Question:
What do Mr. Warren Buffett, Bill Gates, Ken Thomson, Galen Weston, The Forbes 400 Richest in America or the most wealthy people in Canada have in common with the wealthiest person in your neighbourhood or community?

Answer:
They all became wealthy by practicing the philosophy of Buy. Hold. And Prosper.™

THEY BUY
More specifically, they buy businesses that:

1. They understand completely;
2. Have honest and competent management;
3. Possess long-term competitive advantages;
4. Operate in industries with strong, long-term economic fundamentals; and
5. Can be bought at attractive prices.

THEY HOLD
They maintain shareholdings in their respective businesses for a long time. Their time frame is generations, and their favourite holding period is forever.

THEY PROSPER
They have prospered financially because they have an investment philosophy/value system that they adhere to through good and bad times.

Their behaviour is best summarized by Mr. Buffett: "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insight or inside information. What's needed is a sound intellectual framework for decisions and the ability to keep emotions from corroding that framework."

In summary, wealth or financial independence is created by:

1. Having the philosophy of Buy. Hold. And Prosper.™
2. Having the discipline to adhere to the philosophy over the long run.

In my Chairman's Message from the 1999 AIC Annual Report, I wrote: "The second phenomenon we are experiencing today is wanton speculation in a very narrow segment of the market. This situation in effect has masked the bear market occurring in the wider market and has skewed investors' expectations. Of the total advance in the TSE 300 this past year, three companies (Nortel, BCE, and JDS) accounted for 88% of the gain. The story is familiar for the S&P 500 index. Nortel trades today at a P/E ratio of 80. This implies that it would take 80 years (at the current level of earnings) to recover one's initial investment. JDS with a P/E ratio of 200 would need 200 years to return one's initial investment. These lofty valuations require great faith in the continuation of a world with a perfectly blue sky every day for decades to come (no margin of safety). Remember the first rule in investing! Don't lose your principal.

"We are infinitely more confident (by virtue of the cheap valuations being given to our component companies) that the portfolios we manage should provide good protection if results fall short of expectations or should interest rates increase. This speculative bubble is nothing new. We have had these 'new economy' stocks many times in the past and we are reminded by history that they are unlikely to persist."

The Chairman's Message continued to say: "Today (1999) the market is in a period of extreme reverse logic with respect to rational behavior: The areas that should be feared the most (technology stocks) by virtue of their extremely high valuations, are being greedily/fearlessly embraced. Conversely, those sectors showing attractive discounted valuations (financial, consumer non-durables, pharmaceuticals), which should be fearlessly/greedily embraced, are being shunned."

As we now know, this speculative bubble did not persist. On March 10, 2000, the party came to an abrupt end with the NASDAQ entering into a free-fall, down 39% for 2000, and its worst performance in history. The Chairman's Message concluded with "…investing is all about putting out money today to get more money back in the future. In today's environment, we would rather put money into TD Bank trading at a P/E ratio of 14.5 implying that at today's level of earnings, we would get our money back in 14.5 years, versus JDS Uniphase with a P/E ratio of 200, implying it would take 200 years to get our initial investment back. We continue to be disciplined (despite the extremely high emotional atmosphere now prevailing in the market) and judicious in the application of our investment philosophy to ensure that we walk the 'straight and narrow.' We are confident that over time, owning businesses for the long run, purchased at reasonable prices and in strong industries, will reward investors by:

1. Preserving their capital;
2. Giving them an above average rate of return; and
3. Minimizing their taxes payable.

Our prescience in recognizing 1999 for what it was, and avoiding the ensuing market fall, can be totally attributed to our wholehearted belief in our philosophy. It gave us the fortitude to be disciplined, and our reward was the stellar Fund performance delivered to our unitholders in 2000.

PERFORMANCE
A study done by the editors of the Fund Counsel Newsletter in October 2000 concluded that of all the mutual fund companies in Canada, AIC Funds (Canadian and International equity funds) delivered an average five-year return of 24.3% to their unitholders, the best of the fund families studied. The survey was based on the total average monthly asset-weighted return for every dollar under management since January 1, 1995.

