The New

RULES
M
aking money was still easy as recently as 2007. If you’d invested in
just about anything over the previous two decades and held on, you
were ahead of the game. (Well, apart from tech stocks and Zimbabwe.)
Sure, some scolds and worrywarts were muttering about warn-
ing signs like sky-high Florida real estate prices and bewildering
new credit derivatives, but why should anyone have cared? Stocks,
bonds, real estate, oil, gold, China, India, Donald Trump—all were climbing up, up, up.
So were the retirement prospects of baby boomers. Risk? The only risk was not getting in
the game. ¶ And then it all came crashing down. Now, just about every investment vehicle
and strategy is suspect, even though many markets rebounded and posted big gains in
2009. Stocks? Still about 25% below pre-crash highs. Bonds? Real estate? Both are being
propped up by low-interest-rate Viagra from central bankers. Gold? Could be a bubble that’s
about to burst, now that TV pitchmen are offering to buy your fillings. Do we need new
rules for grim new investment realities? Or do some traditional maxims still offer hope?
The answer may be a bit of both. By Scot Blythe and John Daly

Rule % S&P dividend yield vs. 10-year treasury yield

If you’re taking 15
a risk, you deserve
a premium for it 12
10-year U.S. treasury yield
For stock-market 9
at constant maturity
stats junkies, it was
an epochal event: 6
In 2008, the dividend
yield on Standard 3
S&P 500 dividend yield
& Poor’s 500 index 0
stocks climbed above ’50s ’60s ’70s ’80s ’90s ’00s
the bond yield
on 10-year U.S.
treasuries for the Pre-1958 1960s 1970s and 1980s 1990s and 2000s 2008
first time since 1958. Memories of the Stocks surge in The Great Inflation Dividend yields Investors stampede
Great Crash of the 1960s and of the 1970s erodes and bond yields into government
That signalled a 1929 are still early 1970s, and the value of bond both decline bonds after the
fundamental strong. Stocks investors are interest payments as inflation abates market meltdown,
shift in investors’ are perceived satisfied with low and the fixed face and stock and pushing down bond
as riskier than dividends—or value that investors bond prices climb. yields. Rattled baby
perceptions of the bonds. Investors none at all—if receive when bonds Investors aren’t boomers, hungry
relative risks demand hefty they earn fat mature. Bond yields too worried about for income, seek
dividends as capital gains. soar as investors risks of any kind. out higher dividends
of owning stocks a risk premium. demand a premium on stocks.
and bonds. for inflation risk. more rules

FEBRUARY 2010 REPORT ON BUSINESS  31

 s
le
ru Rule

Yes, there are

w
e
n

Rule alternatives to
Watch for scammers’ new tricks income trusts
The tax advantages of income
trusts will end in 2011. CIBC World
Markets estimates that Canadians
have $100 billion parked in money-
market funds, bank deposits
Rule
and cash accounts at brokerages.
Where are you gonna go? Follow the mutual fund herd’s money,
1) then do the opposite
A real emerging Rule Dividend-paying stocks Want to know where stock markets are headed? TrimTabs, a California-based
market, and a
financier who Growth is You’ll be travelling out on the risk
curve, but S&P/TSX composite index
research firm, analyzes market swings and signals like flows of cash in and
Savvy out of mutual funds. Basically, if the herd is flocking to mutual funds, markets are
apparently has investors cheaper stocks have been sporting
critical government like financial than value probably due for a fall, and if fund investors are fleeing, a rally may be imminent. A
connections a 2.8% dividend yield lately.
Attn: Sir/Madam, jargon and Caveat: That isn’t because lots of
look at monthly net sales of long-term mutual funds in Canada versus the S&P/TSX
I am a Chinese Government registered angel investor based in Beijing acronyms Peter Hodson, composite index over the past decade bears out the theory. In April, 2000,
companies raised dividends,
China. I have a huge amount running into Millions of United States Dollars, Manager, Sprott but because share prices haven’t a month after the U.S. tech bubble burst, monthly net sales hit $1.5 billion, double
which I intend to invest into any lucrative project. Growth Fund fully recovered from the the level a year earlier. In the depths of a market slump in October, 2002, investors
I am willing to offer the funding in a form of a direct loan at 7% interest “Value companies 2008 meltdown. removed a net total of $688 million. In February, 2007, as the U.S. mortgage crisis
per annum, the loan will span for a period of 5 years and there is an are trading right deepened, net sales surged to a massive $7.7 billion. Over the last three months
option for re-investment once both of us are satisfied with the profit accrued now at 28 times 2) of 2008, as markets plunged and savvy investors like Warren Buffett scooped up
from the investment. their earnings per Real Estate Investment
Trusts (REITs) bargains, Canadians withdrew $11.4 billion from long-term funds. Get the big picture?
I am also open to Joint Venture at 40% Return On Investment (R.O.I). share, and growth
However, the funds for my investment dealings are clean and does not have companies are Cap rates (basically, the minimum Net sales of long-term
S&P/TSX composite
criminal origin, also clean from Terrorist and Drug activities. trading at 15 to 16 rate of return buyers will accept index (monthly) mutual funds in Canada
Let me know if you require funding for your Business/Project so that times. The historical on the purchase price of a property) ($ billion)
Addresses 15,000
we can establish a long lasting, reliable and fruitful business relationship. compliance multiple for growth are back over 7%—where they
A plausible-
sounding long-term concerns companies is 23 were in the second quarter of 2005.
arrangement, not a I look forward to doing business with you. immediately to 24. So even if REITs are also paying out 12,000
$268,000 bank draft things just went to distributions of 7%.
in West Africa that An actual front
Sincerely, normal, you’d get 9,000
can only be cashed
Joseph Day Lee
guy, although
legitimate tycoons 50% increase in 3)
by sending a Preferred shares
Tel: +005202474790 like Li Ka-shing

sources: (left) tmx group; (top right) investment funds institute of canada; (bottom right) tfc commodity charts
fee of $206 valuation for growth 6,000
Email : joedaylee363@yahoo.com.cn or the Kwok No longer the bargain they
companies.
brothers would were a year or two ago, Canadian ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09
People have been
be better preferreds are still yielding about 5.8%.
paying way too
Given the favourable tax treatment
much for value
of dividends, the website
companies because PrefBlog says that’s equivalent
they’re perceived to to an 8.2% interest rate.
Rule Rule be safe, stable and Rule
less risky. Those 4)
Take a closer look at the index
Stocks still companies have Corporate bonds
Can a hedge fund help you ride out market ups
and downs? Yes—if it survives
Individual investors tend to use indexes such as the S&P 500
as benchmarks and as a cheap, easy way to diversify by “buying
beat bonds and also tended to pay
more in dividends.
They’re also not the bargain they
Of 50 funds for retail investors that Miklos Nagy and Peter Beck reviewed in
the index.” But are indexes suitable for either task? At the end inflation (at That remains true.
were after bond markets froze
up in late December, 2008. But corporate
their 2003 book, Hedge Funds for Canadians, 30 have disappeared. Nine of the
of 1999, more than a quarter of the market value of major least until the So people are paying
up for safety and
bonds are still yielding about 6%,
27 hedge fund companies profiled have gone belly-up or exited the retail business.
Yet some funds with multiple strategies, conservative leverage and contrarian
Toronto Stock Exchange stocks was accounted for by BCE Inc.,
a tired phone monopoly, and its offspring, the grossly overvalued
next crash) they’re paying up
which is roughly 220 basis points (bps)
over Government of Canada
positions steered through the market meltdown of 2008 and posted strong results.
“It’s the sign of a healthy market. Hedge funds are like stocks—they fail all the
You can’t kick yourself for for yield. bonds of similar terms, much
Nortel Networks Corp. At the end of 2009, no individual stock time. The good news is that our business has a failure rate less than the restaurant
not buying some super-duper Historically, larger than the historic gap
was as bloated as Nortel was in 1999, but the S&P/TSX composite business.”—Jim McGovern, CEO of Arrow Hedge Fund Partners
fund with a return of 700%. growth companies of 100 bps to 150 bps.
index was top-heavy with banks and resource companies. But you can kick yourself have been more
Is it ever a good idea to have so many eggs in just a few baskets? for not doing the super-obvious. expensive than
The iShares Canadian value companies.
That makes Rule
LargeCap 60 ETF is probably
Nortel Royal total common Need investment advice? Ask your waiter, not your broker
Bank the most plain-vanilla stock
20 market investment around. sense, because Your dinner plate is an excellent barometer of commodities prices. Many major foodstuffs
BCE
Scotiabank If you’d invested $10,000 in if a company is have climbed strongly over the past five years (see chart below), yet have dipped recently, presenting
15
Seagram 1999, you’d have $18,735 a growing by 100% a buying opportunity. Adrian Ravinsky, manager of operations for Buca, a stylish restaurant
BCE decade later. Investing in the a year, it should be in downtown Toronto, has one word of investment advice: “Rice.”
TD TD Canadian Bond Index fund worth more than a
Cdn
10 Natural company growing
Royal TD would have given you $17,612.
Bank Resources If you’d found an investment that at 2% or 3%. So
5 just kept up with inflation, growth companies
you’d have $12,308. Though were worth more,
0 stocks in 2008-’09 took but they now trade
their biggest beating since at a big, big discount Rice Soybeans Beef Milk Corn Wheat Orange juice Coffee Sugar
1999 2009 the early 1930s, they’ve to value companies.” 108% 93% -7% 5% 98% 80% 46% 31% 196%
TSE 300 composite index S&P/TSX composite index still come out ahead.

