tv The David Rubenstein Show Peer to Peer Conversations Bloomberg April 10, 2020 9:00am-9:31am EDT
just say xfinity movie premiere into your voice remote to bring the theater to you. david: wended the brilliant idea come to you to set up a brokerage firm? >> we wanted to build on how companies make money and not how customers wanted to do business. david: your ads have featured your face. >> the director of advertising said what it we use your picture? i said are you kidding me? we tried one and the results were up tenfold. david: you have any stock tips? charles: how about an index fund? >> would you fix your tie? david: people would not recognize me of my tie was
fixed. let's leave it this way. i do not consider myself a journalist. nobody else would consider myself a journalist. i begin to take on the life of being an interviewer even though i have the day job of running a private equity firm. how do you define leadership? what is it that make somebody tick? david: we are here with charles schwab, one of the best-known figures in the business world because of his ubiquitous face of his at, but also because the company he has built, which is one of the leading financial services companies in the united states. he has now written a book called of the company he"invested" by cha. let me start by asking you about something you may news with.
your company announced you are not just going to do discount brokerage, you're going to give away brokerage for free. i callnt to buy stock, up, i have an account, and i trade for free. how do you make money if i'm am trading for free? charles: first thanks for having me on the show. i've had the opportunity to know you for a while, letting you be here and know all of my secrets. david: how do you make money when you are not charging anything? charles: along time ago we started taking commissions down. that is how we started the business. 495, wewe got down to are so close to zero, i said let's get there. i was had a passion for what the success of google has been. they have made search free and they do very well offering free search. similar in our case. we think we will do very well
offering our services for free for transactions. that is the commodity part of the business. the rest, we give people help and advice on different kinds of things, managed accounts, banking, all of those things. but the fundamental service we want to provide is free. david: so i should not worry about chuck schwab and not making money because you are giving -- charles: you should not worry about it. we are giving up 4% of our revenue in that decision. david: for those who don't really follow this, you started as a discount broker where you were giving lower commissions than the standard rates were before. today, you have become a conglomerate, in effect, in the financial services world. you have about $3.7 trillion of assets under management. so you make your money on other financial services, is that correct? charles: correct. one of the things, we are a conglomerate. but we are really not in the original sense. we only focus on what we can do for individual investors and advisors who have individual investors. david: so when you started doing
this more than 40 years ago, did you ever envision that you would be in more than the discount brokerage business? did you say i was going to build a giant conglomerate or not? charles: i did not, david. certainly, we had a limited view of where we were at the time. but frankly, we thought the original business only had -- would help maybe 10% or 15% of the population. people who did their own research, and only wanted to have a simple transaction. as we found out, there are many, many people who wanted help and advice. david: let me ask you about something some people say makes you so well known. is that your ads in your company for many, many years have featured your face. charles: i started charles schwab and company from the investors point of view. i invite you to find out more about schwab today. david: was that something you decided you wanted to do? charles: david, it started out, our company started with a shoestring. we did not have much money. and i had a tough time raising money because wall street
certainly did not want to help me develop competition for them. so, as a consequence, our ads, when we first started in 1975, it would be one column, three inches. come and save 75% on your -- so people kept coming into our company. and as we grew over the next couple of years, we had some profitability along the way, we were growing very nicely. once we had a nice article written in "the san francisco examiner" about us, they used a picture of me, leaning over the old machines, and there i was, our director of advertising said why we use your picture sometime, show me there are real people. i said, are you kidding me? what is my mother going to say? what is my father going to say? what is my wife going to say? and my friends? that i'm some kind of egomaniac? and they finally convinced me after some conversation, he said, just try one. i tried one.
