22 | Stephen Clapham, Behind the Balance Sheet

My guest today is Stephen Clapham (@steveclapham). Steve is a former partner of a Tiger Cub and former Head of Research at a second multi-billion hedge fund. Nowadays, he is the founder of Behind the Balance Sheet, where he produces investment research and offers training services. Steve is also the author of the book, The Smart Money Method: How to pick stocks like a hedge fund pro. 

In this conversation, we cover red flags for fraud, accounting standards, and his new podcast.

I hope you enjoy my conversation with Stephen Clapham.

Show Notes:

[00:00:32] – [First question] – Where Stephen starts when analyzing financial statements
[00:02:15] – Red flags to look out for?
[00:08:05] – Why don’t people care about financial statements?
[00:19:10] – What changes would Stephen make to accounting standards?
[00:25:17] – How to align incentives of auditors, companies and shareholders
[00:27:30] – Worst accounting offenses he’s seen
[00:28:31] – Why did Stephen start his podcast?

Connect with Stephen:

Mentioned/Recommended Content:

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Kalani Scarrott (00:32): My guest today is Stephen Clapham. Steve is a former partner of a Tiger Cub and former head of research at another multi-billion dollar hedge fund. Nowadays he is the founder of Behind the Balance Sheet, where he produces investment research and offers training services. Steve is also the author of the book, ‘The Smart Money Method: How to Pick Stocks Like a Hedge Fund Pro’. In this conversation, we cover red flags for fraud, some accounting standards and his new podcast. So please enjoy my conversation with Stephen Clapham.

Steven, thanks for being on today. I really appreciate it, I dunno, we’ll start pretty broad and then we’ll dive down into the details, but I think maybe a good place to start is, where do you start when analyzing a company’s financial accounts? Like what’s your process and maybe just walk through, start to finish, and then we’ll go on from there.

Stephen Clapham (01:19): You know, I start at the back and I look at the contingencies, note, I look at the related parties note, I look at the audit report and then I go through the balance sheet. Most people open the accounts and look at the P&L I mean, you know, I’m not saying that’s not a bad idea. And usually by the time I’ve got to the accounts already familiar with the P&L you know, the reason that I’m looking at the accounts is because I’ve detected an opportunity for under or overvaluation and I therefore have some clue about the company’s earnings. So what I’m trying to do when I first opened the accounts is get a sense of whether there’s a risk that accounts are crooked or not. And when I say get a sense of the risk, whether they’re crooked, most of the kinds that I look at are crooked. There’s a question of how crooked they are.

Kalani Scarrott (02:15): So how do you judge how crooked they are, I guess? Like, is there any easy red flags to look out for? And maybe how do you view qualitative versus quantitative red flags?

Stephen Clapham (02:25): I’ve got a whole load of videos on my YouTube channel, which is, you know, ‘Behind the Balance Sheet.’ I go through, I think 7, 8, 9, I’ve forgotten how many, accounting red flags, but the three key flags for me are first one I look at is the margins. So if the margins are higher than the peer group, then I ask myself, why is that? And, you know, I have a forensic accounting course that I do for institutional investors, in actual fact I’ve had a lot of demand from private investors. And so I’m thinking about doing like a multi person, zoom where, you know, I’ll get, I don’t know, 20, 30, 40 people on to do that course, but I primarily do it for large institutional investors, both here in the UK and in the United States. And in fact, I actually have done it for institutions in Brazil and middle east.

Loads of people. So I mean, several hundred people have taken that course. And when I was building that course, I spent six to eight weeks in the British library. The British library is a huge building and it’s got every book ever published. I say, it’s got every book ever published. There’s one investing book, which is valued at about $3,000 that somebody’s nicked it. I spent, a lot of time, much more time than I’d originally budgeted when I was doing this, because I got very curious about it. And I looked at every past fraud I could find. And the one thing that stood out about most of the frauds, not all, I mean, you know, there’s never a rule that will fit a hundred percent, but the vast majority of frauds had margins that were odd, not everyone.