It is also clear that we have achieved superior results versus the TSE 300 Index, which has outperformed the majority of Canadian equity funds. I would also like to reiterate that notwithstanding our over performance in most periods, our short-term performance is more a reflection of prevailing sentiments of the stock market. Our focus is completely long term and you should derive your confidence in your AIC Funds from the quality of the businesses in our portfolios.

SERVICE
We are pleased to announce that AIC was recognized as having provided the best customer service to clients across English-speaking Canada in 2000. AIC received the Dalbar Mutual Funds Service Award for 2000, recognized as the highest achievement of customer service within the mutual fund industry. Dalbar, Inc. is a leading financial services research firm specializing in measuring the performance of institutions and financial professionals in areas such as client satisfaction, service quality and communications effectiveness.

In making the announcement, Dalbar stated: "Receiving this award is the end result of AIC's consistent and gradual improvements in several areas of service delivery to English-speaking investors."

The following chart illustrates the long-term performance of AIC Advantage Fund versus the TSE 300 Index.

AIC Advantage Fund

Period ending December 31, 2000	Historical Compounded Rate of Return %	TSE 300 Return Index %	Difference
1 year	26.2	7.4	18.8
2 years	4.6	18.9	-14.3
3 years	5.1	11.7	-6.6
4 years	13.6	12.5	1.1
5 years	22.6	15.5	7.1
6 years	23.9	15.3	8.6
7 years	17.9	13.0	4.9
8 years	23.0	15.3	7.7
9 years	21.3	13.3	8.0
10 years	23.1	13.1	10.0
11 years	18.6	10.3	8.3
12 years	18.8	11.1	7.7
13 years	17.9	11.1	6.8
14 years	16.1	10.8	5.3
15 years	15.7	10.6	5.1

In the opinion of Dalbar, "AIC has greatly improved its service quality with respect to the knowledge and accommodation of representatives and the quality of e-mail responses. This improvement has culminated in AIC being recognized as the fund company that has provided its customers with the most courteous and attentive service over the past 12 months."

LEADERSHIP
On September 2, 1999, The Globe and Mail printed an article entitled "AIC's disadvantage, no street friends." You will recall that 1999 was a horrific year for performance of AIC Funds as we were not invested in the technology sectors. We were also in the midst of net redemptions from our Funds. This particular article was recommending that AIC unitholders redeem their Funds, as the AIC holdings were concentrated and illiquid. In effect, they concluded that as portfolio managers, we would have to sell our illiquid securities at depressed prices to meet unitholders' redemptions, thus depressing prices further. This crisis presented us with the opportunity to buy more shares of Mackenzie Financial, a business we understood and had confidence in, at prices ranging from $13 to $16. As we had already accumulated our maximum 20% of Mackenzie for certain AIC Funds, we bought, in our corporate account, an additional 5% of Mackenzie in September 1999 (talk about 'putting your money where your mouth is'). In late January 2001, a takeover bid was made for Mackenzie at a price of $30/share. I am pleased to report that those AIC Fund unitholders made a profit of more than $400 million since that eventful day two Septembers ago. I would also like to reiterate that you can have the utmost confidence in the AIC portfolio management team; we will not allow our emotions to corrode our intellectual framework for decisions.

DEPTH OF PEOPLE
Over the past year, AIC actively sought the best investment managers not only in Ontario or Canada, but around the world. We sought individuals who were top of class and, more importantly, managed funds using AIC's buy-and-hold philosophy.

Joining AIC in 2000: James Cole, Senior Vice President and Portfolio Manager; Allan Brown, Senior Vice President and Portfolio Manager; Geoff Barth, Senior Vice President and Portfolio Manager; Randy LeClair, Senior Vice President and Portfolio Manager; Michele Calpin, Vice President, U.S. Equities; Hardev Bains, Vice President, U.S. Equities; and Anne-Mette de Place Filippini, Vice President, International Equities.