32  FEBRUARY 2010 REPORT ON BUSINESS FEBRUARY 2010 REPORT ON BUSINESS  33

 n
e
w
ru
le
s
there’s

MILLIONS
MILLI-
in those

seconds On any given day, electronic upstart Infinium

may trade more shares of TSX heavyweights
than any of the big-bank investment dealers.
Is this creative disruption of market tradition—
or just plain destruction?

by john daly
photographs by Matthew Stylianou

Infinium co-CEOs Alan Grujic (left)

and Sergei Tchetvertnykh
FEBRUARY 2010 REPORT ON BUSINESS  35

“Look,”
says Sergei Tchetvertnykh, pointing
at a flashing spreadsheet on his desktop’s
screen. “I just made $82,000 in one second.”
The co-CEO of the Toronto-based elec-
tronic trading firm Infinium Group isn’t
exaggerating. A second is now a very
long time in financial markets, thanks to
computer algorithms. Traders can gather
and interpret market data, and buy or sell
securities in response, in milliseconds
(thousandths of a second) or even micro-
seconds (millionths of a second).
Not every second is that successful, of
course, and there can be many reversals
over a few hours. On a typical day, Infin-
ium, with offices in Toronto, San Fran-
cisco, London and Barbados, executes
between 500,000 and one million trades
of stocks, options, currencies and other
financial instruments worldwide. Mea-
sured by volume of shares, it is often the
largest single trader of major companies
listed on the Toronto Stock Exchange—
more active, in other words, than any of
the otherwise dominant investment deal-
ers owned by Canada’s Big Five banks.
The paradox is that Infinium is still
very small and very young, with 70-odd
employees spread over its second-floor
headquarters in a block of 19th-century
buildings near Toronto’s historic St. Law-
rence Market. (Its other three offices
account for another 40 staff.) Tchetvert-
nykh and co- CEO Alan Grujic, who are
both 42, founded the firm in 2002. Unlike
old-style investment dealers, Infinium is a
pure proprietary trading outfit—it trades
only its own money, none for clients.
As a specialist in high-frequency trad-
ing, Infinium is one of a handful of cut-
ting-edge firms in Canada, alongside doz-
ens more based in the United States and
Europe, that have overwhelmed and revo-
lutionized financial markets over the past
few years. By some industry estimates,
these hotshot dealers—along with Gold-
man Sachs and some other established
firms that have also jumped into the high-
frequency game—now account for about
a quarter of daily stock trading volume in
Canada, and as much as 60% to 70% south
of the border.
Many of the strategies used by the high-
36  FEBRUARY 2010 REPORT ON BUSINESS
frequency traders are traditional, such as
arbitrage, which takes advantage of price
anomalies in different markets. If, say,
Barrick Gold is trading at $40.04 a share in
Toronto and $40.05 in New York (a huge
price gap these days), the high-frequency
firm quickly buys in Toronto and sells in
New York before the gap closes.
The high-frequency traders’ speed and
volume is scaring the daylights out of many
regulators and traditional investment deal-
ers, who think this new wave threatens to
swamp the very foundations of financial
capitalism. In November, Paul Myners,
financial services secretary to the U.K.
Treasury Department, told an interviewer
that “the danger is that nobody really
seems to think of themselves as owners.”
How can management be accountable to
investors who change every few seconds?
Thomas Caldwell, CEO of Caldwell Secu-
rities Ltd., a mid-sized Toronto dealer that
has large investments in the NYSE Euro-
next and other stock-exchange holding
companies around the world, worries that
“a lot of trading these days is disconnected
from any economic reality or the funda-
mentals of companies.”
H
igh-frequency traders say that,
far from bringing on the apocalypse, what
they are doing is very safe and useful. If
they buy and sell almost instantaneously
at virtually the same price, the risk of
massive losses is tiny. Moreover, they
argue that huge benefits accrue to aver-
age investors in particular. “There’s more
liquidity and tighter spreads,” says Grujic.
“How can that not be better?” More liquid-
ity means anyone can get an order filled
almost immediately at the market price.
(The “spread” is the formerly wide gap
between the high price traditional brokers
would quote to clients who wanted to buy
a security, and the lower price they would
offer to investors who wanted to sell.)
People forget, argue Tchetvertnykh and
Grujic, just how clubby and antiquated
stock and bond markets were as recently
as the early 1990s, when the two of them
entered the business. In those days, the
Toronto Stock Exchange still had a trading
floor, and the New York Stock Exchange
(NYSE) accounted for more than 80% of
all trading in the United States.
Of course, even Tchetvertnykh and
Grujic had little idea of what the future
of the markets would be when they got
acquainted in 1992. The meeting place was
the CAMI automotive factory in Ingersoll,
Ontario. Grujic, who had graduated from
the University of Toronto in 1990 with a
bachelor’s degree in electrical engineer-
ing, was programming and monitoring
robots on the plant’s assembly line. How-
ever, he’d decided to go to the University
of British Columbia for an MBA, and was
helping management look for his succes-
sor. One candidate was Tchetvertnykh,
who had graduated from the Kiev Poly-
technic Institute with a degree in cyber-
netics in 1990, and had come to Canada
from Ukraine to enroll in the MBA pro-
gram at the University of Western Ontar-
io’s Richard Ivey School of Business.
The two hit it off right away. Both were
academically brilliant sons of European
professionals. Tchetvertnykh’s father was
a physicist and his mother an accountant.
Grujic was born in Toronto, but his par-
ents were from the former Yugoslavia—
his father an electrical engineer who
founded his own consulting firm, and his
mother a PhD in psychology. But the duo
also realized that finance, not the profes-
sions, was the place to make big money in
North America.
Tchetvertnykh graduated from West-
ern’s Ivey School in 1994, and was offered
a job in corporate finance with Credit
Suisse First Boston in New York. Grujic
also graduated in 1994, but UBC wasn’t
on Wall Street recruiters’ radar screen in
those days, so he opted for a job in bond
trading with TD Securities.
They could hardly have picked a more
propitious time to enter the securities
business. Markets around the world were
on a roll and the tech boom was in full
swing; investment banks were experi-
menting with new mathematically based
trading strategies and starting to deal in
more complex options and derivatives.
Tchetvertnykh specialized in interna-
tional mergers and acquisitions, which
inevitably meant a lot of travel. In 1997,
he returned to Ukraine briefly to head up
Credit Suisse’s new investment banking
division in Kiev, before joining Bermuda-
based Apollo Fund Management Ltd. in
1998 as director of private equity. In 2000,
he jumped to Merrill Lynch, working first
in London, then moved back to Toronto in
2001 to establish a technology group.
Grujic also landed plum international
assignments. After training in bond trad-
ing in Toronto, TD Securities posted him
to London in 1998. The job gave him the
chance to trade more elaborate products,
such as swaptions, which are options that
allow parties to exchange a fixed-interest
rate security or obligation for a variable-
rate one. Grujic and his colleagues also
developed computer models for bond
pricing. Most bond trading was still done
over the phone in those days, but the mod-
els could instantly compare the price of,
say, a five-year bond with the prices at
several different points on the yield curve
(from one to 30 years) and determine if
the five-year bond was rich or cheap. Hob-
nobbing was an education, too. “You learn
to have dinner with people who’ve made
a billion dollars,” Grujic says. In 2000, TD
moved Grujic to Tokyo, where he traded
even more complex options and deriva-
tives, essentially creating new products.
As things turned out, 1998 was also a
pivotal year for electronic trading. The
U.S. Securities and Exchange Commis-
sion gave the green light to online elec-
tronic communication networks, also
called alternative trading systems (ATS),
to become full-fledged stock exchanges.
The enfranchisement of Instinet, Island,
Archipelago and Brut meant competi-
tion for the NYSE—fast, technologically
advanced competition that allowed just
about any sizable trader to place orders
directly in the market, rather than route
them through investment dealers that
held seats on the NYSE . There are now
dozens of electronic marketplaces in the
United States alone, and only about 25%
of all American stock trading is routed
through the NYSE.
The other gut-wrenching change that
opened the door even wider for a geek
invasion came in April, 2001, when North
American stock exchanges completed the
switch from traditional fractional pricing
to decimalized pricing. Under fractional
pricing, the smallest spread between the
bid price on a stock (the highest a buyer
is offering to pay) and the ask price (the
highest a seller is willing to take) was one-
16th of a dollar, or 6.25 cents. Capturing the
spread ($125 on even a small retail order of
2,000 shares) had been a reliable source
of profit for traditional brokerage firms for
decades, and for a mini-invasion of indi-
vidual day traders in the 1990s. But with
decimalization, bid-ask spreads shrank to
less than a penny overnight.
