Schwab Today: Buy, Hold Or Sell

Summary

  • Back on October 1st, Charles Schwab & Co. announced that it was cutting commissions to 0%.
  • The stock fell 15% over the next couple days. Its biggest competitor, TD Ameritrade, plunged 30%.
  • I began buying for many of my firm’s clients, purchased shares of both in my Investors Edge Marketplace portfolio, and suggested SA readers do their due diligence.
  • What I knew then that others clearly didn’t - and what I am doing today.
  • Looking for a helping hand in the market? Members of The Investor's Edge® get exclusive ideas and guidance to navigate any climate. Get started today »

I was an insider in the brokerage industry for many years. I began my career at Kidder, Peabody - does anybody remember that far back? - as a retail and institutional broker. I chose Kidder because that was a firm within walking distance of where my car broke down.

I had no idea what Kidder even did but it sounded like an impressive name and I was flat broke. One of the great “customers’ men” of that era, a true gentleman and an ethical stockbroker who put his clients first, Don Lewis, took me under his wing when I walked in wearing jeans and a quasi-clean polo shirt. He took me to lunch, recommended me to the boss, and the next day I was hired. (So much for careful career planning…)

A few years later, when discount brokerage became legal, I started my own discount firm. I later sold the business to Chuck Schwab, who was kind enough to note that event with a couple of lines in his current best-selling book.

After 12 years with Schwab, I was tired of the corporate world and retired as head of the Fixed Income division to start my own boutique investment advisory business.

So what was it I knew then that I freely shared with the Seeking Alpha community? As I said then, I knew that “The cost of transactions for brokerage firms in the electronic age is decimal dust.”

I pointed out that Schwab’s total income from commissions amounted to no more than 5% of its total revenues, and that Schwab is more bank than broker these days. The float on cash, the ability to hypothecate shares for a fee, and income from its trading desk are more profitable than commissions. I felt strongly that, while the Street was obsessing that Schwab might not meet its next 12-week earnings report (horreurs in the analyst community) I saw that this was actually great news.

I saw that Schwab would now be able to drive out of business all the pesky little start-ups whose only claim to fame was “no commissions” – too often accompanied by mediocre service and poor executions. I also said then, “I expect to see TD Ameritrade, Fidelity, et al, respond soon.”

They did. Welcome to this Brave New World. With Schwab’s latest move to merge with TD Ameritrade (AMTD), this will create a juggernaut with a half-trillion dollars of customer assets. In addition, it will ultimately streamline operations and provide lower liability insurance premiums, greater protection of customer assets, and fine customer service with well-trained brokers and back-office personnel.

I have enjoyed the meteoric rise in TD Ameritrade and the rocket ride on Schwab which only barely fell when the merger was announced. (In mergers and acquisitions, the acquired firm “usually” rises and the acquiring firm “usually” falls.)

And yet…

I have placed tight trailing stops on both Schwab and TD, many of which have already executed. Why?

Because I know how difficult it will be to kluge two very different management styles, two different cultures of risk-taking, vastly different online order-entry and back-office computer systems, and thousands of employees at both firms who will have to work many extra hours to make all this come together. It will be a momentous undertaking, rife with difficulties and bad news along the path to ultimate success.

I have been there/done that. I bought a small company for Schwab when I was head of Service and Business Development. It had just 4 employees - and it took months to integrate the systems and people into Schwab. Make no mistake, this will be a massive undertaking.

When the news first broke about zero commissions, the market reacted negatively. In fact, the news was good news if you knew what to look for. Today, suddenly, all the analysts have decided after the fact that zero commissions were a brilliant coup that forced Schwab’s competitors into a war they could not win. The purchase of TD Ameritrade solidified its confidence.

I believe these analysts are about to be wrong again. Please don't misunderstand - Schwab is a fine company, well-managed, and with an excellent growth path ahead. But that road is going to be long and bumpy, with some treacherous moments along the way. Both Schwab and TD are going to feel like Sisyphus pushing the unbearable rock up a seemingly insurmountable mountain. The ever-vigilant regulators will be with them every step of the way (often adding more weight to the rock whenever they can!)

As my trailing stops continue to execute, I will watch for new entry points. But mostly I will diversify into the other fine companies I own and suggest for your due diligence.

Good investing,

Joe

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This article was written by

Joseph L. Shaefer profile picture
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Geopolitical analyst, speaker, writer. Former professor, retired Brigadier General, Special Ops and Intelligence. I invest for myself and the world's best clients. You are welcome to join us.

Published or reviewed Wall Street Journal, Strategic Review, American Thinker, Forbes, others. I write for my own pleasure and your feedback on SA, my SA blog and on SA Marketplace site, The Investor's Edge. Author of the investment book "Bringing Home the Gold." I also write geopolitical commentary at "On Point -- National and Global Issues and Intrigues." You can see these essays gratis at https://josephlshaefer.substack.com/.

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Disclosure: I am/we are long SCHW, AMTD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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