AIC also brought on board sub-advisors with solid track records: Elijah Asset Management and Dresdner RCM Global Investors. In addition, AIC increased its research analysts ranks. Members include: John Miller; Patricia Lamont; Diana Racanelli; Jayson Parker; Andrew Srichandra; and Geoff Castle. I encourage you to review the biographies of our AIC portfolio management team which follow the Chairman's Message.

CONCLUSION
The year 2000 vindicated our investment methodology. It reminded me of a conversation with a friend some time ago who remarked that when pressure is applied to coal, one of two things will happen: The coal will become either coal dust, or a diamond. The adage, "you judge your friends by their behaviour in bad times" should not be lost on you.

I am very proud of the discipline, commitment, focus and perseverance demonstrated by our portfolio management team when we were out of favour in 1999. This strength of conviction is what made our long-term track record the best in the country.

I am very proud of our administrative and client service staff. Their hard work and passion was recognized in us winning the Dalbar Mutual Fund Service Award for 2000.

I am very proud of the leadership we demonstrated when our investment philosophy was challenged. This quality should give you, our unitholders, confidence that your future is in good hands.

I am very proud of the 'depth of people' we have assembled. We have never been stronger in our abilities to make good on our commitments to you, which continue to be:

• Preserve AIC investor capital;
• Grow AIC investor capital; and
• Minimize taxes payable for AIC unitholders.

Michael A. Lee-Chin
Chairman & Chief Executive Officer
AIC Limited

It is now a well-known fact that over 80% of professional money managers under-perform their relevant index. More appalling, is the fact that a large number of individual investors lose money even when investing in those mutual funds that outperform. Between the year 1980 and 1992 the most successful fund in the U.S. compounded at an average annual rate of return greater than 25%, yet the average investor in that fund actually lost money. How was this possible? The average shareholder held for seven months. This abysmal result begs the question: Why do so many highly trained, experienced, bright professionals fail to beat the "no-brain" index? Some possible answers would include: Investors buy high and sell low, believe too many experts, are not disciplined enough, buy with insufficient information or understanding of what they are buying, lack a consistent approach, and are driven by fear or greed. What almost every successful investor will agree to is that these erratic actions are rooted in psychological forces that seem to underlie most of the poor results. Our hope is that in recognizing and understanding these potential pitfalls we will all become more successful investors.

According to Mr. Buffett, "What is needed is an ability to keep emotions from corroding that framework." The fact is: it is human to be lazy. We want instant gratification with minimal effort. It is easy to extrapolate (project). Extrapolation is a simple economic concept, but a complex psychological one. In cognitive psychology, an important force is representativeness: the human tendency to consider short series of data to be representative of long-term trends. Recency of events are major influences on investment decisions. We are apt to buy that high-flyer (.com stock, for example) that we have watched go up, forgetting the long-term probabilities that these stocks don’t work. Historically, new issues have under-performed the market over time. Over the 20 years ending 1990, the S&P 500 averaged 12%, while initial public offerings have averaged 3%. Psychologists have done studies concluding that people don’t learn from the past, and are therefore apt to commit the mistakes of history. Because we don’t learn from the past, our attitude is: "This time is different," and we will be drawn into participating in manias.

This irrational behavior by seemingly rational people can be understood by acknowledging that an investment in the stock market involves making decisions the outcome of which is unknown and uncertain, hence, the introduction of risk to the equation. From an emotional standpoint, risk is often equated with uncertainty because all investments that trade in the capital markets involve decisions about an unpredictable future. Investment results are uncertain because they are dependent on the relatively unpredictable performance of a company, its management, the behaviour of others in the marketplace, global occurrences, and the reaction of investors to each of these events.

As investors we face two types of risk: First is market or systematic risk, this is unavoidable as a market participant, in other words, those occurrences such as inflation, interest rate movements, recessions, etc., are all part of being in the market.

The second type of risk is company risk: It refers to the vagaries of management, products, services, industry and business decisions. Company risk can be minimized by buying quality and through diversification. Market risk, on the other hand cannot be eliminated, as it is the price we pay for the rewards of share ownership. Market/systematic risk and company risks are both external, and are unrelated to an investor’s subjective perception of risk.

