The Proper Mind-Set

Chuck Schwab is worried about how you feel. Honest.

Now that he’s helped usher in this age of unprecedented investing by individuals, the founder and chairman of financial services giant Charles Schwab Corp. is concerned that many of those investors aren’t mentally prepared for a brutal, sustained drop in the stock market.

Schwab--whose firm is the largest U.S. discount brokerage and a leading purveyor of mutual funds and other financial services--isn’t predicting a bear market. But he is predicting more anguishing market tumbles such as that last month and frets that investors aren’t emotionally ready.

It’s a topic he’ll discuss further this weekend at the Los Angeles Times Investment Strategies Conference, where he’ll be the featured speaker at Saturday’s general session (1 to 2:15 p.m.)

“If there’s anything that’s most important, it’s how to handle your emotions in down markets,” Schwab said in a telephone interview from his firm’s San Francisco headquarters. “Successful investing is all about understanding your emotions and controlling them.”

By control, he means convincing yourself not to toss your investment plans out the window simply because the markets are going south.

“Look, I’ve hated every down market” in my career, Schwab said. “It’s a painful process. You’re always questioning your judgment, and news events get you terribly depressed about things.

“The tendency is to put aside your investment plan, to bail out,” he said. Those investors then tend to say, “ ‘I’ll get back in when it [the market] gets down to a really good low.’ But it never happens. They never do.”

Solution? Keep a long-term perspective, remember that “down markets are only temporary”--even though “some are longer than others”--and don’t veer from your long-term investment plan.

To be sure, critics could argue that Schwab’s posture is self-serving. After all, what better way to persuade investors that they should keep trading stocks and buying mutual funds through Schwab, no matter what.

Despite the advent of online stock trading, dirt-cheap trading commissions of $8 or less, and the surge of investment chatter now available in the media--all of which can help induce people to jump in and out of the market--Schwab isn’t alone in preaching the advantages of long-term investing. Billionaire stock picker Warren Buffett is the most famous example of how patient investing is rewarded.

Regardless, Schwab--a 60-year-old Sacramento native whose reassuring face is a staple of the firm’s advertising--isn’t kidding when he says market breaks can be painful.

His firm, which first rose to prominence in the 1970s when it undercut “full-service” brokerage houses with its discounted trading commissions, nearly collapsed during the stock market’s crash in October 1987.

Schwab then went to work bolstering his firm’s financial resources and management. But he did much more over the next decade: He transformed the firm into a provider of an array of financial services.

Today the firm has nearly 5 million investor accounts, and overall it manages nearly $350 billion in customer assets. It created a one-stop, no-fee shopping center for investing in mutual funds, called Mutual Fund OneSource. The program was a smash, and quickly copied by fund behemoth Fidelity Investments and others. Schwab also is a major player in online trading.

Along the way, Schwab not only recovered from 1987 but flourished. In the 1990s, Charles Schwab Corp.’s own stock price has soared thirtyfold (after adjusting for splits), and the personal net worth of Schwab--a dyslexic son of a lawyer--has swelled to $1.8 billion, according to Forbes magazine.

Schwab is quick to note that despite the hype surrounding online brokerages, the vast majority of investors don’t yet use their computers to trade stocks or invest in mutual funds. They still like talking to a human when they discuss their money. And that’s a key reason Schwab still runs 270 offices nationwide.

“For a long, long time, there will be people who want a face-to-face communication [with a broker], or at least a telephone communication,” he said.

To be sure, the number of investors who use computers to trade “is going to grow,” because the machines and the online services “are becoming easier and cheaper to use,” he said.

Right now, Schwab figures about 30% of his customers at some point use Schwab’s Internet site, if only to fetch information. Within a few years, “we would hope to have 60% of our customers utilizing our Internet channel on a regular basis,” he said.

Even though he promotes Internet use, Schwab said he frets about how online investing--where “they all talk about how fast you can do a trade, and for eight bucks”--can lead to excess in the market.

(The company still charges $29.95 a trade on the Internet and has said it has no intention of fighting a price war with online brokers with commissions of $10 or less per trade.)

“I worry about the 2% of the population who will fall into the addictive side of the business” with trading available so fast and cheap, Schwab said. “They are trading for fun and excitement, almost in a gambling sense, and are not really thinking about what they are doing.

“It’s more like going to Las Vegas and getting a bucket full of nickels and pulling on the slot machines,” he said. “My whole approach to investing is the simple concept that it’s about the long term. It’s a lifelong process.”