Decimalization was a serendipitous
development for Tchetvertnykh and Gru-
jic. Through all their early postings, the
two men had stayed in touch, and talked
a lot about launching their own business
together someday. That someday came
in 2001, when Merrill Lynch sold almost
all of its operations in Canada to CIBC.
Tchetvertnykh didn’t want to work for a
bank, and Grujic was getting restless in
Tokyo. As well, both men had recently
married, and they didn’t want to raise
families in hectic international financial
capitals. “It was inevitable, so why put it
off?” says Grujic of their collaboration.
T
he duo still weren’t sure exactly
what the business would be, however. At
first they thought of opening a boutique
brokerage firm, like Toronto-based GMP
Capital, but “the proprietary-trading busi-
ness model became the most exciting,”
says Grujic. Although the advent of wafer-
thin spreads knocked traditional broker-
ages for a loop, and wiped out day traders,
Tchetvertnykh and Grujic figured there
were lucrative niches in the market for
new proprietary trading firms. “Banks
cannot compete with an innovative, nim-
ble company,” says Tchetvertnykh.
So, in 2002, he and Grujic founded Infin-
ium with $1 million of their own money.
Off-the-shelf computer hardware was
readily available. The hard part was writ-
ing the software from scratch—even for
two engineers with a decade of high-level
experience in global markets.
First, there were automated trading
strategies to consider. A lot of them were
based on traditional arbitrage between
markets, as well as increasingly sophisti-
cated trend-based arbitrage—buying or
selling if the price of a security had drifted
too far below or above a long-term or
short-term trend line. There’s also arbi-
trage between the prices of stocks and the
prices of futures, options, swaps, index
funds and other derivatives that are based
on them, which may take a while to adjust
when share prices move.
High-frequency traders have started
to assume the role of the traditional mar-
ket makers as well. In the days of stock
exchange trading floors, market makers
were individual traders designated by
industry regulatory organizations to pro-
vide liquidity and maintain an orderly
market in specified stocks—if trading
sagged and buyers or sellers couldn’t find
someone who’d accept their order, the
market maker was supposed to buy or sell
near the latest bid-or-ask prices.
In the modern variation, exchanges
and ATSs charge so-called liquidity tak-
ers a fee, and give liquidity providers a
rebate. In practice, that means that a high-
frequency firm might continuously offer
to buy or sell a stock. If, say, a traditional
brokerage comes in and accepts that offer,
it pays the fee. The fees and rebates are
tiny—say, 0.003 cents a share for liquidity
takers and a rebate of 0.002 cents per share
to the liquidity provider (which means the
exchange covers its costs). But if you col-
lect rebates on a few million shares a day,
they do add up. The same goes for cap-
turing bid-ask spreads, which have been
whittled down to fractions of a cent on
FEBRUARY 2010 REPORT ON BUSINESS  37
The high-frequency traders’
supercharged computers
haven’t blown up markets—
yet—but, according to
Tom Caldwell, they have
blown up individual stocks
major stocks, but still can be realized.
Gaming, in the mathematical sense, is
also very much a part of high-frequency
trading. Other traders, whether they’re
human beings or algorithms, often trade
in patterns. Spot the pattern, and you
might be able to trade against them. Of
course, everyone in the market is trying
to do that, which means continual updates
to software are part of the game. Infinium
runs about a dozen broad strategies at any
given time. “Some might last a week, some
might last a year,” says Tchetvertnykh.
“Our R&D budget is $3 million this year.”
Before Infinium could get its systems
running, Tchetvertnykh and Grujic had to
spend months programming in risk con-
trols, record-keeping functions and tests
for compliance with regulations. On any
one trade, says Tchetvertnykh, there are
dozens of automatic checks within about
20 microseconds.
Speed is so essential that high-frequency
trading firms and traditional investment
dealers have located computer servers a
few feet away from stock exchange trad-
ing platforms. Infinium has two servers:
one near Alpha Trading Systems Ltd.’s
platform in Toronto, and the other near a
TSX platform in the suburb of Markham
(the exchange has another platform down-
town). Transmission time for an order: less
than a millisecond.
Yet Tchetvertnykh says “human con-
trol” also remains a key component. There
are some patterns and anomalies that only
savvy traders who monitor the algorithms
can spot. One Infinium trader in Toronto
who specializes in European stocks and
currencies, watches 22 computer screens
throughout her working day.
At the beginning, however, Infinium
was basically just Tchetvertnykh and
Grujic and two other staffers. In 2003,
the firm’s first full year of operations, rev-
enue totalled just $818,696. Because the
U.S. market is so much bigger and more
advanced than Canada’s, the duo figured
38  FEBRUARY 2010 REPORT ON BUSINESS
they had to expand the business there as
soon as possible. Infinium opened a U.S.
subsidiary in 2005, and Grujic moved to
Marin County, north of Silicon Valley.
Good call: Revenue climbed to $13 million
that year.
Tchetvertnykh says revenue for 2009
will likely reach $100 million. That’s still
small: The full-service investment bank-
ing divisions of several Big Five Canadian
banks each generate more than $1 billion
a year in revenue. And privately owned
Getco LLC, one of the largest U.S. high-
frequency trading firms, employs more
than 200 traders, and earned an estimated
profit of $400 million (U.S.) in 2008.
G
rujic and Tchetvertnykh say Infini-
um’s next step is further geographic expan-
sion. The London office, which opened in
2008, gives them a beachhead in Europe,
and they’re looking at other countries
around the world.
Yet they aren’t certain how big Infinium
will get. Grujic says that “2,000 employees
seems to be a natural place we could go.”
Tchetvertnykh says he’d at least consider
going public. “It would give us equity to
bring in the best people.” He’d also con-
sider selling out—he points out that Citi-
group paid $680 million (U.S.) for South
Carolina-based Automated Trading Desk
LLC in 2007.
Meanwhile, regulators and traditional
investment dealers are struggling to assess
what high-frequency traders have already
done. At a conference in late October, SEC
chairman Mary Schapiro said that new
rules may be needed “to address new types
of market professionals whose activities
may not be sufficiently regulated.”
High-frequency traders argue that
regulators will first have to find problems,
and so far, there don’t appear to be any. In a
study of high-frequency trading in Canada
published in September, New York-based
Investment Technology Group Inc. made
the same argument as the Infinium prin-
cipals that their kind benefit the market:
Bid-ask spreads and share-price volatility
in Canadian stock markets is down over
the past two years, and order depth—
which measures share availability—is up.
Even bank-owned dealers agree with
some of that. In October, CIBC published
a white paper by six of its senior traders
on high-frequency trading and the TSX’s
rebate program for electronic liquidity
providers, which was introduced in 2008.
Much of the impact has been obvious:
“faster-moving quotes, more bids and
offers, more volume, and in some cases,
frustration.” The CIBC traders also say
they believe that high-frequency traders
“are not predatory, simply very fast and
very good at what they do.”
But critics like Thomas Caldwell say
that such overall numbers don’t tell the
whole story. They question whether high-
frequency traders are providing “real
liquidity” to the market. In fact, argues
Caldwell, high-frequency traders are also
removing it. How? Large institutional
investors know that if they start trying to
push through a large block of shares at a
certain price—even if the block is broken
into many small trades on several ATSs
and markets—they can trigger a flood of
high-frequency orders that immediately
move market prices to the institution’s
disadvantage. (This is the source of the
“frustration” mentioned in the paper by
the CIBC traders.)
That’s why institutions have flocked
to so-called dark pools operated by ATSs
such as Instinet, and individual dealers
like Goldman Sachs. The pools allow trad-
ers to offer prices without publicly reveal-
ing their identities and tipping their hand.
Caldwell says the best markets for all par-
ticipants, and for regulators, are “central,
open and transparent auction markets,”
like the old stock exchanges. But the dark
pools mean that “all the big orders are now
sitting somewhere else.”
Risk is also a complex question. The
high-frequency traders’ supercharged
computers haven’t blown up markets—
yet—but Caldwell says they have blown
up individual stocks. Exhibit A: the invest-
ment bank Bear Stearns, which folded
after its share price plummeted in March,
2008, even though then- SEC chairman
Christopher Cox assured the markets that
the firm was sound. “Bear Stearns did not
commit suicide,” says Caldwell. “It was
murdered.”
Gripes like Caldwell’s make Grujic
chuckle a bit. “When you listen to vested
interests complaining about something, it
must be good.”
 s
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Paper houses
w
e
n

