Something old, something new.

David S. Pottruck, president & co-chief executive officer of Charles Schwab, answers questions on black and investing

IN A FUTURE DICTIONARY, "INNOVATION" AND "CHARLES Schwab" may well be synonyms.

Check out the company's history: when Charles Schwab & Co. Inc. became a discount brokerage firm in 1974 and offered low-cost stock trades, the concept was unheard of and scorned by the industry. Later, when the firm started its now successful mutual fund marketplace in 1984, which allowed investors to choose from a wide array of funds, skeptics frowned then, too.

The San Francisco-based firm continues to profit from its success in the marketplace. In the first quarter of 1999, Schwab gained 388,000 new accounts, bringing the total to 6.2 million. Customers' assets have grown by $55 billion--$23 billion of that from the influx of new money--to more than $592 billion. Due to the seesawing of the stocks of Internet companies and online brokers, the firm's shares have taken a beating as of late, down to $43.06 from their all-time high of $77.50 a share. As the firm moves into the 21st century, it faces several challenges. Perhaps its most daunting is what the firm refers to as its "clicks-and-mortar" strategy-fusing the old-fashioned, people-oriented portion of its business with the Internet.

Spearheading this effort is David S. Pottruck, 51, president and co-chief executive officer of Charles Schwab. Pottruck works closely with founder Charles Schwab, now 61, and is slated to succeed him when he retires. And he is committed to making this blend of high-tech know-how and old-fashioned horse sense work.

Personal Finance Editor Ivan Cintron sat down with Pottruck at Schwab's headquarters to discuss, among other topics, how the discount broker intends to successfully marry its burgeoning online brokerage services with its more traditional people-centered approach; renew efforts to recruit African American brokers and customers; and its view of turbulent market conditions.

BLACK ENTERPRISE: With the market so volatile, sparked by fears of rising interest rates, what is Charles Schwab's long and short-term view of the status of the market?

DAVID POTTRUCK: We are very optimistic in the long term. We like the macro trends toward deregulation and technology that enhance productivity. These things result in a more competitive market, more flee-flowing capital, and that always creates a more vibrant business climate. That kind of business climate is going to result in more and more investing and an increase in the value of companies.

I think we start with the notion that investing is not like going to Las Vegas. It's not a zero-sum game. You sit down at Las Vegas and at the end of the night, there's no more money than you started with. It's just changed hands. Some people have more and some people have less. Investing is different from that. Over time, values increase because of economic activity and the growth of enterprise. And so the stock market is simply a valuing mechanism of our economy, which we expect to continue to go up. Now, what happens is sometimes [the market] goes up too fast, and then it corrects down, and sometimes it doesn't go up fast enough, and it shoots up. There tends to be some boom and bust around that, centered around investor psychology of both greed and fear.

B.E.: Do you think those fears are overblown?

POTTRUCK: No, I wouldn't say that. I see that we've had some real greed, some real excesses, in the Internet [sector], for example. The valuations on some Internet companies, which are now down 50%, 60% or 70%, [were] not justifiable. And even though these companies have some fantastic business prospects, it's kind of hard to understand [why there are] multibillion-dollar valuations for companies with $10 million and $20 million in revenues and no prospects for profits as far as the eye can see. Some of that has to work itself out. And the good news is that we've seen a 50% to 60% correction already in the Internet [sector] from April to August, and that has not resulted in some huge, horrible crash in the market.

B.E.: If your portfolio was made up of primarily [Internet] stocks, then it's been a bear market for you?

POTTRUCK: Yes, very much a bear market for you. Now, when people ask us about investing at Schwab, we take a very thoughtful, long-term view. Our recommendations to our clients are always around asset allocation that matches your tolerance for risk. We're great believers in index funds and broad diversification. So clients who have used the recommendations of Schwab have done very, very well up until this time frame. Now that's only a [small] percentage of Schwab's customers. The vast majority are self-directed customers who do their own research and follow their own instincts, and some of them have done well, and some of them in some cases have not done so well.