I mean, you know, I mean, I guess, you know, you look recently maybe Wirecard didn’t have exceptionally stupid margins, but most frauds the margins are at context. So if you, my first check is look at the margins. My second check is to ask myself, are their earnings turning into cash? And if you’ve got earnings that aren’t turning into cash, there’s usually something wrong. May not be a fraud. I mean, these checks are useful because if you’ve got earnings that aren’t turning into cash, then it may just be that, the elastic is being stretched and, you know, people are trying to falsify their earnings in order to make their, management bonuses. Which you see a huge amount of. And the third test is looking at working capital ratios. And again, this is not necessarily a sign of a fraud per se, but if the company is resorting to earnings management, it usually shows off in the working capital.

Kalani Scarrott (05:45): So in terms of management, red flags, I love your story about the chief executive of The Hut group that was often seen more often with his shirt off rather than shirt on.

Stephen Clapham (05:51): Well, I’m trying to, so this is a hilarious one now, I’m actually going to be doing a course for one of the big banks here, and they have a unit that does lending. I maybe shouldn’t say the detail of it. I was talking about this, the hot group, and I say, I’m going to put the, the hot group, the guy with his shirt off, but you know, I’m trying to think of the, right pun, you know, because he has lost his shirt.

Kalani Scarrott (06:24): It’s a great story. Any other good management stories or management red flags, that maybe you look out for ? And how they conduct their business, like qualitatively.

Stephen Clapham (06:31): Yeah. There’s a whole list of them and, you know, it was actually, Jim Chanos, who is a very, I mean, I’ve no, I don’t know him. I’ve never met him. I’ve never had an email exchange or anything. But I discovered that I was having an exchange with him on Twitter. I hadn’t realized that was him. And I mean, really lovely because, you know, there he is. I mean, like one of the giants of the hedge fund world and a man who’s been the longest serving short seller and the longest biggest bull market in history, and he survived and prospered. So, you know, the guys a genius in my opinion. And he, said he uses, so he does a fraud course at Columbia. So he teaches people how to detect fraud and he uses a book. I think it’s called ‘The Seven Signs of Ethical Collapse’ or something like that. I could look it up and some of the tip, some of the signals are, you know, chief executives who bully their staff and, you know, you’ve got youngens and a big boss and those sorts of cultures tend to be the cultures in which fraud or aggressive earnings management are more likely to occur.

Kalani Scarrott (08:05): So if you want to get on your soap box, especially given the last year, how would you get people to care more about financial statements and like, caring about the numbers? Is that just a case of sometimes they have to get burnt or because, yeah, it’s been a bit of buy now think later, and yeah.

Stephen Clapham (08:17): Well, funny enough, it was one of your countrymen who, cancelled my course. So I have a course called ‘The Analyst Academy.’ It’s a 12 months subscription. And he’d been on it for about six months and he cancelled and whenever anybody cancels, I’ve got very low cancellation rate because the course is exceptional. And it’s amazing value, I think.I mean, obviously there’s a limit, you get a limited amount of my time, I just do a webinar once every month or so, but the content is, I mean, really astonishing. And whenever anybody cancels, I always email them personally and say, can you tell me why you cancelled? Because I, you know, if I can get feedback as to what I’m doing wrong, then I can change, you know, I’m changing the content. And this guy said, well, “I dunno why I’m doing this, I should have just bought Tesla.”

And my immediate reaction was to throw out my hands in horror and say, oh God, you know, this is so stupid. I mean, how can he say that? I thought about it actually, he’s quite right. Why would you do my course? You don’t need to know about the balance sheet. You just need to know. I mean, it’s like that guy I’ve forgotten his name, actually I probably shouldn’t say his name. So one of my Twitter pals was having a debate with him about the relative merits of zoom versus his beaten up crappy retailer that was trading a discounted book. And this guy said, “oh, you know what? I have a fantastic, um, view on zoom and it’s brilliant”. And he bet the guy and he tried to bet the guy $5000 or $10,000.

