Taking Stock Failure after failure could not stop Charles Schwab from achieving huge success.

If there are three themes running through Charles Schwab's life, they are: hard work, persistence and vision--in that order. Pursuing these ideals helped him to make San Francisco-based Charles Schwab & Co. Inc., the world's largest and most innovative discount brokerage house. Fortune magazine dubbed Schwab, 59, "the king of discounting." With 235 branch offices worldwide employing nearly 10,000 employees, the company chalked up 1995 revenues of $1.42 billion, a 33 percent gain over 1994. That's not bad for someone who, as a child, could barely read a simple sentence.

The keys to Schwab's extraordinary success can be traced to his childhood in California's San Joaquin Valley. From the moment he entered school, Schwab had great difficulty learning. He didn't understand the reason for his academic struggles until the mid-1970s, when his son Michael, then 10 years old, was diagnosed as having dyslexia, a learning disability that makes reading painfully difficult. Only at that time did Schwab discover that he, too, was dyslexic.

Rather than seeing things sequentially, the way most of us do, Schwab's world was more like a huge, three-dimensional crossword puzzle. He could easily absorb visual symbols, such as illustrations, drawings or cartoons, but deciphering straight text threw him. "If it weren't for the Classics Illustrated comics series, I don't know how I would have gotten through school," he chuckles.

Schwab laughs about the problem now, but for him, learning has been a lifelong struggle. "I remember spending a lot of time at the blackboard running through the multiplication tables," he says. "The teachers were hard on me. They drilled me until I got it."

His teachers assumed he was slow. So did Schwab. "I didn't know I had a learning impediment," he says. "All I knew was that I had to work harder than everyone else."

Schwab's disability turned out to be a blessing in disguise, because it allowed him to see the world differently. "There were people who were a lot brighter than I was, or at least seemed to be, because they got much higher marks," he explains. "But I could see the bigger picture, whereas they could only see what was right in front of them."

A Meager Beginning

Combine the need to work harder with the Puritan work ethicinstilled in him by his father, a Sacramento, California, districtattorney, and you have the makings of a relentless, hard-drivingentrepreneur. Schwab's father, having grown up during theDepression, constantly drove home the importance of prudentspending and of socking away money for a rainy day. "TheDepression had a major impact on my parents and people myage," he says. "Those discussions about the difficulty ofthe Depression were burned in my mind. I was cautioned about notwasting money and the importance of stretching a dollar as far asit could go. There was a real incentive to work hard and earn moneyso I wouldn't wind up without any financialresources."

Pressure to contribute to the family funds fired up Schwab'sentrepreneurial instincts. When he was 11, he made money sellingthe eggs of his father's chickens, as well as the droppings foruse as fertilizer. When it was time for the hens to"retire," he negotiated a good price for them as fryers.As a teenager, he sold ice cream in the summer and sacked walnutsin the fall.

"I learned a lot when I was kid," says Schwab. "Ididn't know what my potential was, but instinctively I knewthere were lots of ways to make money. No matter how I earned it,my goal was always to make and save money. The next step in my lifewas learning how to invest it."

By his late teens, Schwab already knew he wanted to make hismark in the investment world. He insists his learning disabilityhad something to do with his fascination with numbers. However,plunking down $100 of his hard-earned savings to buy 100 shares ofa low-priced, speculative stock and then seeing a hefty return onhis money might have played a part in his decision, too.

Entering Stanford University, Schwab set his sights on becominga securities analyst. He managed to earn a bachelor's degree ineconomics and a master's degree in business administration,though not without difficulty. "My reading speed was abouthalf that of the average Stanford student," he says. Onceagain, he found a second resource: Thanks to Cliff's Notes,Schwab passed with flying colors.

After graduation, in 1961, Schwab and two friends from Stanfordcranked out a monthly newsletter called "InvestmentIndicators," selling one-year subscriptions for $84. Two yearslater, the under-funded newsletter almost went belly-up. "Thenewsletter needed a marketing push," says Schwab, "so Ideveloped a direct-mail marketing program that boostedcirculation."

Disaster Strikes

As the newsletter took off late in 1963, Schwab launched theInvestment Indicators mutual fund in San Francisco. By 1967 thefund had grown to $20 million, but then, in 1969, Schwab hit a snagwhile expanding his operations to other states. Texas orderedSchwab to stop selling shares to its citizens because he wasn'tregistered to do business there. Schwab fought the decision, butlost. To make matters worse, things soured when the market tumbled,and Schwab was forced into financial ruin when he had to reimburseeach Texas investor. By the time it was all over, Schwab was morethan $100,000 in debt and forced to start over.

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

But Schwab became more determined than ever, chalking thesedefeats up as priceless learning experiences. "I learned thatfor every big success a person has, there must be at least one hugefailure," he says. "I think that's the basic law ofthe 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 rumblingsthat a major change would rock the investment world: the then181-year-old fixed-commission structure would be abolished by theSecurities and Exchange Commission in favor of variablecommissions. "It meant brokerage houses could lower the ratesthey charged for transactions," says Schwab. "It signaledthe dawn of a new age, and I intended to be part of it."