B.E.: Because a number of self-directed investors may have been feeling some pain in the market because of Internet stocks has Schwab had to do a lot more hand-holding?

POTTRUCK: Well, sure. We have done a lot of hand-holding. The truth of the matter is we did a fair amount of handholding upfront. One of the things we did [was] not allow as much margin lending on Internet stocks, which is where people really get hurt. Where people really get hurt is when they borrow. They leverage up their positions, and then when the markets come down, they [get] a margin call and they either have to come up with the cash or sell out their stocks [at a low price]. That's not a place you want to be.

So we raised our margin requirements on some of these very risky stocks. Normally, we would lend up to 60% to 65%. Now we're only lending, in some cases, 30% to 50%. So there are much more restrictive margin requirements. And some of our customers didn't like that. They thought we were being too restrictive and may have taken their business elsewhere. We thought it was prudent. We started doing this in the first quarter of 1999.

I think we've also done a fair amount of hand-holding. Now, when you want to put in a purchase order for 500 shares of Microsoft, you may not need to talk to anybody. But if you bought 1,000 shams of [America Online], and watched your portfolio go down by 50%, you might want to discuss that with somebody and get some sense of what to do going forward.

B.E.: For the second year in a row, you co-sponsored a survey with Ariel Capital on the investment patterns of African Americans and in general, found them less invested in stocks, women in particular. How have you used the findings of the survey in your efforts to reach more African American investors?

POTTRUCK: I think that the most profound way is for us to become more familiar with the way African Americans think about investing. The survey suggests that they're typically more conservative and more skeptical about investing. That suggests to us that when we're working with African American investors, we have to be sure that we're really spending the time necessary to make them feel comfortable and well-educated [about the stock market], and have them know that they're not being sold something. I think one of the things that really plays to Schwab's strengths is [that] we don't push products or investments. We're really in the customer service business.

One of our strategies is to recruit and train more African Americans to serve on the front lines serving customers. And so our hope is that the publicity and sponsorship of the African American survey suggests to people our commitment to this business and helps us in the recruitment of people to serve that market.

One of our greatest early successes in recruiting employees at Schwab was recruiting clients of Schwab to become employees. And I think we're going to find that here as well. We're going to find that some of our African American clients who really love the stock market are, in some cases, going to be prime candidates for jobs at Schwab.

B.E.: There are some people who say hiring minorities is not only the right thing, but there's a way to quantify it on the bottom line. What's your view?

POTTRUCK: I think this is all a part of the greater story around diversity. Whether its African Americans, Asians, women, Latinos or the gay and Lesbian population, our view is, number one, there's no question that the employment market in America is becoming less white and less male. So if you build your company around being great at recruiting, promoting and developing white males, you're going to be competing for a smaller and smaller slice of the population and serving a smaller and smaller target market. If you want to draw from the broadest pool of talented people to serve a broad pool of Americans, then you've got to have an employee base that looks like America.

B.E.: As part of this effort, has Schwab opened more branches in minority neighborhoods?

POTTRUCK: We started in the Asian market. We began an Asian business unit about five years ago. And it has been the model of how to do this. We have begun the process of trying to think about our African American initiative from a similar place. We now have two branches--one in Prince George's County (in Maryland) and one in Atlanta--that are really targeted toward the African American community.

But middle class and upscale African Americans tend to be all over. They're not living in single communities. So [we] need to have African Americans populated in all of our branches. We have a multifaceted strategy. And part of that is to reach out to centers of influence in the African American community, organizations like One Hundred Black Men, One Hundred Black Women and the local Black Chamber of Commerce. [We] go to their membership and bring the investor workshops to them.

B.E.: You've been quoted as saying firms that master "clicks and mortar"--combining the best attributes of the Internet and the physical distribution world--will be the winners in the Internet sweepstakes. What are some specific examples of how Schwab has put this philosophy into practice?