And then my Twitter friend, I think, was struggling with you know, the quantum, because although he felt confident about the outcome, you know, quite reasonably so because of course, if some random block in Twitter, you bet, and you, no guarantee it’s going to pay up, right. And you might feel obliged to pay him. Anyway, this guy has a newsletter and he has a lot, I mean, tens of thousands of followers on Twitter, and multiple of the number of followers I’ve got. And I sort of gently pitched in to this conversation. And I said, “so what do you think of the valuation of Zoom?” and you know what he said to me? He said, “I don’t look at valuations. I just think it will be a bigger company in five years time.”

And you know what I mean, you’re wasting your time even having a discussion with somebody that whose view of stock market investing is predicated on the basis that it could be a bigger company in five years time, because the guy is an idiot, right? I mean, he is, I mean, beyond stupid. And it so happens that when you’ve got a massive, crazy bull market, that it’s not the cleverest people that make the most money. It’s the stupidest people who are prepared to take the most risk, who don’t know what they’re doing. And this guy is making a fortune because he’s buying all this crap stock, and he’s got all these idiots, giving them up, paying them to give them stock ideas. And when this bubble bursts, they’re all going to lose their shirt, they’re all going to be in the same-

They’re going to be photographed like Matt, was it? I can’t remember his name, the hot group guy, no shirt. And I hope they spend as much time in the gym as he, and look as good as he does, because this particular fat American is going to look really stupid without his shirt. But, you know, I can’t tell you when, or even if this will happen, because we’re in such a strange time and interest rates are so incredibly low, that you know, this could carry on. In actual fact, I mean, at that point, I think zoom was $170 billion. Now, I don’t know what the capitalization of zoom is today should really look.

Kalani Scarrott (12:47): Yeah 75.

Stephen Clapham (12:47): Yeah. So, yeah, I just halved, so, I mean, this was very close to the peak in zoom. I mean, I don’t even know what the name of the retailer was, but I would bet money it’s doubled. So there’s been a four times, you know, tilt in favor and at 75 billion, I would argue that zoom is still expensive. Yeah. I mean, you know, I’ve really shied away from giving recommendations because what I’m trying to do honestly, is to help people. And you know, what I’m trying to do is I’m trying to teach people how to fish, rather than giving them a fish.

Kalani Scarrott (13:27): Do you find people are pretty receptive to it though? Or do they, do you think people want to be given the fish more often than not?

Stephen Clapham (13:32): No. No. They, people want to be given money, give us a brilliant stock idea and that’s make lots of money and then give us another one. And, you know, look, I’ve done that, you know, I was a south side analyst for many years and I’m not gonna, you know, if I wanted to, I would become an institutional research boutique and service institutions, because in theory at least they should pay more than the retail market. I mean, if anything, if you’ve got a big enough scale or the retail market can work, if your marketing’s effective enough, it can be a lucrative affair, but I don’t really have any interest in doing that. I think, you know, I can add much more value to people by helping them improve their investing technique and they can learn, and then you can find stocks and do it for forever, you know, rather than, you know, rely on me.

I think that’s a much more valuable service I’m doing, rather than telling them to buy Marks and Spencer, you know, I mean, but I mean, oddly, I shouldn’t have done it, But I got sucked into the Tesla thing. So trying to resist the temptation, I just couldn’t resist any longer after the conversation, the weekend the tweet from Elon Musk about, should I sell my stock? I mean the guy’s a genius and the share price, you know, people who have made a huge amount of money and I’m just sore because I didn’t. But you know, their stocks obviously massively overvalued. I mean, just ridiculous. They overvalued and he’s found a way of selling stock without it being his decision. I mean, you know, the, I, oh, I don’t take a salary. Well, you know, you’ve got 36% of his stock pledged as collateral.

So, you know, if you wanted to, you could borrow $10 billion tomorrow easily. But, I made the, I think I’ll probably look back on this was as it being a mistake, I am sure of Tesla on the back of this and I did a video just explaining why I thought the thing was ridiculous. And looking at, I started to look at Cathie Woods valuation target. I mean, to say, it’s stupid. I mean, she hasn’t even got the number of shares right? I mean, how could you, anybody have any credibility when they can even get the right number of shares? I mean, I just don’t even begin to understand, honestly, I mean, it’s just a travesty and I should just add, look, I am sure Tesla is not investment advice. I could be, you know, while we’re speaking, I could close that position. You know, I mean, this is only a short term trade. I don’t do that much short time trading, but, you know, I do do a bit of it, but I do it, you know, I do it because just, you know, a legacy of my professional days that sometimes something’s just too tempting not to do, I’m doing a little bit of shorting now because I feel the market’s at that stage where I can do that.

