Famed Investor Charles Schwab on The David Rubenstein Show

[Music] so when did the brilliant idea come to you to set up a brokerage firm brokers was built upon how well companies could make money and not how customers really want to do business your ads in your company for many many years have featured your face my director of our advertiser and said why don't we use your pick or sometimes I said are you kidding me we tried one the results were up by tenfold do you have any stock tips for me I stock tips you have any good ideas I can do with my money on the stock market how about an index fund would you fix your time please well people wouldn't recognize me if my tie was fixed but okay just leave it this way all right I don't consider myself a journalist and nobody else would consider myself a journalist I began to take on the life of being an interviewer even though I have a day job running a private equity firm how do you define leadership what is it that makes somebody tick we're here today with Chuck Schwab who's one of the best-known figures in the American business world certainly has been so over the last several decades because of his ubiquitous face and his ads but also because of the great company he's built which is one of the leading financial service companies in the United States he's now just written a book called invested by Charles Schwab and we're going to talk about that and his life which is quite incredible but let me start by asking you about something you made news with just recently your company announced that you're not really just gonna do discount brokerage you're gonna give away brokerage for free in other words if I want to buy some stock I call up Schwab I have an account and I trade for free how do you make money if I'm trading for free well David first thanks for having me on your show I have the opportunity to know you for a while so I feel very comfortable being here and letting you know all my secrets all right tell me the secret of how you make money when you're not charging like that well a long time ago we started taking commissions down and that's how we started the business with lower prices along the way and finally we got down to 495 I said we're so close to zero let's go there and I always had a somewhat of a passion for what the success of Google has been they made search free and they do very well by offering free search right similar our case we think we will do very well offering our services free for transactions and that's the commodity part of the business the rest of us we give people if you need help and advice on different kinds of things managed accounts banking all those kinds of things but the fundamental service we want to provide us free okay so I shouldn't worry about Chuck Schwab and not making money because you're giving we're not worried about it okay we actually are giving up about four percent of our revenue in that decision so for those who don't really follow this you started as a discount broker where you were giving lower commissions than if the standard rates were before today you've become a conglomerate in fact in the financial service world you have about 3.7 trillion dollars of assets under management so you make your money on other financial services is that correct correct but you know one of the things we are a conglomerate or really not in the original sense we only focus on what can we do for individual investors and advisors who have individual investors so when you started doing this more than forty some years ago did you ever envision that you would be in more than the discount brokerage business you say I'm gonna build a gigantic conglomerate or not I did not David I mean certainly we had a very limited view of where we were at the time but frankly we thought the original business only had a would help maybe 10 or 15 percent of the population people who did their own research and only wanted to have a simple transaction as we found out there many many people wanted to help and advice so let me ask you about something that some people say it makes you so well known it's that your ads in your company for many many years have featured your face I started Charles Schwab and company from the investors point of view I invite you to find out more about Schwab today now was that something you decided you wanted to do David it started out obviously our company started within the shoestring we didn't have much money and I had a tough time raising money because Wall Street certainly didn't want to help me develop competition for them so as a consequence I our ads were really teeny when we first started the Disney on the 1975 there would be one column by 3 inches come and save 75% on your so people kept coming into our company and as we grew over the next couple years we've had some profitability along the way we were growing very nicely once we had a nice article written in the Sam school examiner about us they used a picture of me leaning over as you remember the old Bunco remo machines and there I was and my director of our advertising said why don't we use your picture sometime it'll show there's real people here I said are you kidding me what's my mother's gonna say what's my father gonna say what's my wife gonna say and my friends is some kind of egomaniac and I said finally convinced me after some conversation he said just try one we tried one the results were up by tenfold because I think people thought there's a real person behind this business and I can identify him I can certainly look for him in the post office he's up on the wall there I don't do business with him so they I think that helped and so anyway my friends got over it but when you