Admit it. You’re curious. When you see Sold signs popping up on multimillion-dollar
McMansions, you wonder, “How much did they pay, and how much did they
put down?” We were curious, too, so we asked our crack research team to perform a few land
title searches and sift through the mortgage terms—yes, we can do that—on several
properties located in a recently built Toronto neighbourhood. It seems
some of the occupants own a lot less of their houses than you might think.
Artwork by Su Blackwell / photograph by Andrew Meredith

37 \9
Purchased by Tanya
in October, 2007
52 17 9
Paid: $1,638,358
Mortgage:
\ 18 $1,298,860
Purchased by 24 (three years, 5.25%)
Geoffrey* in 18 Monthly payment:
April, 2004 $7,740
Paid: $1,440,059 › The same year, Tanya
Mortgage: applied for a second
$1,275,000 mortgage of $36,140
(five years, 0.24% (three years, 5.25%),
below prime) adding $215 to her
Monthly payment: monthly payment
$6,555.17
› In 2005, Geoffrey \ 17
took out a second Purchased by
mortgage for Dave and Chloe in
$4 million (five years, January, 2004
prime plus 5%), Paid: $1,284,912
secured by 200-plus Mortgage: $300,000
acres of property (five years, 4.89%)
north of Toronto. › In 2009, the couple
took out a second
\ 24 mortgage for $600,000
Purchased by (“on demand,”
Jin and Lei in prime plus 7%)
January, 2004
Paid: $1,443,956 \ 37
Mortgage: None Purchased by
Rebecca and Domenic
\ 52 in December, 2006
Purchased by Paid: $1,129,948
Isabelle and Mortgage: $730,000
her husband in (five years, 5.25%)
September, 2006 › In 2009, the couple
Paid: $1,200,894 took out a second
Mortgage: mortgage for
$1,203,000 $500,000 (“on
Terms: Payable demand,” prime
on demand plus 6%). A third
(rate unknown) mortgage was secured
in November, 2009,
* Names have for $580,000
been changed (“on demand,”
terms unknown)

Join Rob Carrick at globeandmail.com/robmagazine on Jan. 29 for an online discussion about the pros and cons of leveraging your mortgage

40  FEBRUARY 2010 REPORT ON BUSINESS febrUARY 2010 REPORT ON BUSINESS  41

 s
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The
turning
point
Investing veterans reflect on
what’s changed for the better—and
for the worse—since 1987, the
year of Black Monday and Ottawa’s
decision to tear down the
walls between banks and brokers

Interviews by Gordon Pitts

Peter Brown
68, founder and chairman of Canaccord
Financial Inc., of Vancouver

In Canada, there is what I call brutal bank dominance

of the market. What the 1987 Big Bang did for Canac-
cord was to scare the hell out of a lot of the indepen-
dent investment dealers. We were fortunate enough
to buy eight of them so we could be big enough to
stand the gaff. So when Ottawa allowed the walls to
break down, we took over a bunch of dealers who felt
they would be unable to compete. And the mergers
didn’t depersonalize our own brokerage business.
After all, I am not a bank—I care about people.
The United States could deregulate its financial
system because it had 15,000 banks and 15,000 bro-
kers. So when, for example, U.S. high-tech invest-
ment banker Hambrecht & Quist was taken over by
Chase Manhattan, there were other high-tech bro-
kers to fill the void. It still allowed for competition.
But Canada, as usual, just followed the United
States and allowed six banks to grab off 80% of the
investment revenue in Canada, which was not good of our company, clients and employees to buy the firm back The highlight of my investment banking career came in 2000,
for the country. Where that had happened histor- Donald Johnson from Bank of America. Even so, we knew it did not make strate- when we were retained by BAT [British American Tobacco] in the
ically—in the Netherlands, for example—small- 74, advisory board member, BMO Capital Markets, gic sense long-term to continue as an independent. Then Bank unbundling of its Canadian subsidiary, Imasco. We wouldn’t have
business financing had declined, regional coverage and former president of Burns Fry Ltd., of Montreal approached us and merged us with their invest- been engaged if we had not been part of a larger investment firm.
which was acquired by Bank of Montreal in 1994
had declined and eventually the small-account ser- ment bank, Nesbitt Thomson. It turned out to be a good fit, but But the big change has been cultural. At Burns Fry, we had a
vice declined. it meant that we ended up selling ourselves twice. partnership culture; then we became part of a major financial
So today, if you have an account that is under In 1987, Burns Fry knew it had to partner up with a big financial I think customers are still well served, even though it is not institution. With an employee-owned investment dealer, mem-
$350,000, and you want to talk to the bank, you talk institution to be competitive. We looked at different alterna- quite as personal a relationship as it used to be. The benefits bers of the management team are direct owners of the business.
to a machine. That was a fundamental mistake in tives and finally did a deal with the U.S. bank, Security Pacific. of being owned by a bank are that you have the strong balance They are more conscious of the risks associated with decisions
Canada. We had a different dynamic here but we just But a couple of years later Security Pacific got into difficulty, and sheet and the resources to compete. Being owned by a Cana- because their own capital is on the line. There is a potential to be
followed the Americans into deregulation. And that it was acquired by Bank of America—which at that time didn’t dian bank in this environment is very fortunate, compared with less risk-averse when a decision does not involve the exposure
led to where we are now. want to be in investment banking. So it was in the best interests investment dealers that were acquired by U.S. or foreign banks. of your own capital. Photograph by KC Armstrong

42  FEBRUARY 2010 REPORT ON BUSINESS FEBRUARY 2010 REPORT ON BUSINESS  43

 Gordon Cheesbrough
57, managing partner, Blair Franklin
Capital Partners, founded 2003.
Cheesbrough was a director at independent
dealer McLeod Young Weir (and CEO
once it became Scotia Capital), and then
CEO at Altamira Investment Services.
In 1987, Cheesbrough was running global
fixed-income trading at McLeod

I remember the 1987 crash like it was yesterday.

