value and opportunity

This is actually the second autobiography of a founder with the surname Schwab that I review. After tire trader Les Schwab, this book is written by the founder and name giver Charles “Chuck” Schwab who founded the financial services company with the same name.

Schwab’s first job was interestingly being a stock analyst in the late 60ies early 70ies and he was running a stock recommendation service for some time. He doesn’t talk about his performance back then, but the market was pretty brutal with the Dow Jones basically going sideways for 20 years which seems to have taught him some very helpful lessons.

When trading and commissions on Wall Street were deregulated in 1975, Schwab decided to create a “start-up” out of his old firm to offer discounted trading to clients. What was interesting from the beginning was that he already pioneered the approach of opening branches but allowing clients as well to trade directly over the phone.

The other distinctive feature was that he didn’t offer stock tips or advice, but just executed trades for people who knew what they wanted to buy. Back at that time this was a novel approach, as traditional brokers primarily wanted to sell what their investment banking division had on their books.

The history of the company is pretty wild: After struggling to match capital requirements, Schwab wanted to go public very early and failed. He then sold out to Bank of America but bought the company back via an leveraged MBO when BoA was in trouble. Soon after “Independence”, he IPOed the company again . As he “got the internet” early on, Schwab ballooned in the dot.com area, only to land really hard and having to cut ~50% of its staff after the bubble burst.

He retired at some point had to come back as CEO as his first chosen successor as CEO didn’t perform as expected, before he finally retired and handed over to the current CEO. Interestingly, despite running a bank, Schwab didn’t take any bail-out money dueing the GFC.

Schwab’s organization always seems to have been extremely client focused by day one and did not rely on any commissions other than direct trading commissions. Schwab managed to maintain a “West Coast outsider” image for a very long time even when the company became bigger and bigger. As a low cost provider, the low cost mentality was also maintained within the company.

Starting relatively early, Schwab offered other services on top of pure brokerage like general financial advise (via advisors with fixed salaries), mutual fund services etc. but always with the goal to empower clients and never trying to “hard sell them” anything. These days, Schwab is a one top shop, offering everything from checking accounts to index fund and even robo-advising.

Overall I think that Schwab’s book is one of the best business biographies that I have ever read, at par with “Shoe Dog” (Nike) and “Made in America” (Walmart).

The added value to other business biographies is that Schwab has a deep understanding of both, financial markets and investor psychology and is able to give some really “deep” advice to anyone interested in investing throughout the book. As he has navigated capital markets thorough almost all of the recent crisis, his experience is not matched by many other people.

My two favorite quotes are:

1. “It is not about timing the market but time in the market” which underlines his long term approach to investing.

2. “To be a successful investor, you’ve got to be an optimist.”

Also his lessons and insights on how to run and grow a company should be very valuable to founders especially but not only for “Fintech” founders.

A few general observations:

• Schwab is very open that he had dyslexia as a child. School was really hard for him. Interestingly, a lot of successful founders seem to have had the same issue. Maybe a deficit in this area is compensated through abilities that are useful as entrepreneur.
• Working for Schwab seems to have been quite stressful as he was very demanding. As an example, his first legal council used to vomit everyday on the street before he entered the building because of all the regulatory stress etc. he had to face
• Similar to “Shoe dog” and Nike, starting a business back then was much harder as there was no Venture Capital etc. Schwab had to raise money within friends and family and mortgage his house to keep the company going. These days, companies like Robinhood get flooded with hundreds of millions very early on. But maybe a history like Schwab adds to the “durability” and culture of a company
• The business model of Schwab doesn’t transport well internationally. They tried to expand internationally but stopped that early on. On the positive side, the US market is so big that they didn’t really need to expand internationally
• As a founder/owner run firm, Schwab more than once sacrificed short term profits in order to either invest in technology or lower prices in order to attract even more clients
• In his book, Schwab is very sceptical about M&A transactions. Interestingly just in late 2019, Schwab agreed to acquired competitor TD Ameritrade for 26 bn USD in an all stock deal, its biggest acquisition by far. So farthe deal looks pretty bad following the Covid-19 crisis.

On top of the pleasure of reading the book, Schwab (the company) also went on my priority list for research…..