go walk downtown in San Francisco or anywhere in the country but certainly in San Francisco can you walk without having people say there's trucks well haven't come up and ask you for some advice or something yes well it happens on occasion which I'm always honored to have that happen but for the most part people don't really recognize me and some sense maybe I part my hair girl for me I'm so when you were starting the company in the early days if somebody called up and said I want to buy a hundred shares of IBM you had a broker he or she would write down a hundred shares of IBM they then do something to go to the stock exchange a teletype but to the exchange no everything's written everything's then teletype debt cetera to the central place in New York execution reverse a little thing called the pecan bag he bought under chairs of IBM at $50 a share and but of course very early on we were very early adopters of a lot of technology to make ourselves more efficient we just had to do that and fortunately I was close to Silicon Valley many of my friends were people in the valley itself and I was an early adopter and so we were one of the very first ones to sort of adopt internet in 1995 I think it was now one of the ways you got customers from all over the country you had something in your mind to do branch offices why did you want to have brands we found out early on very on that about at that time about 50 or 60% of our customers wanted to come into a branch and make sure that real people there were behind the counter that they could see that and so our numbers once we open an office in a location our numbers went up substantially so you had better technology perhaps you spent more money on technology and others you had your face which everybody got to like and you also had the branch offices but there's one other thing that really made your company grow from reading your book it seems to me is that you decided to do more than discount brokerage you came up initially with an idea in effect having people buy mutual funds through your platform yeah that was a big innovation can you explain how that works when I stood first started business mutual funds were sold by salesmen obviously got big Commission for doing up to nine percent of the money invested went to commissions and the salesman got half of that we'll say I thought no load funds with no Commission was the best weight for an investor to go about investing which I used some of the early myself personally through my IRA account I said this is crazy why can't I offer this service did everybody a no load kind of transaction thing so we went to the no load companies they're all small so give us a little piece of your management fee and will offer your fund for free to our whole network of Schwab clients and clients loved it so you were the CEO for from the beginning and then eventually you had a co CEO and then the co co had a heart problem and he had to step back and then you brought somebody else in but you at one point kicked yourself upstairs a little bit made yourself chairman I did and then somebody else was running the company and then it didn't work out so then you came back in for three years to run it again was that some 2,000 or I came back in I wasn't sure I wanted to but obviously I loved the company so much came back in in 2008 I retired again as CEO and Walt Bettinger take over and done a fantastic job for the last 10 or 12 years right and so but I'm always sort of hanging around as the compass of the company thank you pushing the people we're going this way it's north so when you graduate from Stanford Business School did you say I'm gonna go join a private equity firm or a hedge fund as a kid I wanted to find out how could I become successful so I found financial service it was a way to go so one of the causes you have is something that I'd like to talk about you've been very open about it unlike many people that have this problem it's called dyslexia right and for those who aren't familiar with it it basically means it's difficult for you to read in the conventional way that the average person I'd read but the amazing part in your book as you describe it is that you had it for much of your life and you didn't know you actually had it right can you explain that our youngest son was about 7 or 8 we had him diagnosed because he had as it turn out all the similar identical issues I had as a young student all the way through school and he was now just only 7 beheaded all the way through the rest of his career and it was a really aha moment for me to understand yes we he got it through obviously DNA and as a consequence I got into it but we both got into my wife and I and we started an agency to help other parents who had identified kids with this issue turns out one in seven people have some related issue around dyslexia some learning difference so when you're young and you are dyslexic and there's no term for it yet or at least you weren't diagnosed as that did you just think you weren't that smart or your parents think well he's not that good a student and how did you get you get through school early on I read a lot of comic books I read classic comic books they had the picture and a few words but I got all the stories with her Moby Dick or Tale of Two Cities I was a wonderful student in the classics but I got it through comic books but if you're dyslexic or somebody's dyslexic does one compensate by hearing better observing better or being very good in math as you are I think as a phonological issue fundamentally that's what it is it's conversion of code code to sound and then to meaning and then the reverse is true for writing and because that defect in our