Face Time With Charles Schwab

Never mind the cuff links: Charles Schwab is an egalitarian. The man who democratized stock trading talks about nirvana, sage investing, and his first bubble.

Age: 63
Family: Second marriage; 5 children, ages 25 to 40; 10 grandchildren
First started reading the stock pages: Age 13
First business: Raising chickens
Big break: Admitted to Stanford University partly because of his skill in golf
Personal hurdle: Dyslexia, diagnosed when he was in his thirties
Unsolicited expression of grandfatherly concern: "I hope you're signed up for your 401(k)."

As much as anyone else, Charles Schwab helped democratize the U.S. stock market. Twenty-six years ago, when the government deregulated the fees that brokerage firms charged to trade stocks, most big brokerages raised their prices. Schwab did just the opposite — and brought stock trading to ordinary individuals at the then-unheard of price of $50 per transaction.

In person, Schwab conveys a patrician air. He is reserved and thoughtful, and he favors monogrammed shirts with cuff links. But he is fundamentally an egalitarian. Today, in the wake of the first bear market that many individual investors have ever seen, the worst thing you can do, Schwab says, is not be in the market.

What's going on in the markets and in the economy right now?

If you put it in historical terms, we are going through the correction process from a massive bubble that was created in America: the technology bubble.

When I got started in the business, the first bubble we had was in the spring and summer of 1961 — the bubble of the bowling industry. Yes, bowling. B-O-W-L-I-N-G. According to industry analysts, every American, on average, was going to be bowling about two hours per week. Compute it out — 180 million people times two hours per week, for 52 weeks ? That's a lot of bowling. And all of a sudden, it became a very valuable thing to own bowling stocks.

But the bowling industry ?

? didn't quite develop that way.

How do you think that Americans, as investors, are coping with this latest economic downturn?

Quite well. The people who were really hurt by this current downtrend — it's a small percentage of people. Most people in their 401(k)s are diversified. Here at Schwab, they are reasonably well diversified — they've been coached to be. A small segment, maybe 5% of our client base, thought investing in technology was the bullet train to nirvana. Instead, it was a ride on a meteorite.

You've preached financial independence. Yet some of your customers have lost 20% of what they had a year ago.

True. But 15% or 20% is a modest reduction given the rewards one gets by being a successful, sage, long-term investor.

Having said that, emotions are just so volatile now: Every time we have a down market, it is depressing for people to see their hard-earned assets go down in value. So we have to be extraordinary coaches.

Okay, coach me. My Schwab assets are down — don't scold me — by 25%.

Of course, because you're probably heavy in technology stocks. I'd say that you violated the first principle of investing: You didn't diversify. Technology stocks are only 20% of the picture. There's the other 80% of the world that you missed. Get with it. Become an eclectic, smart, sage investor.

Why do you use the word "sage"?

I think someone becomes sage only when they reach a sense of maturity in whatever endeavor they are in. In investing, you only become sage after you've experienced at least one or two of these cycles and understand your emotional response to them. An "unsage" investor will bail out completely now, and they'll miss the turnaround when it comes. They don't know what investing is really about.

So should I check the value of my investments daily? My father is appalled. He says, "You shouldn't count your money."

I'd put your father in a super-sage category. I don't think it's the pathway to long-term success, watching CNBC and checking your account every day. What it leads you to is this emotional imbalance that you've created for yourself. If you are sage, you can do that. But if you are an immature investor and you look at it every day, you just become hyper about it.

How much trading do you personally do?

I really follow the advice I give. I have a core part of my portfolio. I must have 15 accounts here, some of which are for grandkids and so on. Then I also have an "explore" part of my portfolio that I trade actively in. I think it's crucially important for me, as what I call the "head chef," to taste the food. If I'm not tasting the damn food every day, I don't know how I can deliver the service to my customers.

How do you feel about having to lay off 10% of Schwab's staff?

It's a very uncomfortable decision one has to make. We needed to expand — during the boom — because we are in business to serve customers extremely well. But that trading volume won't return for a good number of months.

Was it a mistake on your part that led to overhiring?

I could be criticized for not seeing the extent of the bubble as well as the consequences of what happens to a bubble when it gets deflated. No question about that. It does trouble me.

You and your wife set up a $10 million fund, out of your own money, to help people who were laid off.

Yes, out of our Schwab foundation, we set up money for tuition reimbursement. If laid-off employees want to go back to school, we are helping them to the extent of $10,000 a year for two years.

Why?

I feel a responsibility to those people. And I wanted to deliver the message that we as a company know that, in time, we are going to grow into needing many of these people back. And maybe they will consider coming back.

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