I moved from my desk near the trading floor, to a
spot right on the bond desk, during the week. I knew
that given the losses we were suffering on our equity
holdings, we needed to make money on bonds, so we
traded like nothing you’ve ever seen.
My most vivid memory is of that one terrifying
October morning when liquidity completely dried
up. You simply couldn’t trade a position. I remember
turning to one of my colleagues and saying, “Twelve
hours ago we were solvent, and now we’re not,
because we can’t access the market.”
That experience has stayed with me. I am always
aware of the profound importance of liquidity. When
we started a hedge fund in 2004, we took steps to
ensure that our overall portfolio was always liquid.
That served us well in 2008.
One thing I’ve realized over what’s now a long
career is that everything moves in cycles, and that
the pendulum will always swing back. Back in ’87,
when the Canadian market totally deregulated and
the Americans began to undo the Glass-Steagall
Act [which had separated commercial banks from
investment banks], I remember thinking that even- stock a couple of days ago, and I got a little fed up because some- We’ve seen a lot more money—particularly American
tually, we’ll see the financial world re-regulate. Rob Peters thing funny was happening on the other side of the trade. So I said money—come into the energy market. So instead of deals being
I didn’t claim to be prescient enough to know 67, rancher, investor and retired chairman of Peters & Co., to my broker, “Fill or kill.” He said, “What the hell’s that?” I said, done with a handshake, people are negotiating through legal
when that move would come, but it’s clearly now the Calgary investment bank he founded in 1971 “It’s simple—either take it or I’m going to kill it and the offer’s paperwork. In Calgary, you used to say, “Here’s the deal.” Then
upon us. Hedge funds will face increasing regulation gone.” He didn’t take it and I sold it for 10% more the next day. you would shake hands, go to your lawyers, and say, “Write it up.”
around the globe. I still wake up at 6 a.m. and when I work out, I am watching The nice thing about the smaller investment firms is that your But we’ve seen a lot more formality in how things get done.
On the advisory side of the business, Blair Frank- CNBC and catching the market opening. I run my own portfolio, key players can still be practitioners. But when you’re a manager Our business didn’t change after 1987 because we really stuck
lin was founded with the idea that CEOs and boards which is fairly hefty. I don’t do as much trading as finding small in one of the bigger firms, you’re not in the middle of the war all to our knitting. We had a very nice niche in the oil and gas busi-
would appreciate, and pay for, totally unconflicted companies and riding through with them. Still, I always have a the time—and that’s what I loved. Being small means your best ness, primarily in junior oils. We expanded in the U.S., in Europe,
advice. We advise on the best course of action, and pretty good idea of where the market is. Is that necessary for a people are still doing the business, making contact with clients and even had a bit of a following in Hong Kong. Is it less personal
we’re not then following up by trying to sell a prod- long-term investor? No. So do I miss [the daily market]? Yeah. and finding potential deals, as opposed to administering a group now? No, the investment business is a relationship business, and
uct. That lack of conflict is becoming increasingly The opening bell still makes my toes tingle. of people. Often when you get up that high in a big organization, the people who do well are the ones who can make money for
important. Interview by Andrew Willis I probably use a lot of old techniques. I tried to sell a block of you hear about the victories but you’re not there for the action. their clients. It’s that simple. Photograph by Andrew Querner

44  FEBRUARY 2010 REPORT ON BUSINESS FEBRUARY 2010 REPORT ON BUSINESS  45


Tony Arrell
65, chairman and CEO of Burgundy Asset Management
in Toronto, who spent 23 years as an analyst and top executive
at formerly independent brokerage firms Gardiner Watson,
Wood Gundy and Midland Walwyn
People have got bored or fed up with the idea of just buying
good companies and hanging on to them. In the past 20 years,
there has been much more interest in trying to enhance invest-
ment returns by using a lot of leverage, through derivatives or by
engaging in very rapid trading practices—what I call black-box
investing.
One reason for the surge in alternative investments is that
the past 10 years have been the decade of the poorest returns
ever from just owning stocks. If you had owned the Standard
and Poor’s 500 index in 2000, and held it through the decade,
you would have ended the period with a little less money, even
though you would have collected a whole bunch of dividends.
The performance was worse than even in the 1930s.
The typical holding period for stocks has shortened dramati-
cally to the point where many people aren’t really investors any
46  FEBRUARY 2010 REPORT ON BUSINESS
more; they are more in the camp of traders. In 2008, the New
York Stock Exchange turned over its entire value by 138%. When
I started in the business in the early 1970s, the turnover was only
about 20% a year.
In the late 1980s, with the banks looking to take over the bro-
kerage business, it became less attractive to me. I was more
entrepreneurial. But my major motivation was that, with my
background in research, I wanted to be in the investment man-
agement business. So at my firm, we study companies very
carefully and try to find ones that are good businesses, run by
good people and available at good prices. We buy them and try
to hang on to them. It seems sort of simple and obvious, but it
always comes as a surprise that it is not what most people do.
Many of the alternative strategies today are trying to super-
charge returns by using leverage. For example, pension funds all
have assumptions on investment returns, and those assumptions
haven’t been met by conventional investing. So when someone
comes in with a pitch for a new fund that offers much higher
possible returns—and if it is credible—it tends to attract inter-
est. Meanwhile, we have 125 years or so of statistical information
on major stock indices. Our approach is still the most credible
and we’re sticking with it. Photograph by Joseph + Jaime
Anthony Graham
53, former senior executive and managing director,
Lévesque Beaubien, of Montreal, which was taken over
by National Bank in 1988. Now, president of Wittington
Investments, the Weston family holding company
In the old days, banks and brokers saw themselves as
very, very different. It was like the Army versus the
Navy. The brokers always thought of the bankers as
dressed-up bureaucrats; the bankers always thought of
the brokers as cowboys.
Then, in 1987, things changed. A number of brokerages
[including Lévesque Beaubien] had gone public and, for
the first time, their shares were trading at multiples to
book value. Then, the legislation changed to allow banks
to buy brokers. Against that backdrop, the stock market
crash of October, 1987, shook people up. There was a
square dance going on and people were choosing part-
ners. There was fear and opportunity; there was avarice,
cupidity, stupidity—everything you could ask for.
After the bank-broker marriages, many brokers
boasted that their banks still left them alone: “They
understand that we’re so good, they’re not going to
touch us. These are two separate cultures.” That has
certainly changed now. Yet, maybe in some ways, the
brokers took over the bankers. We used to fear that bro-
kers would end up being paid like the [more modestly
compensated] bankers. In those days, nobody ever
thought it would go the other way around.
After the National Bank took us over, I still owned
10% of the [investment] firm for a while. As time moved
on, the bank bought out 100% of the shares, and once
all your money is off the table, it’s a different motiva-
tion. I figured it was time to go. I was of the old school.
I had decided in the very early days that I wanted to
be an investment banker; I didn’t want to be a banker
banker. In my mind the world was changing. There are
still some independent firms and some characters who
consider themselves fairly independent no matter who
signs their paycheques. But there is no question who
dominates the league tables—it is the banker bankers.
Before 1987, brokerage firms were much smaller, and
it was our money on the table. When Lévesque Beau-
bien was a partnership, we did a major transaction to buy
out our senior partner. He said, “Be careful, boys, you
could lose your shirt in this business,” and it literally was
your shirt. Now, of course, it is different—it’s investors’
money, and so it is a very different culture.
Financial instruments are also much more com-
plex. Lévesque Beaubien used to be based in the old
head office of the Royal Bank at 360 St. James Street
in Montreal. Every morning, the executive committee
would come in and have coffee—five or six guys, rep-
resenting 80% of the ownership of the firm. You would
quickly find out what our inventory consisted of, what
the new-issue market looked like, what issues we got
stuck with.
But look at the complexity of the stuff that institutions
are running now. Today, you couldn’t have a conversa-
tion among five guys and in 20 minutes figure out exactly
what exposure you have. You wouldn’t know. Leading
up to the financial crisis, were they taking greater risk?
Yes. Did they realize they were taking greater risk? I
don’t know. Photograph by Lee Towndrow
FEBRUARY 2010 REPORT ON BUSINESS  47
 The New
le
s
ru
HOW TO Click for gold
w

T
Smelt your own gold
e

Gold
n

he Bank of Nova Scotia has long sold gold at its branches, but
in late September, 2009, it became the first bank to allow Cana-
1) dian customers to shop for the precious metal from the comfort
Realize this idea is probably stupid of their living rooms. The bank’s Scotia Mocatta division, which has gold
and consider going through a professional.
trading roots dating back to 1671, plans to open online sales to customers
2) in international markets in the coming years.
Collect your gold scraps,
select a well-ventilated work
“There are people who are more at ease online,” explains Scotia
area, and lay out your Mocatta’s managing director Richard Maskobi. “We could see there was