Kalani Scarrott (16:48): So probably with all the upheaval from COVID. Do you think there’s any examples of how forensic accounting can identify changes that are transitory versus those are likely to be permanent?

Stephen Clapham (16:57): I mean quite interesting, the supply chain changes. So last April, I did a blog the “Ten changes that we should think about post the virus”. And I kind of made that the last chapter in my book because I thought my book was published in November. And I thought it’s really, you know, be quite odd to publish a book at this time and not mention Covid. Well, I just thought it would make it more relevant. I mean, I’m not sure that it was the right decision, because obviously I’m hoping people in five years time will buy the book and then it will have this like weird chapter. But I suppose we can always just take out one change that you know, the book with or without, but the, one of the things I talked about was supply chain, and I talked about, you know, the amount of credit taken by large companies from smaller suppliers.

And I said, well, you know, in this environment, this may well have to unwind. And I talked about, you know, reassuring, the globalization or whatever. And, you know, as you know, this is not going to be an easy transition. And I mean, I hadn’t envisaged that the problems that we’re encountering would be quite as severe, but I was, you know, thinking, well, yeah, I use the example of Electrolux, the appliance manufacturer. I don’t know how many components there are in the fridge, a thousand, 10,000. I don’t know. I mean, let’s call it 3000, but you only need to be missing one tiny washer or specialist, you know, one specialist piece and you can’t ship. That’s what we’re seeing, you know, how transitory will that be? I don’t know. I mean, you know, I think certainly what it’s contributing to is inflation and inflation will certainly not be transitory. All these people saying, no it’s inflation is just temporary. It’s just gonna, you know, it’s just because of the Covid nonsense in my view.

Kalani Scarrott (19:10): In terms of general, like accounting standards and rules, if you had a magic wand, like what accounting standards would you change for listed companies? Like, and what would you be going after? What needs to shake up? I’ve heard you speak about it before is IFRS 16, your first target? Like what really grinds your gears in accounting standards?

Stephen Clapham (19:24): Oh, I mean, I don’t know where I would start. I’d start with IFRS one, and then go through to 16. I mean, I go through every single one of them. The cashflow statement is, I don’t know. I just don’t think that I don’t think the accounting standard setters have got a clue. I mean, they just do not live in the real world. And the accountants, the auditors don’t live in the real world. I mean, 16 is garbage. I mean, if ever there was a problem, a solution looking for a problem. It was, IFRS 16. Funny, you know, my former colleague, Matt Tilling, super nice guy, was doing some, my training, accounting training for some of my clients. But, we found it very hard to sell institutional investors and the idea that accounting, they should know more about accounting. Surprisingly. I mean, you know, we did a lot of helping people when there was a problem, an issue.

And the thing that I think is slightly bizarre. So I am an expert accountant, but I don’t spend a huge amount of time looking at the new standards or worrying about them. I just, you know, when they come out, I look at the staff and I say, okay, what does that mean? And sometimes the treatment today, and not necessarily there’s been a new standard, but there’s a new way of doing-. Some of the stuff is so complicated that, you know, the sensible answer, oh, no, that’s not right because of this. And you’ve actually got, I mean, it’s as if you need legal advice, so you need to go and have professional accounting advice is the common sense answer doesn’t work anymore. And it’s just incredibly stupid. And this idea, you’ve got so many notional adjustments to make the accounts theoretically accurate, and IFRS 16 is a classic example of that, you know, no longer do you know what the operating lease rentals are?