That day came on May 1, 1975, which marked the legal eliminationof the fixed-rate structure. As soon as it was announced thatbrokerage houses had free reign on their commissions, many smallcompanies made plans to operate as discount houses. Anticipatingthe 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 adiscount broker."

Rolling with the Punches

Schwab saw the change in rate structure as a chance to executethe savings and investment philosophies that had been instilled inhim as a child. "It was an opportunity to develop new andcreative investment and savings vehicles," he says.

Schwab never intended to be just another discount brokeroffering bargain-counter trading for small investors who didn'twant to deal with the big guys. From the outset, he establishedhimself as an innovator--and an ethical one at that. "As soonas I established an identity as a discount broker, I wanted tocreate a reputation as an honest broker who sincerely cared abouthis customers," says Schwab.

Schwab discovered he had his work cut out for him. His firstpriority was toppling the image that discount brokers were slickoperators offering third-rate, inferior brokerage services; rumorshad circulated that discounters could not offer clients the bestexecutions or market analysis and that they lacked sufficientcapital to weather sudden market downturns.

Schwab separated his company from the huge Wall Street brokeragefirms that depend on commissioned salespeople by paying his brokerssalaries and awarding bonuses based on customer satisfaction."That fundamental change altered the traditional paradigm ofthe brokerage industry," says Schwab. "It changed theentire relationship between customer and broker. Even today, if youget to the core of why we are different than traditional commissionfirms, it is that one single factor that makes us stand out. Bypaying our brokers salaries, we removed the concept of interestfrom the relationship."

Through innovative marketing, he began to offer a selection oflow-cost and imaginative investment programs, such as no-fee mutualfunds, computerized stock trading and specialized banking services.Without resorting to the high-pressure tactics common among many ofthe larger, traditional brokerage firms, he left it up to thecustomers to stop in at one of the branches and talk to a Schwabbroker.

It was simply smart marketing that promtped Schwab to makehimself the spokesperson for his company. In commercials, potentialcustomers didn't see some slick actor pretending to be a Schwabbroker; instead, they saw clean-cut, All-American Chuck Schwabhimself, dressed conservatively and presenting a hard-to-resist,down-to-earth manner that clearly identified him as a no-nonsense,straight-talking professional ready to meet his customers'investment needs.

The plan worked. Schwab finished his first year racking up salesof $30,000 a month. In 1976, that figure doubled to $60,000 a monthand continued to grow. "Revenues increased by about 40 percenta year," he says, "and moved very fast."

Technological Advantages

Schwab also knew the industry was changing rapidly, and thattoday's innovators would be tomorrow's leaders. He intendedto be one of them. "I didn't want to fall into a rut andstay in one place," he says. "The key was to continuallyoffer better service. And one of the most efficient ways to do thatis through technological innovation."

In 1979, he shocked his competitors by spending $2 million tobuy a used IBM System/360 mainframe computer and software. "Atthe time, it was a lot of money to invest in technology, but I knewit would pay off," says Schwab. He was right. Two years later,financial reporters heralded Schwab as an innovator, one whooffered better technology than the average Wall Street firm.

Even though the business was growing rapidly, Schwab neededlarge amounts of capital to fuel plans for expansion. "I wasat a point where I needed talented people," he says. "ButI couldn't afford them. Without a lot of reserve capital, itwas hard recruiting people away from big companies. They had noreason to leave a secure job and take a gamble on a fledglingcompany."

In an attempt to raise money quickly, Schwab sold his company in1983 to BankAmerica Corp. for $55 million in the bank's stock.In 1987, Schwab began to regret the move, as the giant bank wassinking in loan losses. "After coming that far, I was notabout to lose everything I had worked for," says a determinedSchwab. He bought his company back for $175 million in cash and$105 million in bonds. Six months later, (just one month before theOctober, 1987 stock market debacle), he took his company public,with a price tag of $100 million more than he had paid BankAmericafor his company.

Once again firmly positioned in the fast lane, Schwab intendedto stay there by continually upgrading his technology. In 1989, heintroduced TeleBroker, an automated 800-number touch-tone telephonesystem that handled more than 14 million client calls and more than640,000 trades in its first year. He also spent an additional $20million to upgrade software. Today, 25 percent of Schwab'strades are made through the TeleBroker service.

Judging by his sales, credibility and market penetration,you'd think Schwab would feel untouchable. Yet, he stillworries about his competitors. "We have competitors at everylevel of the business," he says. "That's the way theAmerican system works. Maybe it's a good thing, because itkeeps us fresh and on our toes."

Schwab adds that a crowded marketplace keeps him humble."Early on, I learned the importance of keeping in touch withthe core of my business. Once you lose sight of that, you'renot doing your job. No matter how big my business gets, I still askmyself how I can do better."