All fired up

Dawn Callega interviews Tom Caldwell who says he's trying to
encourage the 'attack mentality' culture

Opening Up
Globe Investor Magazine, May 22, 2008
Photograph by Christopher Wahl
Illustrations by Ted McGrath

I haven't even sat down before Tom Caldwell is off and running. "People call me a nationalist investor," he says. "I'm an internationalist investor." Caldwell, of course, is famous for buying 49 seats on the New York Stock Exchange starting in 2003, a move that netted him and his investors $250-million (U.S.) when it went public two years later. "Canadians, we can compete with anyone, on anything," he says. "A firm our size, 150 people, we went to the centre of U.S. capitalism and changed the NYSE. If you go to N.Y. and ask about 'that Canadian,' usually with an epithet between those two words, everybody knows who you're talking about. I consider that a compliment."

This is a full version of the interview. An excerpted version appeared
in the latest Globe Investor Magazine.

What got you into stock exchanges?

As we looked at the world, we realized that exchanges are a wonderful proxy for an economy. For example, I don't know what specific companies to buy in India or China, but if I own the stock exchange, whatever works well in that economy will eventually percolate to that exchange. Initially when the [Toronto Stock Exchange] was decoupling from its members, I was opposed to it, because being a [TSX] member was who I was. It was part of my persona. But then I realized I was wrong. And as I always tell my portfolio managers, there's nothing wrong with being wrong, but there is with staying wrong. Then I went to New York, and I was stunned. At the time, the operating margins in Toronto were 50 per cent. New York was 3.4 per cent ... We paid $2-million for our first seat there. Three weeks later, Dick Grasso exploded with the pension scandal. Seats went immediately to $1-million, and everyone looked at me sideways. There's a real lesson there in investing, and the lesson is, What do you do when you're down? What do you do in adversity? Is it a trap or is it an opportunity? And I had a choice. I always keep telling investors, what determines whether you make money in a market is your emotional behaviour, not who you invest with or who you invest through or even what you buy. It's how you handle it. I could have said those guys are crooks, and they're terrible and I don't want to own any stock and those Americans . I could've grumbled and walked away, or I could've said, am I on the right track here? And if I am, then it's an opportunity. You're on the knife edge and it's amazing. I've seen so many clients selling when they should be buying. In this recent market collapse, for instance, the second the Fed bailed out Bear Stearns, you knew the war was over. It was already over. What they're saying is, "We will not allow the financial industry to collapse," and you could just put on your buying boots and get at it. As for New York, we kept on buying and campaigning, and the rest, as they say, is history.

How much opportunity is there in a place like Karachi or Nigeria?

These economies are growing at an immense rate. And a lot of the capital is staying in its own market now. It doesn't naturally gravitate to America any more, because America is killing itself with Sarbanes-Oxley, a legal system where everyone sues each other, an oppressive criminal system. As you have more and more companies trading, there are lots of revenue streams from exchanges. It's a cable television station that you have to watch. And it's electronic, in most cases, which means it has a fixed cost. So your volumes are going up and costs are staying the same, though actually they're going down because technology is deflationary.

At what point do these smaller exchanges start consolidating?

Consolidations have a personality to them. Typically, they are stock markets trying to get into derivatives markets -- option, futures -- because the derivatives market is growing faster and has higher profit margins. But in the emerging world, the stock market is an organ of economic growth. Nationalism also comes into it. For example, Dubai has an alliance with Nasdaq, Abu Dhabi has a deal with the NYSE, and Qatar has a deal with the London Stock Exchange. Well, these guys are going the wrong way because they all dislike and distrust each other. They should be merging with each other.

Sounds like the TSX and MX.

MX would rather [have sold] the Montreal Exchange to the Americans, the South Africans -- anybody other than those English in Ontario. They [said they were] trying to preserve their financial market. I have news for them: They already blew it. It was gone a long time ago. When I started in the financial services industry in 1965, Montreal was the centre. All the big banks, the big insurance companies, the big brokers, they were all headquartered in Montreal. They blew it. That train is gone. Elvis has left the building. Get over it.

What's the future for the new TMX?

It depends on the new management. I was rather disappointed to see Richard Nesbitt leave. When I do research on a company, there are only two things I care about: What's your vision, and what's your plan to achieve that vision? And are your subsequent actions consistent with that? I don't care about quarterly earnings. I look three to five years in any position I take. The problem with Canadians is, we are so myopic. I always tell people, if you're going to dream, you might as well dream big. We should've bought the American Stock Exchange, but nobody thinks that big. AMEX could have been bought for $260-million. That's what the NYSE is buying it at. One-hundred plus years later, we're still fiddling around with French-English questions instead of saying, "We can take on the rest of the world."

You've been a very vocal critic of hollowing out.

I'm not concerned about protectionism. We've got to have enough confidence in ourselves to know that we can win at the games we enter into. We should be on the takeover-er side, not the takeover-ee side. That's the culture I'm trying to encourage -- not the siege mentality, but the attack mentality. For example, you have Stelco and Dofasco staring at each other for years -- excellent companies, gone. Falconbridge and Inco, wonderful companies, and Noranda, a world leader in smelting. And some Brazilian companies we don't even know of takes these things out. Really, I want to hold the directors' feet to the fire. They're not paid as custodians; they're paid to build organizations, to maintain and create wealth. What we need are directors who've got some guts and some gumption, and management who don't have a sense of entitlement.