Behind the Balance Sheet training courses

Sunday, Jan 20 2019 by
12

Last year was a tough one for private investors no doubt about it. Like many investors I was feeling pretty pleased with myself in September and entertained thoughts of perhaps making 20% by Christmas. In retrospect I was clearly being complacent and perhaps a bit lazy with my investment decisions. Then came the big winter freeze, which seemed to hit smaller shares particularly hard, and an unpleasant end to 2018.

However immediately before that, on 10th October, Patisserie Holdings (LON:CAKE) put out a surprise announcement that their shares were to be temporarily suspended. Good joke considering that they're about to fall into administration. Anyway with this wiping out a few percent of my portfolio my interest in detecting fraud was immediately rekindled. I have a few books on the subject but my wanderings took me to this excellent report from Hardman & Co where they discuss the coming explosion in accounting fraud. Wish I'd seen this in August!

Anyway when I realised that the author, Steve Clapham, would be running a forensic accounting course for private investors I got in touch with his office. Seemed like a great opportunity to learn and pretty cheap if it helped me avoid another Patisserie Holdings (LON:CAKE). Yet even with the very thorough course brochure in front of me I found myself somewhat distracted by the markets (oddly enough) and didn't follow up. Fortunately lightning struck twice when I found out that Steve would be presenting at Mello London. What a chance to meet him in person. 

Now let me say this: when the panel were discussing Patisserie Holdings (LON:CAKE), and whether there were any warning signs, Steve was right there with graphs which (at the very least) raised a number of red-flags. The video of this discussion is available on vimeo and it's certainly worth £3.99 of anyone's money. Later on Steve gave his own presentation on forensic accounting and this was equally fascinating (if a little superficial given the time constraints). All of this only served to whet my appetite for a full-day course.

As it turns out Steve runs three different courses and all of them look very interesting. It's worth going to…

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way

Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


Do you like this Post?
Yes
No
12 thumbs up
0 thumbs down
Share this post with friends




22 Posts on this Thread show/hide all

Gromley 21st Jan 3 of 22
9

Interesting Damian, thanks for sharing that and it would be great to get your feedback after attending the session.

Personally though, I found the panel session at Mello to be all rather rear view mirror stuff - I would have been more impressed if any of these concerns had been raised before the event.

If look at some of the ratios that were being suggested, then chances are it will protect you from the next fraud, so long as it is off exactly the same nature of Patisserie Holdings (LON:CAKE) and the perpetrator has not learned to conceal those ratios!

No doubt there are many more tools in the anti-fraud toolkit, but for me personally I don't think it would be a good use of my time.

I have been fortunate enough not to fall foul of any outright frauds in my investing career, although I have fallen foul of a few situations that were less rosy than they appeared. Some of those could have been avoided if I had learned at the time to read "what they say" as opposed to what I wanted them to say.

I would guess that the remaining situations would probably make up less than 2% of the investments I have ever made. If I had spent too much time being forensic I might not have found time to discover the other 98% (and still might not have avoided all of the bad uns.)

So my friend in all of this (as I seem to find myself continually coming back to recently is diversification. I accept that I don't know everything and that I will get a fair share of things wrong, but if on balance I'm more right than wrong all will be well.

For anyone following a more concentrated path (holding only a handful of 'conviction buys' ) these courses probably will be very valuable. For me though it doesn't make a high priority.


| Link | Share | 2 replies
Damian Cannon 21st Jan 4 of 22

In reply to post #438653

Thanks for your very considered reply Gromley. You've done well to avoid falling for any outright frauds although I suppose that's been the case for me except with Patisserie Holdings (LON:CAKE). What I have had, a few times, is a situation where management have juiced the accounts (to meet expectations, pay out bonuses etc) and I haven't spotted this malfeasance. So my hope is that these courses will prime my brain to match the type of patterns that are common in these situations.

Still I take your point that these courses will not be for everyone and I totally agree. I'm a bit of a numbers guy, and this sort of analysis appeals to me, but it won't be useful for many investors. I also agree about the benefit of diversification and can attest that this has saved me a number of times!

Blog: Ambling Randomly
| Link | Share
LongValue 21st Jan 5 of 22
2

In reply to post #438653

Gromley, as with you, I keep coming back to diversification. Whether it's Patisserie Holdings, Enron, Bear Stearns or whoever, the nature of sizeable public company collapse is generally surprise. Sure, some may put up red flags such booking sales too early to inflate the figures but many disasters are genuinely out of the blue. It's the randomness of it. Some people will use Warren Buffett to justify a concentrated portfolio. But Buffett is an insider who can have companies and managers investigated inside and out. Private investors simply don't have those tools available. Avoiding over exposure to one stock seems to make a lot of sense.

| Link | Share
JohnWigg 23rd Jan 6 of 22
1

Steve Clapham was on BBC R4 this morning discussing (of course) Patisserie Holdings (LON:CAKE). He did, retrospectively, spot some anomalies (I forget details) but his target was the auditors.

