Charles Schwab on what he’s learned in his career spanning six decades: ‘Panic is not a strategy’

Investing pioneer Charles Schwab came to the New York Stock Exchange floor this week to speak with CNBC about his new book, “Invested,” a personal memoir of the company’s history. Schwab founded an investing newsletter firm in 1963 that would be incorporated in 1971 and officially become Charles Schwab & Co. in 1973.

Schwab rocked the investment world last week with the announcement of zero commissions on equity and ETF trading. He told me it was part of a long-term strategy to cut fees and keep as many assets with Charles Schwab Corp. as possible.

“We make our money on other relationships. You might want advice and might want to have a fixed income or things like that,” the 82-year-old Schwab said.

When I asked Schwab if these price wars might spark a wave of consolidation in the brokerage business, he acknowledged, “It probably will happen.”

Is Schwab a buyer? “At the right valuations we would do it,” he said, “but we are really strong and very independent [in] the way we do things. If it happens, if it’s appropriate for our shareholders, we’ll do it.”

Schwab also noted that the company had become a major player in the exchange-traded fund business. He pushed back against assertions that passive, indexed-based investing was in some way harmful to the average investor.

“Passive investing is clearly a path for most people. It’s really easy, and offers great diversification and low cost.”

A good part of the book deals with how Schwab interacted with clients during the worst of times, most notably the market crashes of 1987, 2000, and 2007-2008. He said clients panicked and withdrew large chunks of their investment money at or near market bottoms.

Schwab made efforts to calm investors’ nerves by declaring that “panic is not a strategy.” He told me, “Well, we sent out a lot of communications to our clients through those time periods. Not all were perfect timing. When we were down 40%, we’d send out an alert that said, ‘Do not sell. This is not a time to panic. Hang on. Six months from now, you’ll be much better off.’ That was the kind of view we would take.”

Still, Schwab admitted that clients often did not heed his advice, that rather than buy high and sell low, investors often did the opposite.

In his book, he notes that “in fact, the late 1980s, right after the crash, was probably the best opportunity my generation was ever presented to dive into the market. It was the chance of a lifetime to make enormous long-term investing gains. But few recognized it at the time. Having just been burned, many now watched warily from the sidelines. … Sometimes I wish I could just tie them to their chairs to help them ride out the temporary storm.”

To counter bad investment decisions (like selling at the bottom), Schwab has been a relentless advocate for financial literacy. In 2008 President George W. Bush appointed him chairman of the President’s Advisory Council on Financial Literacy, where he supported, among other programs, a financial literacy course in every high school that would teach fundamentals of investing. “Listen, we’re a sophisticated free-enterprise country. We should have an understanding of what that really means in schools,” he told me.

Schwab also told me that more financial literacy would involve studying human behavior, and how fears and biases creep into investment decisions.

“I just think it’s a matter of education — understanding how humans react to things,” Schwab said. “There’s many stories and many factual things that have been written by psychiatrists — how people react to different new things. They all generally want to panic, but then they say, ‘Oh my God, I’m panicky.’ You ever recognize when you’re panicky? Do not panic. The down markets are always so much more critical—they always go straight down, basically. And that’s what really creates the panic.”

Schwab said more financial literacy was a key to help Americans deal with retirement. He noted that even with the markets rising this year, Americans are still woefully unprepared for retirement.

“It is a crisis. It’s not adequate. And plus the fact that they’re going to live longer than they ever would have thought. So, the only way you can do that right now is probably help your kids get started. Get them started, get an investment account, make sure they do their IRA account, their 401(k) account, all those things are free money and tax exempt.”