A general observation that I have made over the years is: "Success begets arrogance which begets failure." This cycle which regresses success to mediocrity can be explained by the psychological concept of grandiosity. Grandiosity is defined as "a strong belief in one’s greatness, abilities, knowledge, or character." When investors make choices that are successful, there is an igniting of confidence, which usually leads to uncontrolled grandiosity and a feeling of invincibility; such investors can do no wrong. Risk becomes an insignificant consideration. In everyday parlance we say, "Don’t confuse brilliance with a bull market." Controlled grandiosity on the other hand can lead to outstanding results; Warren Buffett is a good example. Mr. Buffett introduces us to the concept of "circle of competence," which is his discipline to maintain a state of controlled grandiosity. According to Mr. Buffett: "Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. You don’t have to be an expert on every company or even many, you only have to evaluate companies within your circle of competence. The size of the circle is not very important; knowing its boundaries is vital."

"What is needed is a sound intellectual framework for decisions."
Mr. Buffett is absolutely right. To be successful we need a sound intellectual framework that will:

1. Avoid the natural tendency of representativeness, where recency of events shape long-term decisions;
2. Assist us to learn from past mistakes;
3. Truly recognize and minimize risk; and,
4. Help us to avoid uncontrolled grandiosity.

Assist us to learn from past mistakes.
Bernard Baruch’s lifetime lesson – "Never follow the crowd" – certainly will help us to watch manias from the sideline. John Kenneth Galbraith was very clear in his book A Short History of Financial Euphoria when he identified the four conditions that typify an investment mania:

1. Investors focus on rewards without any cognizance of risk.
2. The belief that there are new paradigms to justify abnormally high valuations.
3. The belief that despite temporary setbacks, values will continue to rise.
4. The condemnation of those who express doubt to currently bullish optimism.

In our 1999 annual report (pre-March 10th), I wrote: "The second phenomenon we are experiencing is wanton speculation in a very narrow segment of the market. This situation in effect has masked the bear market occurring in the wider market and has skewed investors’ expectations...these lofty valuations require great faith in the continuation of a world with a perfectly blue sky every day for decades to come (no margin of safety)... This speculative bubble is nothing new. We have had these "new economy" stocks many times in the past and we are reminded by history that they are unlikely to persist." They did not persist; on March 10, 2000 we witnessed the NASDAQ start a fall that resulted in a 40% decline in two months.

Understand risk
Here the saying "Worry about the things that you can control" is most instructive. As mentioned earlier, market or systematic risk is beyond our control. What is definitely within our influence are: the businesses we buy (company risk), and our emotions.

To minimize company risk, we only buy businesses that we understand, we are therefore constantly trying to further our knowledge of: management, the composition of the revenue stream, cash flows, long-term opportunities, operating and financial leverage, reputation, products, etc. This rigorous investment strategy has led to portfolios that are comprised of a limited number of securities that are thoroughly understood. It is our level of understanding of the business that will ultimately mitigate company risk.

To this end, I am pleased to introduce the newest members of our portfolio management team: Michele Calpin, James Cole, Randy LeClair, Ron Elijah and Rod Berry. Together with Neil Murdoch, Larry Sarbit, Jonathan Wellum and myself, you can be confident that we have a team of portfolio managers that is eminently capable of identifying and investing in the best businesses throughout the world.

By way of background, Michele Calpin earned an Honors BA in business from the University of Western Ontario and an MBA with distinction from Harvard Business School in 1993. As Vice President, U.S. Equities, she brings to her position a decade of experience in progressive positions at McKinsey & Company, a leading management consulting firm. Michele was a leader of McKinsey’s Corporate Finance and Strategy Practice and counseled CEOs and their management teams in areas of strategy and organization. At McKinsey, Michele developed extensive industry and business analysis and valuation skills across many sectors, including healthcare and pharmaceuticals, energy, and telecommunications.

