out letters. He recalls reading the classics but in comic book form, the only way he could plod through school reading assignments. As a Stanford University freshman in 1955, Schwab was “completely buried,” flunking both French and freshman English before finding safety and comfort in economics. He got through Stanford by reading summaries of books and borrowing the lecture notes from fellow classmates.

There was little surprise when, after college, he launched an investment newsletter with two other partners. After all, besides his entrepreneurial bent, at the age of thirteen, he had begun reading the stock market tables in the Santa Barbara News-Press with his father, finding himself amazed that the prices of shares would change each day.

Though at its peak it reached a subscriber base of three thousand users, the newsletter barely survived. But in 1973, with a $100,000 loan from his uncle, Schwab made his big move, waging a war against the Wall Street giants. His aim was to exploit fixed-rate commissions, which ended in 1975, when the government mandated negotiated commission rates. While many brokerages took the opportunity to raise commissions, Schwab seized the chance to create the first discount brokerage, opening his first branch in Sacramento, California.

Charles Schwab & Co. was a huge success, helping to slash more traditional broker revenues and driving dozens of old line firms out of business. Schwab was the first brokerage firm to extend service hours to customers, the first to use an automated transaction and record-keeping system to bring down the cost of trades, and the first to offer a twenty-four-hour, seven-day-a-week order entry and quotation service.

There were ups and downs through different market cycles. At one point, in 1983, Schwab sold his company to Bank of America, only to buy it back four years later. After completely giving up the CEO’s job to his handpicked successor, David Pottruck, Schwab came back just fourteen months later to replace him in 2004 when the firm hit difficult times. But the story of Chuck Schwab is really the story of a financial revolution that has attracted tens of millions of Americans as investors.

Today, Chuck Schwab remains chairman of a company to which investors have entrusted $1.66 trillion. With more than thirteen thousand employees, The Charles Schwab Corporation is one of the largest brokerage firms in the world.

 

On getting through Stanford with dyslexia:

Man, I struggled through Stanford. It was just hard work all the time. In fact, I got in on a golf scholarship and thank God I had this athletic capability. It wasn’t my academics that got me in. I had no trouble with numbers or conceptual ideas. It was the inability of decoding words into meaning in a rapid way. It’s not only reading. It’s writing, too. It’s very dif ficult in college when you are taking notes from a lecture. I always had people I went to and borrowed their notes.

I didn’t discover I had dyslexia until my youngest son had a difficult time in first and second grade and we went to have him tested. I was in my early forties. That’s when I discovered that what I had was what he had. In some sense I’m glad I didn’t know, because I just struggled as hard as I could.

 

On being an entrepreneur:

I have been an entrepreneur all my life—having come from a time when things were pretty tough. My dad was a small-town lawyer, and our family conversations were about how limited resources were.

I did as much as I could: raising chickens, pushing an ice cream cart, bagging walnuts, driving a tractor on a beet farm, working on the railroad. I think this eclectic career helped me a lot in life. I really encourage kids to get those kinds of jobs.

 

On naming the company after himself:

In ’73, I changed the name from what it was, First Commander, to Charles Schwab and Company. To establish the name, you have to go to the state, and they had other Schwab companies. There was a Schwab drugstore, a Schwab this, a Schwab that. Finally I said to the lawyer, How about Charles Schwab? They can’t take my name away from me, for goodness’ sakes!

 

On his company’s mission:

Our mission statement was to be the most ethical and most useful financial services company in the world. We really emphasize the word ethics. We work on it. We thrive for it. It is critically important to us. Any kind of conflicts we have or might have we talk about. We let our customers know about them on our Web site.

 

On selling his firm by selling himself:

Way back when, we had an advertising executive here who said, “Chuck, let’s take that picture of you and put it in the ad.” I had all the reticence you could imagine: what kind of an egomaniac would do that?

But what happened was the results were five- or six-fold what they were without some kind of figurehead talking about something that is quite passionate to him—what we could do for clients. The results were just tremendously better than not having a real spokesman, or having some actor do this stuff.

Then we got into a phase where we were using lots of celebrities. Coming back to the “Talk to Chuck” thing was brilliant. It distinguished our company over the years that there really is somebody there who cares and takes responsibility for what we do, every day.

 

On the importance of customers and keeping costs low:

Every company, a mature company, can look at their costs and redundancies. It’s natural for every company that’s successful to build up infrastructures that are inefficient. We’re all human. We all do that. And you want to take whatever savings you can out of that and figure out how to get it back to your loyal clients. They will reward you with additional business, even if you mess things up.

The most important part is that your clients have to sense that they are valuable. Because at the end of every day, having a clientele that speaks well of you, that’s the largest source of business.

