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 NYSE 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 goes on. "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."
What got you into stock exchanges?
Exchanges are a wonderful proxy for an economy. I don't know what companies to buy in India, but if I own the stock exchange, whatever works well in that economy will percolate to the exchange. Initially when the TSE was decoupling from its members, I was opposed to it. But then I realized I was wrong. When I went to New York, I was stunned. At the time, operating margins in Toronto were 50%. New York was 3.4%. I remember blurting out, Helen Keller could find efficiencies there. We paid $ 2 million (U.S.) for our first seat in New York. Three weeks later, they went to $ 1 million, and everyone looked at me sideways. There's a lesson: What do you do when you're down? So many clients sell when they should be buying. For instance, the second the Fed bailed out Bear Stearns, you knew the war was over. They were saying, "We will not allow the financial industry to collapse." And you could put on your buying boots and get at it.
How much opportunity is there in a place like Karachi or Nigeria?
These economies are growing at an im--mense rate. And a lot of the capital is staying in its own market now. It doesn't naturally gravitate to America, because America is killing itself with Sarbanes-Oxley, a legal system where everybody sues each other, and an oppressive criminal system--and I'm not just talking about Conrad. As you have more companies trading, there are lots of revenue streams from exchanges. And it's electronic, 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, which have higher profit margins. But in the emerging world, nationalism always comes into it. Dubai has an alliance with Nasdaq, Abu Dhabi has a deal with the NYSE, and Qatar has a deal with the London Stock Exchange. These guys are going the wrong way because they all distrust each other. They should be merging with each other.
Sounds like the TSX and MX.
MX would rather sell to the Americans, the South Africans--anybody other than those English in Ontario. They say they're trying to preserve their financial market. I have news for them: They already blew it. When I started in financial services in 1965, 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.
You've been a very vocal critic of hollowing out...
I'm not concerned about protectionism. We gotta have enough confidence in ourselves to know that we can win at the games we enter into. We should be on the takeover(or) side, not the takeover(ee) side. For example, you have Stelco and Dofasco staring at each other for years--excellent companies, gone. We need directors who've got some guts and gumption. They're not paid as custodians; they're paid to create wealth.
Where does Canada's future lie?
We're next to such a large capital pool, so we've ended up losing head offices. And head offices are critical. Fly to Manhattan and see if you see any drill rigs or manufacturing plants. Then go fly around Sudbury. You don't have to do a study. It's really simple--everything spins off from head offices. End of story.
Where are you looking now?
We like India a lot. It's growing very fast and it has a rule of law, so you have recourse if something does not work out. The problem with China is that it's still a very arbitrary environment. We're also talking to exchanges in Cairo and Southeast Asia.
I read that you recently received an Arabian horse from a Saudi sheik.
I haven't received the horse, and I'm not pushing it. In Saudi Arabia, they can either give you a jewelled sword or a horse--these are the top gifts to some perceived potentate. Would that he had given me the jewelled sword, because walking around Bay Street with a sword commands a certain respect. The sheik has his own 767, and he said he'd fly it over. One of my greatest fears is getting a call in the wee hours from the airport saying there's a horse waiting for me.
Caldwell's rules for investing
NO MARGIN ACCOUNTS "I know what it's like when you want to throw up in the wastebasket when you're down."
NO UNDERWRITING "I don't want the compulsion to sell an issue because we have a commitment to do it." ONLY BUY GOVERNMENT OF CANADA OR ONTARIO BONDS OR TREASURY BILLS--NEVER CORPORATE BONDS "THIS ASSET-BACKED COMMERCIAL PAPER IS JUST IRRELEVANT TO US."
On Eliot Spitzer "What a moron. That's part of the American phenomenon: You grow by tearing others down. And Spitzer clearly did it with a vicious sense of careerism. And that's unforgivable. You gotta be consistent in what you say and what you do."
Buddy, can you spare a toonie? Caldwell carries around a pocketful of tiny bible tracts with toonies taped to them. When someone asks for spare change, he hands one over. "I know all the guys downtown. They call me the Bible Man."
First investment "I put $6,000 into a jockey-shorts maker.
It went out of business but I saved money, because every time the founders popped up, I would warn people."
Investing idol
Himself. "Most money managers are egomaniacs who feel no one can do it as well as they can. And they're all mistaken, because it's me."
1943: Born in Toronto
1964: Caldwell lands a job at Royal Securities Corp . A year later, after graduating with an economics degree from McGill , he rejoins the company
1966: Caldwell marries Dorothy Anne Boylen , and they go on to have two sons, Brendan and Theo (both now run parts of the family firm)
1969: Royal Securities is acquired by Merrill Lynch. Eventually, Caldwell becomes head of institutional equity trading at Merrill Lynch Canada
1980: Starts Caldwell Financial, a brokerage and investment management company
2003: Caldwell buys his first seat on the NYSE for $2 million (U.S.)
2008: Caldwell and his partners own stakes in 39 stock exchanges worldwide, including Hungary, Bermuda, South Africa, India and Pakistan