And I said to Matt, well, that’s really, it should be said, but there’s no such thing as an operating lease rental. I say, Matt hello, every company that is got, that is leasing an office has an operating lease rental ,it is an illegal document, it is a legal obligation. What are you talking about? There’s no such thing that can say, there’s no such thing. There’s no such thing. You’ve got these fictitious assets and these fictitious liabilities. Well, guess what? What I want to know is, how much the company has to pay each year. I mean, it just obliterated that. I mean, if they wanted to put all this garbage nonsense on the balance sheet, fine put your theoretical calculations on the balance sheet, fine. But don’t take away the basic information I’m used to having that helps me. I mean, there’s a number of instances where the rules have changed and they’ve deleted information that was actually really valuable.

And then they add all these requirements to produce these theoretical calculations that are, you know, I mean, I struggled to know who gets a benefit from them, probably the accounting profession and the auditors, get the auditors can spend a huge amount of time and money checking that the numbers, the calculations are accurate, according to the standard, I mean, words fail me. They tried to enlist my support. There’s a group that’s kind of like a user group. And they said, oh, well, Steve, why don’t you join this user group? And I sort of went along to a couple of events and listened to what he said, and I said, you know, I think it’s a waste of time. I’m not, I’m not- oh, well you want to change things you’ve got to- Yeah I said, well, but the thing is that, you know, you’ve got all these big committees and they’re dominated by accountants who have got a different agenda. I think I’m doing a better service by telling people, you know, these things are a complete waste of time, just ignore it.

Kalani Scarrott (23:59): So what’s their agenda, do you think? Just pad the balance sheet and hide as much information as they can, or ?

Stephen Clapham (24:04): I don’t really, I don’t honestly know. I mean, I struggle to understand why they think that you’ve got a retailer and putting a notional asset for the shops on the balance sheet and notional liability on a balance sheet is better than the old method. I mean, if you’ve got that and, you know, okay. So if it were me, you know, I might put that information together and I might add it as a note to their clients. I mean, you know, if I wanted it, but to add a notional liability and the calculation of that liability is incredibly subjective and not consistent from one company to another, at least with an operating lease rental, you know what the cashflow is going to be, and if you want to make an estimate of what the balance sheet effect will be, you can do it very easily, with this. I mean, I’ve got very little confidence that the assets and liabilities are consistent from one company.

Kalani Scarrott (25:17): So is it even possible to align the incentives of auditors companies and shareholders, do you think? and is it even possible? And if so, how ?

Stephen Clapham (25:24): Companies should want, what is right for their investors? They should, I mean, in some cases you got vested interest because they can, you know, the accounting department doesn’t want to do stuff that’s too difficult or too complicated. In some cases you’ve got an issue because that the management are worried that this will impinge on their ability to fleece the shareholders with stock options. But also I think the investment industry have done a poor job in representing themselves to the people that are creating their accounts. So they’ve not been nearly vocal enough and they, don’t organize themselves together, because they’re all competing. But in actual fact, what they should do is they should, you know, they should create a pressure group. They should appoint somebody like me and to come up with some, you know, so, okay, adjusted earnings, here’s what you’re allowed to do with adjusted earnings.

I mean, the SEC should do this. You know, you should say, okay, if you’re going to have adjusted earnings, they have to conform to this. Like admins are too stupid to make up some sensible rules. So we’ll make them up. And if you don’t conform to that, you you’ll get a fine and not only will the company get fine, but the CEO and CFO will get fined personally. And then everybody would, would it be the rules, but you’ve got the ridiculous situation today that Warren Buffett is producing a non gap measure. I mean, whoever is in charge of gap should go and jump out the window. When Warren Buffet has to produce an alternative performance measure, words, fail me. You know, I mean, if they can’t see that they’ve lost their way from that, how would they ever, see?

Kalani Scarrott (27:30): What’s been some of the worst accounting offenses you’ve come across in your entire career? Like, are there any examples that stick out or come to mind straight away?

Stephen Clapham (27:36): I mean, any of the big frauds, you know, I mean from Enron to Patisserie Valerie, I mean, Steinhoff, I mean, there is an amazing number of frauds. I mean the accounting thing, you know, people doing accounting tricks. Well, I’ve got, I think in my forensic accounting course, I’ve got something like a hundred and between a hundred and fifteen and two hundred different examples of companies cheating. And some of them are shocking, really quite shocking. And some of them are, some of them are less severe, but in all these cases, the companies are deliberately trying to pull the wool over investors’ eyes. And, you know, I think it’s the responsibility of people like me to shine a light on that sort of trickery and ensure that people understand how to, how to spot it.