I don’t care what kind of business you’re in: clients who refer us to their friends or relatives is so much more powerful than any advertising we could ever do. We talk about that a lot around here: “What do our clients say about us?” The ultimate question to ask a client is, “Would you recommend us to a friend or relative of yours?” That’s the ultimate test. If they say, “Well, I don’t know,” that’s not a good outcome.

So our organization just has to outfox our larger competitors by really emphasizing our value proposition, which is really outstanding compared to them. We have to make sure our clients feel that there is personal service here, there is indeed someone at Schwab who cares about them, whom they can talk to and get the kind of help they want. Some people want a lot of help. Others just need a tiny bit of help, such as “How can I navigate on Schwab.com better than I do today?”

 

On advice he would give a young entrepreneur:

You’ve got to start with your gut, with something you are really passionate about, for a good reason. You won’t get there by sitting in a closet and thinking, “Boy, I know the world must want this.” You have to get some real-world experience that tells you what people want. Luck helps every successful entrepreneur. But it doesn’t come [without] a lot of preparation and hard work.

 

On surviving bear markets as a financial firm:

You’ve got to understand that markets go both ways, up and down. Over longer periods, stocks generally have always gone up. But any specific stock may never come back. Buy an index fund, and you’re going to have long-term growth almost to a certainty. Buy an individual stock, and you never know. You could go to zero.

And there’s a whole other area, which is how you react. We get very emotional and do dumb things. Look back at October 2002 [when the Dow sank below 7300]. Everything was going wrong, and you were feeling pretty horrible. But that was the most opportune time to invest! What kind of a thing is that?

 

On buying back his firm from Bank of America:

In our case, we were a small company at the time, about $50 or $60 million in revenue, and this humongous company bought us. It never really got around to the appropriate level of synergy that should have come about. There was resistance within the big corporation to allow the little child to flourish. So we were battling old bureaucracies within the old enterprise. After several years of that I just got sick and tired of it. Eventually, they had fallen on bad times and wanted to sell several of their assets because of their bad loans to foreign governments. I said, “Why don’t you sell us, too?” And they did. The story was we stole the company back. We didn’t.

This is the definition of a crazy entrepreneur. I paid the bank five times what they paid us for the firm just four years before. So they made a bundle off of us. I was so happy to get out of there. Freedom was something else. As a young man, I started with not too much. They dangled a whole bunch of money in front of me at a certain age. And I thought, “Gosh, I could become really respectable and go on their board and do all these things and it would be pretty neat.” Little did I know what I was getting into. It was a stage in my career and something I never want to go back to.

 

On taking back his full-time job as CEO in 2004:

When I came back—not that I’d completely left, I was still chairman of the board—it was time for me to make some really bold decisions. Only a founding father could really do these things, because they were pretty scary for anyone else to do and because they were potentially risky. What we had to do was dramatically reduce our cost, but the benefit of the reduced cost was going to be a dramatic reduction in our prices. So the benefit of all that went directly to our clients in the form of lower prices.

We had allowed ourselves over a period of time to get disconnected with our clients. We got somewhat arrogant, all caught up in the dot-com arena, all that wonderful explosion of new accounts, transactions, valuations. From 1998 to 2002 there was an unbelievable circus of things that went on. Some people like to say it was an unbelievable party at the end of the millennium, and then we all suffered the consequences in the aftermath of it in 2002.

Anyway, I had to reduce costs dramatically. We ended up using an outside firm that helped us organize our thinking, Bain & Company, to help us review every cost center that we had here and take out $600 million in costs. That was painful. Usually the costs end up being not just space, but people. We had to reduce our head count, and it is extremely painful. We did not have expertise in that, since we had been growing the company consistently since 1973. Each year was going to be a better year than the prior year.

The other thing I had to do was to de-layer the company. We’d built up our overhead and our bureaucracies, and our business activities were sort of far flung. We had international activities, capital markets activities, a lot of different things that needed to be assessed. The conclusion was [that] we needed to really refocus the company on our core, which was serving individual investors and helping them do a better job with respect to their investing. So we ended up selling our capital markets, all of our international activities, anything that deviated really from our focus on our core business, which is the individual investor.

I sensed what had to happen. Most of us use consultants to confirm things we already know we need to do. It’s not a mystery when they come and say, “Look, you have excess costs, redundancies here, inefficiencies here, loss of market share there.” Those are things that generally speaking I sensed, but I had to have a reconfirmation of just how bad it was. In some respect, the company had grown and matured and thought it could do everything. And it wasn’t the case. We had a core capacity, a core culture, and we needed to get back to the basics. It took my management group a good year and a half to see that we could really do it.