Rush
tools: crucible, blowtorch a demand, but we had seen very few ways to buy gold on the Internet.”
(oxy/MAPP is recommended Demand, indeed. When the bank began selling online in 2009, Canadians
for its “gentle” heat),
mould and tongs.
could purchase a maximum of $6,000 worth of gold (and other metals) a
day at the site, but as the value of bullion increased, the bank soon upped
3) the total to $9,500.
Place the metal inside the
crucible, and apply heat. Don’t expect an armoured car to roll up your driveway delivering loads
The gold will melt at 1,064 C. of precious metal—the bank uses commercial couriers for the majority
of its low-key deliveries. While that may sound like a heavy load for a
4) bicycle, consider that Scotia Mocatta’s most popular product is a one-
Using the tongs, tilt the
crucible, pouring the ounce gold wafer (worth more than $1,100 in early January). The 99.99%
liquid metal into the pure token comes in a transparent case—just like a baseball card—ready
The past year has seen gold prices surge to all- mould. When the mould to be tucked away in a safe, or hung around your neck.

photographs (left) courtesy new york federal reserve; (grill) gregg deguire/wireimage
time highs as investors clung to the perceived has cooled, flip it over and
tap to release.
safety of the precious metal. Consider this every-
thing you need to know (like, is it too late?) to
Three places to find gold at home
get in on the hottest commodity in recent history Located 24 metres underneath Manhattan, the Federal Get a gold grill
Reserve Bank of New York is the world’s largest known No, not a grill for your Bentley. Your liquor cabinet
by Steve Ladurantaye gold repository, with a cache of over $300 billion (U.S.) Indeed that is real gold floating in that bottle
We’re talking about custom- of yummy Goldschläger—a little less than
made gold mouthguards, popular a tenth of a gram per 750 ml bottle. If you
How much gold is out there, among rappers you’ve never could filter the gold flakes from the schnapps,

Q&A ARE RISING GOLD VALUES GOOD OR BAD FOR GOLD PRODUCERS? anyway? heard of, and teenagers you’re you’d have about $3.50 on your hands.
A rising gold price is generally seen as good news for gold miners, but the hot afraid of. Want to get your own? Your pantry
market has actually cost Barrick Gold $6 billion. That’s how much the world’s biggest gold miner All the gold that has All you need is a mail-order
catalogue and some faith.
It’s possible the fruitcake you got last Christmas
was wrapped in real gold leaf. Don’t worry,
paid to eliminate its hedge book so it could benefit from the record prices. We asked Aaron Regent,
CEO of Barrick, to explain: ever been mined › Step 1 Find a website that offers a home-moulding kit,
it’s edible (as much as the cake itself was),
but you may be shocked to learn that the
“Higher gold prices have resulted in higher revenues and cash such as krunkgrillz.com. For $20 you get “instructions, How to wear gold wrapping on a 30-centimetre-long cake could
flows, which provide us with greater financial flexibility to advance
would scarcely fill mouthpiece, measuring cup and powder.” That’s right: a “The shade is important: contain as much as $25 in gold leaf.
mystery powder you put in your mouth.
and develop new projects. Also, the life of some of our currently two Olympic-sized › Step 2 Pick out a style in your price range, but expect
It can’t be brash
yellow and bright like
Your home office
Gold is used on circuit boards to carry electrical
operating mines is being extended as a result of previously uneco-
nomic ore becoming economic. swimming pools. to pay at least $300. Diamonds are popular, as are lesser
jewels (it all depends on your budget). When you’re ready,
those chicks in sequin
tube tops at Wasaga
current because the metal doesn’t corrode. Look
for gold-plated connectors and soldered joints
“On the other hand, it’s harder to acquire new assets. Sellers’ in everything from cellphones to television sets.
expectations are high, and this translates into higher valuations for It seems Scrooge place your order online, drop your mould into the mail and
wait for your grill to arrive (probably about the same time
Beach. It’s cooler
if it’s more antique
A cellphone contains about 50 cents worth.
assets. Also, the industry is well capitalized...so, for smaller companies,
the opportunity to do joint ventures on exploration or development
McDuck was richer the infection from the mystery powder clears up). or darkened to look
worn or aged.”
› Step 3 Retrieve grill from mail. Wear it once. Put it in
properties is reduced. Opportunities still exist, but the terms than we thought. the drawer with your M.C. Hammer parachute pants and —Joeffer Caoc, Toronto- Where will gold go in 2010?
may be different.” pistachio leisure suit. Pretend it never happened. based fashion designer

Gold unleashed
One of the most stable assets in the world has taken off like a rocket. What gives?
$U.S. 1870 to 1914
1,000
Until the outbreak of the First
World War, virtually all currencies
were backed by gold (paper money
800 could be freely converted to
gold at a fixed rate), which gave
stability to the money supply
600 and global exchange rates.
In 1914, Britain suspended
gold convertibility and used its
400 reserves to fund the war effort.
Other nations followed suit.
200
1914 1920
1920s and 1930s
In one of the biggest monetary
blunders of all time, Winston
Churchill—then the British
Chancellor of the Exchequer—
brought back the gold standard,
in 1925, at a fixed rate of
$4.87 (U.S.) to the pound. His aim
was to restore Britain’s position
at the centre of the world’s
financial system, but the high
valuation made British industry
uncompetitive, leading to an
economic slump.
1930
1944
During the Second World
War, delegates from 44 Allied
nations gathered in Bretton
Woods, New Hampshire,
to draw up terms for an
International Monetary Fund
(IMF). Because the U.S.
dollar was seen to be “as
to gold. This became known
good as gold” (fixed to a $35
ounce of the shiny stuff),
the greenback was accepted
as the international reserve
currency, a system that
provided the stability of the
gold standard.
1940
STEADY: $1,500
1971 1980 2009
“Gold stocks have been a big part of our portfolios,
but are down from where they used to be....It would
What caused gold to spike
In his effort to stabilize Here’s what happened before gold spiked surprise me to see it beyond $1,500 [this] year.”
the U.S. economy and curb above $800. In 1974, the U.S. lifted its ban on above $1,200 in December, Normand Lamarche, portfolio manager,
inflation, President Richard private purchases of gold and soon began 2009? You could point Front Street Capital (November, 2009)
Nixon famously “closed selling its reserves on the open market. In 1978, to a weakening U.S. dollar,
the gold window,” meaning the U.S. cut the link between gold and the a shaky economic recovery
the U.S. dollar could no dollar, officially releasing gold prices from or tensions in the Middle UP: $2,000
longer be freely converted government control. When inflation skyrocketed East. But, really, it boils “The [U.S.] dollar can only go lower, and gold
down to this: Whenever can only go higher.”
(in some cases, into double digits),
as the “Nixon Shock,” investors flocked to the metal. the going gets rough, John Ing, president, Maison Placements Canada Inc.
because he didn’t bother people buy gold. (November, 2009)
to alert the IMF. Many
experts point to this event DOWN
as the source of modern “Gold gets dug out of the ground in Africa or some place.
monetary volatility. Then we melt it down, dig another hole, bury it again
and pay people to stand around guarding it....Anyone
watching from Mars would be scratching their head.”
Warren Buffett, CEO, Berkshire Hathaway (April, 1998)
1971 1980 2009
“Nothing gold can stay.”
Robert Frost, poet (October, 1923)

48  FEBRUARY 2010 REPORT ON BUSINESS FEBRUARY 2010 REPORT ON BUSINESS  49

 n
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ru
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R *
It’s no secret that a
majority of Canadians
are ill-prepared for
*retirement. With only
$9,000 in savings,
Dave McGinn is one
of them. That’s not
going to stop him from
attempting the
impossible: to retire
rich in 10 years.