Kalani Scarrott (28:31): No. Fair enough. So maybe I’d like to hear maybe about your podcast and what you do? Cause what was your motivations for starting the podcast and even behind the balance sheets? So moving away from a corporate career, like why make the leap and do your own thing? And because I suppose it’s pretty uncertain waters I guess .

Stephen Clapham (28:44): I sell my own business because no hedge fund wants to employ me. I mean, I couldn’t even get an interview. So the fund that I was working for we’d made the decision that it would close at the end of the year. None of us, well, I was, taking a draw, but the original funders weren’t making any money and they, we’d tried to grow the assets under management, unsuccessfully, the performance wasn’t brilliant. And, you know, we were sub-scale and I’d been brought in to take it upscale. But as soon as I joined the fund fell 5% and then the founders got reluctant to take, take on risk. And then of course you don’t take risks coming on it. So the founder called me in his office. I’m going to give it to the end of the year, but if we don’t, you know, grow.

I’m gonna go. I think we’re going to close. And I thought, well, I better get out because I’m a partner and we’ve just signed the long lease on a very expensive office. And the flashiest part of the west end most expensive street. You know, it wasn’t an, it wasn’t an expensive office by the local standards, but it was an expensive office. And I didn’t want to pay my share of 10 years of that rent. So I thought, well, look, I don’t think there’s any chance of us making any money or getting any more funds under management. So I’m going to go and get another job, but, you know, I couldn’t go as a headhunter. I couldn’t let the word out, So I, you know, I just applied for jobs that I saw advertised mainly on LinkedIn. And I applied for 47 jobs in LinkedIn.

And I got one reply. The only reply I got was from a fund who were serviced by sales guy, that I was friendly with who I’d called up and said, I’ve apply for this job, tell them to see me. And they replied saying, I’m sorry, I don’t think you’re a good fit. We don’t want to see you. And I just thought, well, you know, why is this? Because, um, you know, you could argue about my ability, but you know, I’ve got a pretty decent track record. I’ve got a pretty decent CV. And I’d had quite a lot of value to most funds. And I came to the conclusion that it was age. People did not want to employ an analyst who’s over 50, the average hedge fund manager in London, something like 42. And they don’t want somebody older than them. I mean, that’s my hypothesis.

I mean, I don’t know whether it’s possible to prove it, but that, and I thought okay, well, look, um, you’ve got various options. And one of the options was to take my experience and, you know, deploy that to my advantage and hence the training business. And I quite liked teaching people when I can do fun stuff that I wouldn’t otherwise be able to do. The podcast came about because various people had said to me, why don’t you do a podcast? And I kind of, I thought, well, you know, should I? Anyway, I’ve, since I set out with my business, I’ve set myself a new challenge each year or at least one. And I thought the podcast would be a new challenge. And, um, originally I was going to do it last year and Pete Davis, the then senior partner of Lansdowne partners, which is, you know, one of the largest, most successful, well, no longer one of the largest, had been one of the most successful hedge funds in London said he would do the podcast.

I’ve known Pete for 20 years. And you know, one of the advantages I’ve got is I’ve got a great Rolodex, but what I’m trying to do with a podcast, I’m trying to do a couple of things. The first thing is I’m trying to pass on my knowledge and learning by getting friends and contacts to pass on their knowledge and learning. And, you know, I think that this is a, a worthwhile endeavor, helping people to improve their investing skills. And that’s the purpose of the podcast is to educate people. Obviously we also hope to entertain them, but you know, the second objective is a much higher objective. About a year ago, I read in the FT weekend magazine, an article by Patrick Jenkins, the deputy editor. And he said that FT was going to set up our financial literacy campaign. And I wrote to him, and I said, that’s fantastic.