the results were up tenfold, because i think people thought, there is a real person behind this business. i can identify him, i can certainly look for him in the post office. he is not up on the wall, so i know to do business with him. so i think that helped. anyway, my friends got over it. david: when you walk downtown in san francisco or anywhere in the country, certainly in san francisco, can you walk without having people say, there is chuck schwab, and ask you for stock advice or something? [laughter] charles: yes, it happens on occasion, which i'm always honored to have that happen, but for the most part, people don't really recognize me. maybe i part my hair differently. david: so when you were starting the company in the early days, if somebody called up and said, i want to buy 100 shares of ibm, you had a broker who would write down 100 shares of ibm, they do something to go to the stock exchange. charles: we teletyped it to the exchange at that time. everything was written and
teletyped and sent to the central place in new york. execution, the client bought about 100 shares of ibm at $50 a share. 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, so we were one of the first ones to adopt internet in 1995, i think it was. david: 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 branch offices? charles: david, what we found out early on, very early on, at that time, about 50% or 60% of our customers wanted to come into a branch and make sure there were real people behind the counter, that they could see that. and so our numbers, once we opened offices in the location,
our numbers went up substantially. david: you had better technology, perhaps. you spent more money on technologies than others. you had your face, which everyone got to like, and you also had the branch offices. but, there is one other thing that really made your company grow. from reading your book, it seems to me, you decided to do more than discount brokerage. you came up with an idea in effect of having people buy mutual funds through your platform. charles: that was a big innovation. david: can you explain how that works? charles: when i first started this, mutual funds were sold by salesmen, obviously. got a big commission for doing it, up to 9% of the money invested went to commissions, and the salesmen got half of that, we'll say. i thought no-load funds with no commission was the best way for an investor to go about investing, which i used some some of the early, myself personally, through my ira account. i said, this is crazy, why can't
i offer this service to everybody? a no-load kind of transaction thing. so we went to the no-load companies, they were all small. give us a little piece of your management fee, and we will offer your fund for free to our whole network of schwab clients. and clients loved it. david: so you were the ceo from the beginning. and then eventually, you had a co-ceo. and then the co-ceo had a heart problem, and he had to step back, and then you brought somebody else in. but you, at one point, you kicked yourself upstairs and made yourself chairman. charles: i did. i did. david: then somebody else was running the company, and it did not work out, so you came back in for three years to run it again. was that something you wanted to do? charles: 2004, i came back in. i was not sure i wanted to do, but obviously i love the company so much that i came back in in 2008. i retired again as ceo. i had walter bettinger take over, and he has done a fantastic job for the last 10 to 12 years. david: right. charles: and so -- but i am always sort of hanging around as
the compass of the company. i gotta keep pushing the people who are going this way, it's north. david: so when you graduate from stanford business school, did you say, i'm going to join a private equity firm or a hedge fund? charles: as a kid, i wanted to find out how but i become successful. i found financial services was the way to go. ♪
david: so one of the causes you have is something i would like to talk about. you have been very open about it, unlike many people who have this problem. it is called dyslexia. for those who are not familiar with it, it basically means it is difficult for you to read in the conventional way that the average person can read. charles: right. david: but, the amazing part, in your book, as you describe it, is that you had it for much of your life, and you did not know you actually had it. charles: right. david: can you explain it? charles: our youngest son was about seven or eight. we had him diagnosed. it turns out he had all the similar, identical issues that i had as a young student, all the way through school, and was now just only seven, and he had it through the rest of his career. and it was a really a-ha moment for me to understand that yes, we -- he got it, obviously, through dna, and as a consequence, i got into it, we both got into it -- my wife and
i -- and we started an agency to help other parents that had identified kids with this issue. turns out, one in seven people have some related issue around dyslexia. some learning difference. david: so when you are young, and you are dyslexic, and there is no term for it yet, or you weren't diagnosed, did you just think you were not that smart or did your parents think you are not that good of a student? how did you actually get through school? charles: early on, i read a lot of comic books. i read classic comic books. they had the picture, a few words, but i got all the stories. whether it was "moby dick," "a tale of two cities." i was a wonderful student in the classics. but, i got it through comic books. david: but if you are dyslexic, or somebody is dyslexic does one , compensate by hearing better, observing better, or being very good in math, as you are? charles: i think it is a issue, fundamentally is what it is. it is the conversion of code to sound, and then to meaning, and then the reverse is true for
writing. and because of that, the effect in our brain, we are slow readers. david: you were not a great student, i guess, because of dyslexia in high school, but you have said in your book that maybe you got into stanford because you were a pretty good golfer. charles: i am a pretty good golfer. i don't think it makes the academics too happy i got into stanford anyhow. the fact was the coach was looking for some talent in the golf area. david: did you play golf at stanford? charles: i did play golf at stanford, only as a freshman, only for a period of time. i almost flunked out. that is what happened. i was not prepared for college at that moment. david: you graduated from stanford. you went to stanford business school. you did pretty well at stanford business school. charles: i did. david: when you graduated, did you say, i'm going to join a private equity firm or hedge fund or what did you do? charles: no. i always wanted to do research. as a kid, i wanted to find out how i could become successful. that was important to me. i came through the depression
years, my parents did. and i wanted to sort of make money and get the resources to have choices in my life. so i moved off -- financial services was the way to go. so at age 13 or 14, i began to think about this thing, the stock market. and i went to stanford economics, business school, all financial investment management, all of that, in my early career. and then i worked after and during business school for a small advisory company. i was a research analyst, portfolio manager. and i had the responsibility and the introduction to many brokers. they would come and tell us their stories. so i got to know the fundamentals of how wall street functioned. it is all by sales commissions. and some were bad incentives. david: so you are doing investment reports, but eventually, you realize you will not 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? charles: well, i started really in the early 1970's. i saw how difficult this business was. it was built upon -- brokerage was built 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 in 1973 to 1974, congress, the sec all thought that the commission system was really not a particularly good one, particularly a fixed-rate thing. and so, the beginning of the end of that started in 1974. we had the test period, and then 1975, we went to mayday. david: but when you wanted to start the company, did you just go down to silicon valley and say, hey, give me some money. i have a start up idea? charles: no, there was nothing like that available to us. i would have to go to friends 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. we were associated with the b of a, the largest bank of the time. and that was four years of that before i bought the company. david: it sounds like a great idea. b of a, which the is the epitome of the establishment, is buying this little, renegade company which is not the establishment. you not only sell it for $52 million -- charles: a lot of money. david: a lot of money. and also you got on the board with bank of america. i think at the age of 43, you were the youngest person on the board. charles: and one of the largest shareholders. david: the largest individual shareholder, the youngest person on the board, the establishment is there and you don't regard yourself as the establishment. so what can go wrong with that? it sounds great.
