Taking Stock

Disaster Strikes

As the newsletter took off late in 1963, Schwab launched the Investment Indicators mutual fund in San Francisco. By 1967 the fund had grown to $20 million, but then, in 1969, Schwab hit a snag while expanding his operations to other states. Texas ordered Schwab to stop selling shares to its citizens because he wasn't registered to do business there. Schwab fought the decision, but lost. To make matters worse, things soured when the market tumbled, and Schwab was forced into financial ruin when he had to reimburse each Texas investor. By the time it was all over, Schwab was more than $100,000 in debt and forced to start over.

The early 1970s brought more financial disasters for Schwab: a drive-thru animal park that never opened, and Music Expo, a three-day extravaganza that took place at San Francisco's Cow Palace. Both ventures failed miserably.

But Schwab became more determined than ever, chalking these defeats up as priceless learning experiences. "I learned that for every big success a person has, there must be at least one huge failure," he says. "I think that's the basic law of the universe."

In 1971, Schwab, now ready to make his mark as an innovator, borrowed $100,000 from his uncle and launched First Commander Corp. as a traditional brokerage house. By 1973, there were rumblings that a major change would rock the investment world: the then 181-year-old fixed-commission structure would be abolished by the Securities and Exchange Commission in favor of variable commissions. "It meant brokerage houses could lower the rates they charged for transactions," says Schwab. "It signaled the dawn of a new age, and I intended to be part of it."

That day came on May 1, 1975, which marked the legal elimination of the fixed-rate structure. As soon as it was announced that brokerage houses had free reign on their commissions, many small companies made plans to operate as discount houses. Anticipating the change, Schwab was ready to do business as a discount broker. "In 1974, we had already changed our name to Charles Schwab & Co.," he says, "to create a new identity as a discount broker."

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This article was originally published in the November 1996 print edition of Entrepreneur with the headline: Taking Stock.

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