I said, because I, in my plan, I’m not a great, you know, I don’t have a strategic plan, but one of the things I’ve said that I would do in my, you know, new things. So my new thing for 2023, was, I was going to set up a financial literacy charity in the second half of this year. And I said, oh, well, that’s great because you are going to do a much better job of it than I ever would. And the issue here is that kids do not get taught in school about money. It’s crazy. Right? So I was walking across Hyde park in London, central London, going to lunch with my elder son who goes to one of the best schools in London, England, and probably the world. I mean, it is an unbelievable school. I mean, you know, I wish that I had gone to school like that.

And, you know, of the day schools in the UK is undoubtedly one of the top ones. And I said to him, So what do you get taught about money at school? Nothing. Oh, well, I better teach you then hadn’t I. But if you think about life, what do you need in life? You need love and money, which was a name of a Scottish Glaswegian band. And, you know, everybody needs love, and you can be lucky in love or unlucky in love, but there’s not, you know, there are some things you can do to make yourself a more attractive person, but you’ve gotta be lucky as well to find the right person. And you can think you found the right person and the person can change over time. You know, I’m not an expert in that. I feel I have a little bit more expertise in the money side.

And I just think, you know, why? you don’t need a lot of money to be happy. And in fact, the more money you have often the less happy you are, but you need a bare minimum to get by. And people who don’t have enough money tend to have, I was going to say, tend to have a more miserable life. That’s not, actually true. I mean, lots of people with not enough money are very happy, but if their life is more difficult than it otherwise need be. And it’s those people that usually suffer the most from the scammers, you know, payday loans borrowing in your credit cards, not saving early. So having a miserable retirement because their kids don’t care about them. And they’re saying, well, you know, these things are incredibly simple problems to solve. I was talking to Patrick about it, and Patrick, a really nice guy.

And I said, you know, I’m going to do whatever I can to help this charity. Because to me, this is a classic example of Warren Buffett’s one foot bar. You know, there’s some amazing charities that are out there to solve incredibly difficult problems to find a cure for cancer. The charity that I’ve supported as my primary charity is a charity called Duchenne and my older boy, one of the kids in his school when he was very young, one of the mums emailed all the parents. And I was, I remember it very vividly. I was in my kitchen on the bar stool with the end of the bar, having a glass of wine on a Friday evening, I was just going through my emails as I was talking to my wife and I opened this email and Emily Crossly lovely lady talked about her son, Eli and how he would soon find it difficult to go up the stairs at school.

And then he would be in a wheelchair because he had this Duchenne’s disease and there wasn’t a cure for it. And I mean, I actually started crying, reading an email. I’ve never, never cried in an email, but I thought, you know what? That could be my kid, you know, it’s only luck that separates me from her, you know? And I said, you know, Emily I’m going to do everything I can to help you. And you know, that is a fantastic cause. And they’re doing, I mean, she’s raised a huge amount of money. They’re doing clinical trials of various drugs, but she may or may not be successful. It’s an absolutely fantastic cause. And I’m continuing to support it wholeheartedly, but the financial literacy and inclusion campaign, and if you can, your listeners can find it FT.com/flic. This is a one foot bar because we can teach every child in the world about compound interest.

We can explain to every child in the world, if you save for your future early, your compound interest will help you. We can explain to them that borrowing on your credit cards is a bad idea. Payday loans is a bad idea. Okay? You may not, you may need the money. You may have a burning need for it. And that’s the, you know, that’s the only resort, but try and pay it off as fast as you can. Those simple lessons can help a lot of people. I mean, how many people, I don’t know, but potentially millions of people. So this charity is starting in the UK and they’re starting to educate kids in school. And Patrick says, one of the problems is that teachers don’t feel comfortable at money. So it’s part of the curriculum, but it’s not a compulsory part of the curriculum.

It’s an optional part of the curriculum, but the teachers don’t feel comfortable teaching it because they don’t understand it themselves. So, you know, one of the programs is training the teachers, but you know, to me, this is straightforward and this is a potentially, you know it’s like a tiny thing, but potentially could change. It could be life-changing for many, many people. So, you know, that is, a primary motivation for me to do the podcast because there is a very good way of getting that message out. And in our second podcast with the brilliant Stuart Rodan, I tacked an interview with Patrick on the end of that. And we’ll release that as a separate show. It’s only a 15 minute episode, but just me talking to Patrick about, well, what is the charity? Why, what are you going to do? And, you know, I’m in a fortunate position.