brain we are slow readers you were not a great student I guess because of dyslexia in high school but you've said in your book that maybe you got into Stanford because you were a pretty good golfer how do I get to offer I don't think makes the academics too happy that I got into Stanford anyhow but the fact was the coach was looking for some talent in the Gulf area did you play golf at Stanford I did play golf in it Sandra only as a freshman only for a period of time and I almost flunked out was that what happened because I was not prepared for college at that moment you graduated from Stanford you went to Stanford Business School and you did pretty well in Stanford Business School yeah I did so when you graduate from Stanford Business School did you say I'm gonna go join a private equity firm or a hedge fund or what did you do no I always wanted to do research as a kid I wanted to find out how could I become successful that was important to me because that we came through the Depression years my parents did and I wanted to sort of make money and get the resources to have choices my life so I moved off found financial services it was a way to go so at the age thirteen or fourteen I began to think about this thing stock market then I went to Stanford economics Business School all financial investment management all that in my early career and then I worked after and during business school for a small advisory company it was a research analyst portfolio manager and I had the the responsibility and the introduction to many brokers would come and sell us their stories so I got to know the fundamentals with how Wall Street functioned it's all by sales commissions and some were bad incentives all right so you're doing investment reports but then eventually you realize I guess that you're not going to get that wealthy writing investment reports so when did the brilliant idea come to you to set up a brokerage firm and a discount brokerage firm well it started really in the early seventies I saw how how difficult this business was a built upon brokers would build upon how well companies could make money the brokerage companies and not how customers really wanted to do business so as it became in the conversation there in 73 and 74 Congress SEC all thought that the Commission system was really not a particularly good one particularly the fixed rate thing and so the big the beginnings of the end of that started then in 74 with the test period and then 75 boom we went to Mayday when you wanted to start the company did you just go down the Silicon Valley and say to a venture firm hey give me some money I got a startup idea no there was nothing like that available to us I would have to go to friends if for a little bit of money I had some people in YPO who thought my business was great and that of course eventually led to our deal with the B of A I went to them to borrow money they liked our business model so much at the time they decided to try to buy our company and I came from nothing as I mentioned and so they enticed me to sell the company to B of A I thought that was a great thing and would enhance our reputation as a discount broker there we were associated with the B of a the largest bank of the time and that was then four years of that before I bought the company that sound like a great idea at the time B of A which is the epitome of the establishment is buying this little town kind of renegade company which is not the establishment you've not only sell it for fifty two million dollars which strikes you then money a lot of money and also you got a little board a Bank of America I think the age of put 43 something like that where the youngest person on the board and one of the largest shareholders the largest individual shareholder the youngest person the board the establishment is there and you don't regard yourself as the establishment so what can go wrong with that it's and what sounds great well it sounds great them but then the Bank fell on some bad times we couldn't continue to do our progression of new services for instance one one case we couldn't even develop our own money market funds because the bank had to get permission because they were in trouble by their operational issues and loan loss issues that we couldn't get the Federal Reserve to approve us to do our own money market fund okay and I thought it was time that we should get out of the company well you had one advantage in buying it back I think you had the right to your picture I did I had a name and likeness went with me and they could sell the companies we finally came to terms who was the clever lawyer that told you to keep your name separate I don't know I thank him every day let me tell you so you bought it back for let's say 250 to 300 million dollars more or less and so how did you feel you bought it you sold it for 52 million but you then had to put up 250 to 300 million to buy it back and you were to you know put up a lot of your own money to do David back then the valuation when I sold the company to be a Bissell for about three times revenue when I bought it back I bought it for three times revenue so it was about the same we just grown that much in that time period so it was fair deal for them when they I sold and a fair deal when they sold to me but you did what's called a leveraged buyout and you were advised by one of the leaders of the leveraged buyout industry then and now George Roberts from KKR and so you had a lot of leverage in those days leverage was higher than it is today so you had a lot of your net worth tied up there you also had a lot of debt ahead of you had all my net worth and then some so you decided to try to deleverage pretty