James Cole, Senior Vice President and Portfolio Manager, brings almost 20 years of investment experience to AIC including eight years as a portfolio manager managing Canadian equity portfolios. Most recently, James held the position of portfolio manager with Gluskin Sheff + Associates Inc. where he managed Canadian equities for institutional clients. Prior to this, James was vice president and portfolio manager with Beutel, Goodman & Company Ltd. James also spent five years as a securities analyst with McCarthy Securities before joining BBN James Capel Inc. in 1988 as vice president, institutional research. James has also served a three-year term as a director of the Toronto Society of Financial Analysts (TSFA), and chairman of the TSFA’s Accounting and Disclosure Committee. James holds a degree in Economics from Trent University and earned his CFA designation in 1986.

Randy LeClair joined AIC in July 1998 as Senior Fixed Income Analyst and became Vice President and Portfolio Manager in December, 1999. Randy graduated from the University of Western Ontario with a Bachelor of Arts degree (Administrative and Commercial Studies – Finance) in 1983, and followed this with a Bachelor of Education degree from the University of Windsor in 1985. Randy earned his Chartered Financial Analyst (CFA) designation in 1991. Randy’s career started in retail banking where he completed the Canadian Securities Course. At the same time, he earned the Letter of Accomplishment from the Institute of Canadian Bankers. He then spent three years working in the investment department of an insurance company (CUMIS) as an investment analyst for a multi-asset portfolio covering Canadian equities, fixed income, mortgage, and real estate markets. Subsequently, Randy spent seven years managing a fixed income portfolio for the Regional Municipality of Halton. Randy served as Chairman of the CHUMS Financing Corporation (a wholly-owned subsidiary of MFOA – the Municipal Finance Officers Association of Ontario) and in this capacity co-chaired the Joint Management Committee for ONE – The Public Sector Group of Funds – established as an investment pool for Ontario municipalities. In addition, Randy has been involved with the Canadian Shareowners Association and is also a published magazine author.

Ronald Elijah, MBA, has 19 years' investment experience, and is the founding member of Elijah Asset Management. Elijah Asset Management (EAM) is the sub-advisor to AIC Limited for AIC Global Technology Fund. Formerly a managing director of Robertson Stephens Investment Management (a division of Robertson Stephens & Company), Ron is both the Research Director and Chief Executive Officer of EAM. Ron began his career as a technology analyst with Montgomery Securities in 1981. In 1985, Ron joined Robertson Stephens & Company as a research analyst and became a partner in 1986. While at Robertson Stephens & Company his research coverage included technology, environmental and business services sectors. From 1990 to 1992, Ron worked as an investment analyst for a US$400 million shortoriented hedge fund where he broadened his research expertise to include consumer retailing, wholesaling and natural resource industries. He received his MA in economics from Humboldt State University and his MBA in finance from Golden Gate University. Also joining us from EAM, is Rod Berry, President of EAM, and a member of EAM’s management committee. Rod served with Robertson Stephens Investment Management (RSIM) as a vice president and senior analyst covering data networking, telecommunications and software. Prior to joining RSIM, Rod worked for USL Capital for six years as an investment officer and financial manager. While with EAM, Rod has broadened his research efforts to include the Internet universe. Rod received his BA in economics from Stanford University and his MBA from the J.L. Kellogg School at Northwestern University.

Help us to avoid uncontrolled grandiosity
Recognizing that "success begets arrogance which begets failure," how does one insulate oneself from this natural cycle? The answer: "stick to your knitting," keep doing the things that made you successful in the first place, and strive to do them better. In our case, we developed a strong long term track record by: Buying excellent businesses in strong growth industries and holding them for the long term. Our guarantee to you, our unitholders is that we will not deviate from this methodology, which has a lineage of preserving capital, delivering over the medium to long term an above average return, and is most tax efficient. What do we expect of you our unitholders? This thesis on investing is not relevant only to us as portfolio managers, it is also most relevant to you. Our highest value-added to you is to apply the following character traits to our investment methodology: commitment, confidence, determination, discipline, enthusiasm, focus, honesty, loyalty, preparedness, and respect. Your success as investors is 100% dependent on you applying the same traits to your investments with AIC. "What is needed is a sound intellectual framework for decisions, and the ability to keep emotions from corroding that framework."

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