A Reply to Mr. Schwab

by Jay Pestrichelli on July 12th, 2013

In yesterday’s Journal, there was an Opinion piece by Charles Schwab and Walt Bettinger (Schwab’s President and CEO) titled “Why Individual Investors Are Fleeing Stocks”. The piece takes the position the individual investor has been turned off form making investments in stocks due to the disadvantages against institutions, choking tax policies and systemic technical glitches. The one demographic fact references a Gallup survey conducted this April that found only 52% of Americans were invested in stocks compared to 67% in June of 2002. Here’s the link to the article: WSJ: Why Individual Investors Are Fleeing Stocks

I have always respected the opinion of pioneers in the discount brokerage industry like Charles Schwab and Joe Ricketts (who both myself and my co-author worked for for over 10 years). Their vision of empowering the individual investor has changed business of stocks forever.
But when I read this piece, it almost feels like Chuck is giving up. More accurately, it feels like he is pleading to the “authorities” (whomever they are) to please help the poor disadvantaged investor otherwise they are going the away and never coming back.
While being an advocate for the active trader or long-term investor is of course a noble effort, waiting for things like regulations change, glitch-proof technology, or a moral sense of fairness from the institutions is foolish. I’m reminded of a quote from Psychologist/Author Albert Ellis:
"The best years of your life are the ones in which you decide your problems are your own. You do not blame them on your mother, the ecology, or the president. You realize that you control your own destiny."
Instead of blaming the market environment or the inability of our government to create viable tax reform, I’d much prefer for an innovator like Charles Schwab to see the opportunity presented here. That opportunity is to give the little guy the education and tools to handle these kinds of risks. 
Should the investor who is rebalancing his/her 401k every quarter really care that high frequency traders are getting a microsecond advantage in trade speed? Should the individual investing for the long-term really be impacted by a 5-minute market panic due to a hacked AP twitter feed on the President’s health?
These kinds of issues along with the technical glitches that caused the flash crash, the Knight Capital implosion, or the BATS and Facebook IPO debacle will always be hurdles for the individual investor. Big institutions will always have more money and resources than the individual. They have an obligation to perform because they have shareholders to whom they are accountable.
I submit that the individual will always have some kind of obstacle overcome. But that doesn’t mean throwing in the towel and not investing. Charles Schwab was right about the need for investing in the markets and I’ll add that it is a necessity for just about anyone trying to build wealth. The more than forty million Americans who manage their own trades online are well aware of this.
So what can the individual do? The answer has been on this site for the past 2 years. Build a hedged portfolio. Use the Iron Rules. Everything in the opinion piece is actually in the Buy and Hedge book we published in October 2011. These are some of the reasons why we wrote our book; to teach the little guy how to protect against the big problems of our financial markets and still prevail over the long-term.
Mr. Schwab and Mr. Bettinger, I respond to you by saying be innovators again. Be the first brokerage to incorporate the practice of teaching your clients to hedge into your core business. Prepare them for the unthinkable and expected market corrections alike. The methods are not complicated and can be understood by anyone who can make a decision to buy a stock.
Your company bought an options brokerage firm as well as an options education company.  Take the concepts of speculative options trading and apply them to helping the long-term investor hedge and protect. Give them back the control and agility you once did when you broke ground and offered the first discount brokerage services back in 1975.

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TOM Y. - July 12th, 2013 at 3:19 PM

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