quickly and in the same year you bought it back you decided to go lovely go public I did that was pretty courageous did anybody tell you that was not a good idea a lot of people I said I needed to do it at the D deleverage as quickly as I possibly could and fortunately we did because shortly after going public we had the crash of 87 and that was another complication did that affect your business at all of course it didn't our stock dropped from 15 was the IPO price right on down to 6 so your net worth went down a little yeah more than half that didn't bother me I mean I because we still had the company we still had the opportunity and having been a student of stock market cycles I knew we would eventually return to more normal times as you look back on your career the most important lesson you've taken away from what you've done is it to innovate pay attention technology be nice to people have a team of people that you really honor that work with you because you could do so many more things with other brilliance around you so your company now has a market value that is staggering compared to what it once was I think that your market value is about fifty six billion dollars something that fifty six billion dollars and you are the biggest single individual shareholder still yes so you have a net worth yourself that's fairly high what is your view on the wealth tax do you think that a wealth tax is gonna make society better or not or how do you look at it as somebody like me that is subject to criticism for not supporting such a tax well I think it's sort of wrong directed in many ways I think we as a society and you probably don't talk about it as much I don't either about our philanthropy and I feel that's an obligation of all of us I came from really nothing and was had plenty of incentive to create what we've created of course my wife and I have spent a lot of time over the last twenty years giving back money to different causes that we really think need improvement for this education or the art world or Alzheimer's issues you name but we are probably supporting that so you're a pretty famous face and obviously a famous person so in California when you're famous sometimes you say well I should run for governor senator president did you ever think of running for anything I was suggested to be appointed Secretary of Treasury one time under the Bush administration I thought I just can't do it I can't put everything in some trust and so forth and I really I felt that this was my purpose in life developing a company like this and we have benefits so many people so politics wasn't really my maybe if I was King I like to make I guess I like to make the things happen quickly so today the way you view you're contributing to the country other than paying taxes building a big company do you spend any time advising government officials or do you do other things than the relating to government well I'm obviously very actively involved in politics I think every individual in America should have it some piece and the outcome of this country and hopefully will on to free-market systems for indefinite periods of time it's provided for all of us the all the various benefits of creation of new things along the way and that was I think that's what what we're doing we're at the heart and soul of free enterprise now if you look back on your incredible career and you say I made a mistake or two mistakes what would you say is the biggest mistake you made that you think if you hadn't made it you'll be even more successful well I think David I've made a lot of mistakes and every mistake along the way I think I've learned something from that so you have the benefit of having now five children yes and thirteen thirteen grandkids okay so what a great chapter in one's life your children our grandchildren or say you know can you give me a stock tip or something because I got some money I think you wrote I think your oldest daughter once they ask you for some stock tips and you just told her to just diversify well I did but I we have a mutual fund actually the index fund called the Schwab 1000 I use that all the time for my kids the ETF portion of things I've taught them all about it but in some respects it's a little bit boring I'd rather have the kids buy individual stocks so what I'm gonna do coming up this spring we're gonna introduce fractionalization of stock so you can buy a small fraction of Facebook right Amazon Amazon is a high price on Amazon let's say it's trading for thirteen hundred dollars a share some people can't afford a $39 of shares they could buy about 130 dollars how about $13 worth okay so that's something you're going to be doing and doing for the young people okay so as you look back on your career the most important lesson you've taken away from what you've done is it to innovate pay attention technology be nice to people what would you say is the key lesson I think have enough humility in business that extract and and have a team of people that you really honor that work with you because you can do so many more things with other brilliance around you and I think that's one of the best things I taken away from business having throw your ego aside and get with it and a team really appreciates you honoring that now by the way before we close do you have any stock tips for me I'd look for stock tips you have any good ideas I could do with my money in the stock market I think maybe you ought to consider you know I know Carlisle a lot and you've done a fantastic job how about an index on it you

Channel: David Rubenstein

Views: 120,275

Keywords: Bloomberg

Id: SdF06ViElNQ

Length: 24min 6sec (1446 seconds)

Published: Thu Feb 20 2020