Photographs by Ryan Hughes

I have a recurring dream. It comes

to me when I am slumped at my
desk, giving the clock my best Svengali
stare, willing the hour hand to move faster.
In this dream, I kiss my wife goodbye as she
leaves for work and I, pyjama-clad, return
to a large plate of waffles that awaits me in
the kitchen. My schedule is free and clear,
showing only a date with the newspaper
and maybe a tee time on the horizon. Per-
haps I will learn to play bocce.
Normally, I snap out of it. I’m 32 years
old. I have a home to pay off, a car to fix, and
a year-old daughter who one day will want
to wear shoes. Retirement, I tell myself, is
reserved for those who have worked long
and hard. But not today. This is the day I
resolve to realize my dreams. I have just
over $9,000 in RSP savings. It’s not a lot,
but I can’t help thinking that, with a bit
of financial wizardry, I could cultivate a
small fortune. It’s time to make my money
work for me.

50  FEBRUARY 2010 REPORT ON BUSINESS FEBRUARY 2010 REPORT ON BUSINESS  51

 I’m actually in a better position for
retirement than many of my peers. At least
I’ve started saving. A poll conducted for
the Royal Bank of Canada in late October
of last year found that 32% of Canadians
have yet to even begin tucking away funds
for retirement (compared with 24% the
year before). The same survey found that
a mere 35% of Canadians had contributed,
or planned to contribute, to an RSP for
the 2009 tax year, the lowest percentage
of contributors in more than a decade. “As
a whole, Canadians have undersaved for
their retirement,” Tina Di Vito, the direc-
tor of retirement strategies at BMO Finan-
cial, tells me. The word “understatement”
comes to mind.
Even more depressing is the fact that a
so heartily, she has to put one hand over
her stomach to contain herself. I remain
stone-faced.
Turning to her computer, she crunches
some numbers. If I want to retire in 10 years
with an annual income of $40,000, I need
to put $4,900 into an RSP each month, she
says, assuming an annual rate of return of
8%. Finally, I realize what I should have
been doing with that extra five grand I had
lying around each month. Good to know.
What if I had access to $50,000? I ask. (I
don’t want to reveal what scenarios would
allow me to come up with such a princely
sum on short notice.) Could I turn that
into $750,000 in 10 years?
If that’s what I want to do, I’m in the
wrong place, she says. I need to find a
know the company inside and out.”
Had I come to see him last year, Klein
would have suggested I look to commodi-
ties. For instance, had I known Ventana
Gold Corp. even existed, I could have
invested at 14 cents a share in November,
2008, and watched it climb to $9 by early
December, 2009. These days, however, the
gold market is overheated. As is the market
for lithium, which apparently everyone in
the world but me knew was the hot com-
modity of 2009. “You’ve got to buy it when
it’s quiet, and sell when it’s a riot,” Klein
says. His knack for turning investing max-
ims into nursery rhymes is appreciated.
Sensing my desperation, or perhaps my
cowardice, he tells me to invest in myself.
“If a person wants to make a lot of money

large number of those ill-prepared Cana-
dians are running out of time. Among
the respondents 55 and older, almost half
admitted they had yet to start planning for
retirement. Even supposing they managed
to tuck away $50,000, that will only grow
to about $105,000 by the time they hit 65,
assuming an 8% rate of return. If these
folks have any hope of hanging up their
hats any time soon, they have little choice
but to take whatever they’ve got now and
swing for the fences.
To which I say, why wait until I’m 55 to
32%
money manager. quickly, the smartest way to do it is to start
up their own company and hope they’re
successful,” he says.
Unfortunately, I lack an idea for said
successful company. I scratch my head for
a few days, coming up with nothing. Then
it hits me: Instead of starting my own com-
pany, maybe I can find a guy who already
of Canadians has one—preferably the guy develop-
ing the next Rubik’s Cube—and who just
have yet to even happens to be looking for $50,000 of seed
begin tucking money. How do I find that guy?

make my big move? I could make my Hail away funds for

Mary pass today and, if I’m successful, I
could be signing up for aquafit classes
tomorrow. I hereby resolve to turn my
$9,000 into $750,000, a figure the retire-
ment calculators tell me should translate
into an annual income of around $40,000.
The challenge? I want to do it in fewer
than 10 years, before my daughter even
starts Grade 5.
Like many Canadians, I turn to my
local bank branch for answers to
my most pressing financial questions: Can
I start a Registered Education Savings Plan
for my daughter? Can I please get a credit
card with a lower interest rate? Are those
calendars free? I make an appointment
to see the manager, a very professional
woman who welcomes me into her spare
office with a warm smile. It’s a tiny space
with a potted fern and one of those posters
of an eagle with a quote about inspiration
or courage. I can’t remember which.
“What can I help you with?” she asks.
Here goes. I explain my plan and ask
her what I should do with my nine grand
in retirement savings so that in 10 years it
will have grown to $750,000?
Did I just make the funniest joke in the
world, or was it merely the best zinger ever
heard in this branch of one of Canada’s big
banks? Either way, the manager laughs
retirement
Wolfgang Klein, a senior invest-
ment adviser at Canaccord Wealth
Management, is willing to help me out.
Sitting in his office overlooking down-
town Toronto, Klein turns to one of the
three monitors on his desk, each display-
ing enough information to make my head
explode, and explains that in order to turn
$50,000 into $750,000 in a decade I need
to achieve an annual rate of return of just
over 31%. Not even Warren Buffett gets
returns like that, he adds, helpfully. It can
be done, he says, but at a level of risk that
would make most investors queasy.
“You need to be able to put it all on red,”
he says. Blue-chip stocks are out, as are
bonds and mutual funds, since none of
them will come anywhere close to gener-
ating an annual compounded return large
enough to reach my goal.
Klein suggests investing in one or two
junior mining stocks. Several such stocks
have been known to go from pennies a
share to 10 times that amount in the course
of a year. “The problem is, it fails more
often than it happens,” he says. “You have
to have luck and do your homework and
If anybody has a line on the next mil-
lion-dollar idea, it’s Brett Wilson. As
anyone who’s ever seen an episode of CBC’s
Dragon’s Den knows, this is what he does for
a living. And Wilson is stinking rich. In 1991,
he co-founded a successful Calgary-based
investment banking advisory firm. Then,
two years later, he added some more dough
to his pile when he co-founded FirstEnergy
Capital Corp., a firm that provides finan-
cial advice to Canada’s energy sector. Now,
he’s the chairman of a private merchant
bank, and uses his keen ability to sniff out
the next big thing to make some change on
the side. Over the phone, I beg him to tell
me his secret of success.
“The reality is, you can’t pick the win-
ners,” he tells me. “All you can do is pick
a portfolio, and embedded in that will be
a winner or two.” But Brett, you pick win-
ners all the time on TV. Pick me a winner.
“I’ve got lots of things in my portfolio
that, over a 10-year cycle, would be worth
five or 10 times what I paid for them,” he
patiently explains, but adds that he’s got
a lot of duds as well. The key is to pick
companies that have management you are
confident in, and then be patient. “In most
cases I’m looking for a double or a triple
over a three- to five-year period,” he says.
Wilson suggests I bank my money in a
start-up natural gas company. “My gut feel
right now is that natural gas is one of the
most oversold markets in North Amer-
ica—and one of the least understood,” he
says. It’s “ripe for a cyclical run.”
Finding the right early-stage gas com-
pany is going to require research, which
sounds suspiciously like work. Even think-
ing about it makes me want to take a nap.
In an ideal world, I wouldn’t have to rack
my brain trying to pick just one natural
gas company; there would be some kind
of investment product that would allow
me to tuck my nest egg into a whole bunch
of said companies at once—all the while
earning outrageous returns.
As it happens, there is such a prod-
uct. Exchange-traded funds (ETFs)
follow an index of companies but trade
like stocks on a major exchange. There
are ETFs that track everything from gold
to real estate to airlines and, yes, natural
gas. Rather than having to pick one com-
pany, I figure that the right leveraged ETF
should allow me to ride a few natural gas
companies all the way to my time-share in
Del Boca Vista—in theory at least.
I call up Howard Atkinson, president
of Horizons Exchange Traded Funds, a
Toronto-based firm and the sole Canadian
provider of leveraged and inverse lever-
aged ETFs. I ask him how I can get in on
what appears to be the best game in town.
Atkinson agrees that in rare cases, an
ETF could hold the potential of a massive
payout. “If an index has a great year and
goes up 35%, a regular ETF that just tracked
an index on a one-time basis should be up
pretty close to that,” he says. With lever-
aged and inverse leveraged ETFs—known
in the industry parlance as bull and bear
ETFs—the potential earnings would actu-
ally be much, much higher. He translates:
A bull ETF aims to double, and in some
cases triple, the daily gains of the under-
lying index. (In other words, index goes
up 35%, I earn 70%.) An inverse leveraged
ETF, on the other hand, does the opposite:
It gains in value as the index drops, through
a combination of short selling and trading
in derivatives such as futures contracts.
The only problem? When the index does
go in the wrong direction, well, the losses
are equally dramatic.
Still, if I were to purchase a leveraged
ETF and ride a strong index trend, it’s pos-
sible, admits Atkinson, that I could see
returns of 600% in a year, with compound-
ing. This is exactly what happened when
oil ran up to $147 a barrel in 2008, and also
when natural gas cratered from $15 down
to $3 in 2009. The question is, would I have
the nerve to ride such a wave?
“Very few investors would hold through
that entire period,” Atkinson says. Lever-
aged and inverse leveraged ETFs are “not
necessarily something that you are going
to buy, stuff into your portfolio and ignore
for long periods of time.”
While I like the idea of anything that
comes with a 600% upshot—however
rare—the thought of losing anything at all
is a real downer. What I need is something
tangible, an investment simple enough
that a mouth-breather such as myself can
understand it. What I need is real estate!
Maybe I can become the next Donald, get
myself a comb-over and a catchphrase,
and a gold-plated hotel with my name on
it. If I want all this in 10 years’ time, I had
better get started now.