charles: it sounded great then, but then the bank fell on some bad times. we could not continue to do our progression of new services. for instance, one case, we could not 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. we could not get the federal reserve to approve us to do our own money market funds. david: ok. charles: and i thought it was time that we should get out of the company. david: well, you had one advantage in buying it back. i think you had the right to your picture. charles: i did. i had the name and likeness that went with me, and they could sell the company. we finally came to terms. david: who was the clever lawyer that told you to keep your name separate? charles: i don't know. i thank him every day. let me tell you. david: you bought it back for let's say $250 million to $300 million more or less. how did you feel? you sold it for $52 million, but you had to put up $250 million
to buy it back and a lot of your own money to do that. charles: david, back then, when i sold the company, the valuation, i sold it for about three times revenue. when i bought it back, i bought it for three times revenue. it was about the same. we had just grown that much in that time period. so it was a fair deal for them when i sold to them, and a fair deal when they sold to me. david: but you did what is called a leveraged buyout, and you were advised by one of the leaders of the industry, 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, and you also had a lot of your debt ahead of you. charles: i had all of my net worth there, and then some. david: so you decided to try to deleverage quickly. the same year you bought it back, you decided to go public. charles: i did. david: that was pretty courageous. did anybody tell you that was not a good idea? charles: a lot of people. i said i needed to deleverage as quickly as i possibly could.
and fortunately, we did. shortly after going public, we had the crash of 1987. that was another complication. david: did that affect your business at all? charles: of course it did. our stock dropped from 15, the ipo price, down to 6. david: so your net worth went down a little bit. [laughter] charles: yeah, more than half. that did not bother me. 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. david: as you look back on your career, the most important lesson you have taken away from what you have done, is it to innovate, pay attention to technology, be nice to people? charles: 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. ♪
david: so your company now has a market value that is staggering compared to what it once was. i think your market value is about $56 billion. something like that? charles: something like that. david: $56 billion, and you are the biggest single individual shareholder. charles: yes. david: so, you have a net worth yourself that is fairly high. what is your view on the wealth tax? do you think a wealth tax will is going to make society better or not? or how do you look at it as somebody, like me, who is subject to criticism for not supporting such a tax? charles: i think it is wrong directed, in many ways. i think we, as a society, and you probably don't talk about it as much, and i don't either, our philanthropy. i feel like that is an obligation of all of us. i came from, really, nothing.
i had plenty of incentive to create what we created. of course, my wife and i have spent a lot of time over the last 20 years giving back money to different causes that we really think need improvement, whether it is education or the art world or alzheimer's issues. you name it, we are probably supporting that. david: so you are a pretty famous face and obviously a famous person. so in california, when you are famous, sometimes you say, i should run for governor, senator, president. did you ever think of running for anything? charles: 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. i really felt that this is my purpose in life, developing a company like this. we have benefited so many people. politics was not really my -- maybe if i was king. i like to make -- i guess i like
to make the things happen quickly. david: so today, the way you view you are contributing to the country other than paying taxes, building up the company, do you spend any time advising government officials or do other things related to government? charles: well, i am obviously very actively involved in politics. i think every individual in america should have some piece in the outcome of this country, and hopefully we will hang onto free market systems for indefinite periods of time. it has provided for all of us, all the various benefits of the creation of new things along the way. and that was -- i think that is what we are doing. we are at the heart and soul of free enterprise. david: 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 had not made it, you would be even more successful? charles: i think, david, i've made a lot of mistakes. and every mistake along the way,
i think i've learned something from that. david: so you have the benefit of having now five children and 13 grandchildren. charles: yes. 13 grandkids. what a great chapter in one's life. david: do your children or grand children ever say, can you give me a stock tip because i've got some money? i think you wrote -- your oldest daughter once asked you for some stock tips and you told her to diversify. charles: well, i did. we have a mutual fund, an index fund, called the schwab 1000. i use that all the time for my kids, the etf portion of the thing. i have taught them all about it, but in some respects, it is a little boring. i would rather have the kids buy individual stocks. so what i'm going to do, coming up this spring, we are going to introduce fractionalization of stocks. so you can buy a small fraction of facebook. david: or amazon. amazon is a high price. charles: amazon. david: amazon, let's say, is trading $1300 a share. some people cannot afford $1300 a share.
charles: how about $130? how about $13 worth? david: ok. so that is something you will be doing? charles: we will be doing it for the young people. david: so as you look back on your career, the most important lesson you have taken away from what you have done. is it to innovate? pay attention to technology? be nice to people? what would you say is the key lesson? charles: i think, have enough humility in business to extract 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 is one of the best things i have taken away from business. having -- throw your ego aside, get with it, and the team really appreciates you honoring that. david: now, by the way, before we close, do you have any stock tips for me? [laughter] david: i'm looking for a couple stock tips. any good ideas of what i could do with my money in the stock market? charles: i think maybe you ought to consider, i know carlisle a lot, you have done a fantastic
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