POTTRUCK: I think it's going to be very hard for companies to distinguish themselves purely on the basis of having a superior technology, because technology today is so easy to copy. So someone builds a new feature into a Website and then everyone else adds that feature. I'm a little skeptical about building a sustainable competitive long-term advantage based upon your Website being better. Building it based on a better price, well, that's hard, too, became people want service, not just low prices.

The ability of a company to connect with its customers is going to be how it distinguishes itself from other companies. People, local branches, phone centers, Touch-Tone services, the Website and e-mail [services from Schwab] all complete a mosaic that makes the process seamless and effortless for our customer. And companies that blend all of that together are going to have the spectacular service experience that's going to be unique and are going to see the dividend of the Web.

One of the things that we're seeing in our business is that all the stuff that happens over the Web saves us money. It's cheaper than it used to be with people delivering all [those services]. You can then take all those savings and invest them in people delivering new levels of service in things that we didn't do before. For example, we didn't [provide] advice before, [but] we haven't raised our cost structure to do advice. What we've done is we've saved money on telling people what their account balance is or giving them a quote. You can do that over the Web now, or on a Touch-Tone phone.

B.E.: As you know, Mark Barton, a day trader in Atlanta, killed several people in a shooting spree at two investment firms where he worked. His rampage has been linked to losses as high as $400,000 that he suffered while day trading. Some firms have responded by beefing up security at their offices as well as warning clients about the dangers of day trading. Has Schwab done the same thing?

POTTRUCK: We don't have any traders like Mark Barton. We have none like that. We don't have any people that are trading to those levels, number one. Number two, we monitor the portfolios of our customers. And when they have excessive losses, we try to cut them off or prevent them from continuing to lose money at that level.

B.E.: What kind of cutoff are we talking about?

POTTRUCK: Well, every customer's situation is different. We have a progressive set of letters we send people to inform them that they're losing money. So we really don't have that kind of a problem or trading profile at Schwab.

Of course, you have to be concerned. Our society is becoming more violent. We haven't put armed guards in all our branches. We've tried to respond to the security fears and concerns of our employees. We have a branch in Atlanta that was very concerned about this, some worries about copycat homicides, so that had us paying attention. We did beef up security [the first couple of day after the shooting], especially in our branches in Atlanta.

I think day trading is a convenient scapegoat for people who want to go blame something that's new and different. Let me suggest that day trading has many issues. Some of the practices that go on, the promises that are made that suggest that a guy who drives a cab one day can be a multimillionaire the next, that's kind of silly.

RELATED ARTICLE: pottruck's prosaic picks

How an officer of a leading online broker selects stocks offers a few surprises

You would think that as one of the officers of an online brokerage firm, David S. Pottruck, president and co-chief executive officer of Charles Schwab & Co. Inc., would have more of his own personal holdings in Internet stocks. After all, the firm controls roughly 300% of all online trading volume and its Website is integral to the way it conducts business.

But in keeping with Schwab's cautious approach to the market-a philosophy it endlessly preaches to its customers-Pottruck says his major investments, outside of company stock, are placed in index funds and blue-chip companies providing the framework for the Internet.

"I have an enormous amount of money in index funds," says Pottruck. "The core of all my investment holdings are in index funds. That's probably more than 50% of my personal investments outside of Schwab. That guarantees me that I'm going to match the market. You don't have to beat the market to do very, very well."

As for Internet pure plays? Forget about it "I don't own a single e-commerce company stock," says Pottruck. "What I do own are stocks like Cisco Systems (Nasdaq: CSCO), and IBM (NYSE: IBM), and Lucent Technologies (NYSE: LU), and Intel (Nasdaq INTC) and Microsoft (Nasdaq: MSFT)."

His reasoning is simple: these companies providing the technology that makes the Internet work. So regardless of which e-commerce t winds up on top, they'll also be along for the r It's also consistent with Schwab's focus on using best elements of the Internet to maintain its position in the online brokerage field.

Pottruck adds that in today's world, you have to worry a little about what's considered the safest of investments--even sure bets like in funds and blue chips. "I like to dabble in the other stocks because I enjoy it," he says. "It's kind of fun to see how well I can pick winning investments."

--Ivan Cini