52  FEBRUARY 2010 REPORT ON BUSINESS FEBRUARY 2010 REPORT ON BUSINESS  53

 For guidance, I turn to Brad Lamb, a
man often described as Toronto’s condo
king. Over the phone, he assures me that
real estate is probably the most viable way
for me to achieve my goals.
He lays it out: With a pair of $25,000
down payments, I could likely purchase
two 400-square-foot apartments in down-
town Toronto. In four years, there’s a
decent chance I could list each of those
units for $250,000, assuming the housing
market continues to run strong. Using my
profits from the sales, I might buy four
more such apartments (at a discount from
the builder, if I’m smart) and flip those in
another four to five years, by which time I
should be able to realize another $50,000
per apartment.
“If there’s no setbacks, you could get up
to maybe $500,000, after tax, in 10 years,”
Lamb calculates. But while such a strategy
appears “foolproof ” in a hot market, he
cautions that there’s a strong chance that
house prices will cool off at some point
over the next decade. Considering the risk
involved, he throws out an alternative.
“You should go to Vegas,” he says.
54  FEBRUARY 2010 REPORT ON BUSINESS
On a cold Monday night in Decem-
ber, I point my Oldsmobile Alero
toward Casino Niagara. As I rattle down the
QEW, the words of Wolfgang Klein echo in
my head: “You’ve got to put it all on red.”
Once inside, having wiped my feet on
the plush gaudy carpet, I make a beeline
for the first roulette wheel I see, and settle
in beside five guys in sports jerseys. I slide
$100 in cash—the maximum bet—toward
the dealer.
Do I want $5 or $10 chips, she asks?
“Doesn’t matter,” I say. “It’s all going on
red.” The guys at the table turn and look
at me as the dealer passes me a single,
black chip. They think I’m either a god or a
moron. I promptly slide the chip onto the
red section of the mat.
As the ball rattles round the wheel,
images of retired life serenade my cor-
tex. Lazy mornings. Crosswords. Tues-
day morning tee-offs. Waffles. The ball
bounces erratically as the wheel slows,
finally settling on...19 red!
I just doubled my investment.
However, if I’m going to retire rich, I
need to keep this roll going. I put my black
chip back on red, but spread my winnings
four ways—the roulette version of an
ETF—over the numbers 26, 27, 29 and 30.
If the ball lands on any of them, the pay-
out is 8 to 1. The dealer gives me a look
not unlike the one my banker gave me, and
spins the wheel again.
I’ll give you the Coles Notes summary:
The ball landed on 33 black and, just like
that, my chips were gone. I only lost $100
but I learned a pair of very valuable les-
sons. One is that my investment adviser
was only half-right: You do need to put it
all on red. You also need to be prepared to
put it on red again and again, except for
the times you need to put it on black.
The second thing I’ve learned is that
there are a lot of senior citizens at Casino
Niagara on a Monday night. Each is seated
at a slot machine, and each has that same
checked-out look upon their face. Some of
the seniors don’t even appear to be play-
ing, just sitting on their stools staring at
the machines. If this is what retirement
looks like, I think I’d rather be at work.
 n
e
what’s your

w
body

ru
le
s
worth?
Your investments are in the
tank, you’ve had to “voluntarily”
disclose your offshore assets to
the taxman, and the last time
your year-end bonus was this
paltry, Parachute Club was
on the radio. Well, at least you
have your health. Hold on to
that, because it might be
photograph (top right) “Romania #6, 1995” from The Dead by Jack Burman (Magenta Foundation, spring, 2010); appears courtesy of Clint Roenisch Gallery

your last tangible asset.

by Steve Brearton

Plasma $20 to $50* Your Dead Body $3,000 to $7,000

The global thirst for blood products is big business.
American clinics will pay blood contributors
as often as twice-weekly for their “donations.” And
in China, “a barrel of unmodified blood”
is estimated to be worth $20,000 at wholesale,
according to a 2008 Asia Catalyst report.
Skin, bone, ligaments and even veins are harvested from dead bodies,
and used during surgeries. Canada forbids the sale of human tissue,
but it’s legal in the U.S.—within limits: A North Carolina man was jailed for
falsifying medical histories so that he could sell potentially infected tissues.

Head $777 Breast Milk $10

Call it a lease. In November, 2008, Air New Zealand
offered willing candidates the choice of an airline ticket or
$777 to display a temporary tattoo on the back of their shaved
head—a “cranial billboard,” as the airline called it. Other
companies have paid cash-hungry individuals (and pregnant
women) for ad space on their eyelids (and bellies).
Online classified sites like Craigslist have spawned
a pint-sized underground market for breast milk.
“I am a mother of two, with plenty of leftover milk,”
reads one posting on a North American site.
“I am of excellent health and eat as organic as possible.”
For $10, you’ll get about 175 millilitres.

reproductive Bone Marrow

Eggs
$6,000 to $8,000
Canada’s Bill C-13 made it
illegal to profit from the sale
of eggs. But women can find
buyers through the black
market, and score nearly
$8,000 per egg retrieved,
according to recent news
reports. In the U.S., donors
can legally earn this amount
for each contribution, and
up to $40,000 annually.
Body Fat $0
Media outlets worldwide
recently relayed the tale of
Peruvian bandits who
were murdering peasants
for their body fat, then
selling it to cosmetic
companies. It wasn’t true.
No one wants your fat.
*all figures U.S. dollars
up to $750
Womb $20,000+ In 2005, it was reported
American women that a California cancer
can earn up to $25,000 treatment centre was
to bear someone else’s child paying local students
Sperm $100 (it’s prohibited in Canada). to donate their bone
You can’t sell your sperm Some surrogacy agencies marrow—a procedure
in Canada, but desirable have targeted wives of that can take up to four Kidney
U.S. candidates (sperm American military days. “I feel a little sick $10,000
banks screen for medical personnel, who often have and achy for several Selling organs is, of
history, height, weight and difficulty building their days,” one participant course, illegal, but it’s
IQ) can earn about $100 per own careers and are hard- said. “But once I go pick no secret that a global
pressed to manage the up the cheque, I feel black market exists
contribution, and can donate
a lot better.” to serve desperate
up to three times weekly. family budget.
parties. Developing
nations, such as
Pakistan, are often
listed as sources
Hair $200+
for kidneys, but last
Got a nice mane? Thehairtrader.com is a global year, a Brooklyn, New
clearinghouse for long locks and tresses. One Ohio York, businessman
was charged after he
woman received $200 for 38 to 48 centimetres of allegedly bought
“healthy blond hair,” while a Californian earned kidneys from Israelis
$715 for over 60 centimetres of “luxurious virgin hair.” for $10,000.

FEBRuary 2010 REPORT ON BUSINESS  55