That I now have, you know, some people listening to me and I can do a lot of good, but by advertising that charity to a lot of, you know, ordinary people, but also trying to motivate some of my friends who have been incredibly successful, you know, running hedge funds. And they’re very, very wealthy. And some of them are very philanthropic and, you know, there’s, I know more than one person with a foundation of over a hundred million pounds and, you know, if they can, if we can persuade them, you know, I can say, look, I think there’s a one foot bar. I think we can do a lot of good. And you just get a little bit of money, I can help. And also the other thing is it’s quite good, fun, you know, I mean, interestingly, the videos, I mean the quality of the videos are brilliant, but I, you know, I did go through a phase where I hired a studio and hired a man to video me and did a, you know, a whole rack of them off the top.

But, I’m now just doing them at my desk for now, you know, it’s for fun. I mean, it appeals to me. You know, they’re good fun to do. The podcast I’ve found to be interesting in a different way, because like that particularly, one was sure I learned, I mean, all three, were all five of the podcast’s that I’ve recorded today, and three of them have been published. I’ve learned a huge amount, but I’d never had a conversation like that with Stewart. And that’s what, you know, so unless I had a podcast, I would never have learned those things because, you know, I mean, I might sit down and have a cup of coffee with them, but, you know, we would be sitting, having a cup of coffee. You wouldn’t say, well, sure, what makes a good investor? And he then, you know, said, well, there are four things. And he’d thought about it. I mean, the thing that amazed me was I didn’t tell him, I’m going to ask you this and you can prepare an answer. I just said, off the cuff. And he had clearly given a tremendous amount of thought because he was trying to improve his own performance. And that really impressed me because he’s a seriously good investor, but in spite of his fantastic skill, he was hungry to do even better.

Kalani Scarrott (42:50): Yeah. I love that answer. I think that’s probably a great way to wrap up because I know you’re a busy man, so I appreciate you being on today.

Stephen Clapham (42:55): Well, no, I mean, listen, thank you for, thank you for asking me. I hope, you know, it helps with the, you promote the podcast and attract some more listeners. Oh, you know, I’m always happy to help anybody. I’ve got a lot of friends in Australia, as I said to you, this lunchtime, I’m doing a presentation to the Australian CPA society. The accountants in the EMEA region. I’ve been doing their lunchtime webinar for the last, I don’t know, 12 months. So I’ve done several of them and their really nice group of people to work with. And, you know, I’ve got a long standing connection to Australia. I’ve got a lot of friends there I’ve visited for the first time, many, many years ago. I mean, I was really quite young when I went there the first time and I’ve been going there. I mean, I now have young, now teenage children, but you know, your young children that is too long a distance, but we used to holiday at Christmas time in your part of the world.

And, I’m looking forward to going back. I got lots of connections in Australia and Australia is, you know, one of my top markets. I mean, it’s not, you know, it’s obviously it’s a small market, but I think I must have quite a high share of that market in terms of, you know, the book has sold very well. So if you haven’t bought the book, you really should. It’s called the Smart Money Method: How to Invest Like a Hedge Fund Pro, available on Amazon and all good other booksellers. There isn’t actually available on other good booksellers because the booksellers in the UK don’t stock it. But, I’ve also got quite a lot of, Australians on my analyst academy course. So you want to find the courses, visit my website, Behind the balance sheet.com and please, I hope lots of your listeners sign up for my newsletter.

I’ve been rather disappointed in the circulation of the newsletter. I produced some really interesting content, so not just blogs, but I do book reviews, podcast reviews. And if you sign up, you get access to my club site, which is like separate from the main website behind the paywall. Except it’s not paywall, it’s free. You just need to sign up and get your email so that we can enroll you. And there is, I mean, I don’t know how many, we’ve got hundreds of fun lectures. We’ve got a library with 1500 investing articles. It’s an absolutely amazing resource. I don’t know why people don’t use it more. I mean, I’d probably do a very poor job of advertising. And if you want to find me, you can follow me on Twitter @SteveClapham.