Wednesday, April 30, 1975. The founder and financial director of one of the largest US brokerage companies, Charles Schwab, was in San Francisco that day. Charles recalls: “I don’t remember whether it was a sunny day or the city was shrouded in fog. I had a lot of thoughts in my head. ” Investors were in a good mood that spring. The nightmarish days associated with the impeachment of President Nixon ended, the war in Vietnam ended, the market rekindled. The Dow Jones Index has grown by almost 50% since late December. Charles Schwab was full of hope. And at the same time, his life experience told him that hardly all the worst was over.
Charles Schwab opens a brokerage firm
In a few months, Charles will turn 38 years old. Over the past 10 years, the Dow Jones Index has been flirting with a magic mark of 1000. For the first time, it was overcome on November 14, 1972. In those days, he was around 800. Charles had doubts about his stability. But if he had been told then that until December 21, 1982, the Dow Jones index could not be firmly fixed above the mark of 1000, he would certainly have chosen a different tactic.
In fact, Charles was on the verge of making such a decision for some time. Who will open a brokerage firm in the middle of two decades of stock market downturn? This was Charles Schwab’s third step in starting his own business after graduating from Stanford Business School.
Market liberalization
Charles had a 6-digit debt at the time. He had obligations to Crocker Bank to repay the loan, which he took to buy one of his business partners. In addition, he had several debts left after the divorce. He married again and lived with his wife Helen and daughter Katie in a small apartment in the town of Sausalito. His wife worked in the field of real estate trading, and he himself tried to organize the work of his company selling shares at discounts. The activities of his company became possible thanks to the experiment conducted by the Securities and Exchange Commission and the liberalization of the market.
What will Merrill Lynch do?
Charles was tormented by one question that Wednesday. The answer to him was to greatly influence his plans. One year after the trial period, a law on market liberalization should begin to operate. What will Merrill Lynch do?
Merrill Lynch, founded in 1914 by the legendary Charles Merrill, was the underwriter and undisputed king of the retail brokerage market. Its branches were everywhere: from one coast of the ocean to another. Merrill Lynch had an army of thousands of highly motivated brokers working under the slogan "Merrill Lynch is American-style." This slogan at that time was known to every American who watched TV or read newspapers.
Charles Merrill built his company on the idea of opening the world of investment for the middle class. This was a goal admired by many, including Charles Schwab. Merrill was the first to experiment with hired brokers as far back as the 40s of the last century, seriously considering such a concept as “conflict of interest”. Merrill Lynch departed from this model only in the 70s. Schwab then often had to hear: “Wait until Merrill Lynch decides to go into your business closely. You will be crushed. ”
Unexpected denouement
The more Schwab thought about Merrill Lynch’s options, the more he was inclined to conclude that Merrill would lower his commission by at least a small amount. In this case, Schwab's company would have been inevitable collapse.He will not be able to compete with such a giant as Merrill.
This is what Schwab was thinking about when he arrived at his 120th Montgomery office that morning. He took the elevator to the 24th floor, went into a small office building and opened the Wall Street Journal. On the first page, he immediately saw the news: “Merrill Lynch will charge a fee for most transactions in the amount of up to 5 thousand dollars.” Schwab did not believe his happiness: Merrill Lynch raises a fee for securities transactions!
Infernal business
Schwab was afraid that Merrill Lynch would lower fees and deprive his business of any chance of success. Instead, Merrill took advantage of liberalization to increase fees for the middle class and reduce fees for large companies. As soon as Charles Schwab was shocked by what he read, he realized that a road with many irregularities opened before him. At the same time, he had new opportunities that he had to take advantage of. He then said to himself: “I have a hellish business.”