Can probably be accessed on BBC iPlayer at c. 6:15am (15 minutes into "Today").

| Link | Share
jonesj 23rd Jan 7 of 22

Reading books can be a very cost effective way of training.

My current book is "The signs were there" by Tim Steer. I am part way through this and am finding it useful so far. Available on Kindle, which is ideal for procuring books when on holiday to escape winter.

| Link | Share
TMFMayn 23rd Jan 8 of 22
5

I have a few books on the subject but my wanderings took me to this excellent report from Hardman & Co where they discuss the coming explosion in accounting fraud. Wish I'd seen this in August!

I saw Steve present at Mello London about this 'coming explosion in accounting fraud'.

I asked whether he could name some suspect companies *before* the frauds came to light. He declined due to regulatory reasons.

I asked if I attended the course, whether some suspect companies would be named then. He said no, although he did mention that on one course someone asked about IQE which soon afterwards issued a warning.

It seems these courses just look at past cases of fraud, so they are a bit of a history lesson. The attendees then have to go home and apply the lessons learnt on their chosen companies.

I would have thought for the money being asked, Steve would have doubled-checked the attendees' portfolios.

The best advert for these courses would be Steve saying "here are three dodgy companies, just watch..." I am sure he will be deluged with attendees if one goes under due to fraud.

| Link | Share | 2 replies
Damian Cannon 23rd Jan 9 of 22
2

Thanks for the comments. I agree that having a few decent books on accounting fraud (such as Accounting for Growth, Financial Shenanigans or Quality of Earnings) is of great benefit to investors. I have a number of these books and some of their examples are eye-opening.

That said I think that reading about fraud is not enough. To identify the fingerprint of fraud you need to roll up your sleeves and dig through the accounts of fraudulent companies. Do this enough times and you'll develop a gut feeling about the shape of accounts and when something feels off.

My interest in the course is that I'm hoping to accelerate this process since the course should cover a lot more dodgy companies than I can hope to uncover individually. Still I take the point that this is just historical analysis and may miss the next big fraud.

As for naming companies before they collapse I can see both the value of this and the potential for expensive litigation! I think that the best thing to do is publish an analysis which highlights areas that seem odd but then to let readers join the dots and interpret the result as they see fit. That would be a useful service!

Blog: Ambling Randomly
| Link | Share
Gromley 23rd Jan 10 of 22
2

In reply to post #439468

he did mention that on one course someone asked about IQE which soon afterwards issued a warning.

If by that statement he was seeking to infer that his forensic techniques would have predicted the IQE profits warning, then that strikes me as a bit shabby.

There have certainly been attempts to sling mud at the IQE accounts, but none of it has stuck. The profits warning on the other hand was the result of their largest customer pulling an order very late in the day. Certainly one can say that this points to a heavy reliance on a single customer (Apple) at this stage in the development, but that was very much the talk of the market as opposed to a startling find by deep forensic accounting.

Why would one trust a fraud buster who makes misleading claims?


| Link | Share | 1 reply
Damian Cannon 23rd Jan 11 of 22

In reply to post #439503

Well I really don't want to become a cheerleader here, especially as I haven't been on the course, but I don't think that Steve said that he predicted anything about IQE (LON:IQE). Instead he was asked to name specific companies but he demurred and mentioned in passing that IQE (LON:IQE) had come up as a company that people had concerns with.

Anyway if you want to get a sense of his analysis style then this video on Patisserie Holdings (LON:CAKE) is worth watching. No outright smoking gun unfortunately but the accounts did look anomalous (not enough for anyone to be able to go on record and call it out as a potential fraud though):

https://behindthebalancesheet.com/blog_entry/patisserie_valerie

Blog: Ambling Randomly
| Link | Share
hayashi22 24th Jan 12 of 22

In reply to post #439468

I agree. If this Clapham chap were to have a course detailing presently quoted companies which he deems to be well dodgy then it would be very popular. No doubt he is fearful of legal action from said dodgy outfits.

| Link | Share
TheShareWhisperer 24th Jan 13 of 22

Damien,

When Steve identified Patisserie was a fraud, did he short it ? If not why not ?

| Link | Share | 1 reply
Damian Cannon 24th Jan 14 of 22

In reply to post #440008

Sorry I cannot answer this question. I would suggest going straight to the horse's mouth by asking him on Twitter (https://twitter.com/steveclapham) or by emailing him directly (sclapham@behindthebalancesheet.com).

Blog: Ambling Randomly
| Link | Share | 1 reply
TheShareWhisperer 24th Jan 15 of 22

In reply to post #440038

Damien

Ok, another obvious question would be. What companies has Steve also identified that are frauds like Patisserie , that the market hasn't woken up to.

| Link | Share | 1 reply
Damian Cannon 24th Jan 16 of 22

In reply to post #440143

I've no idea but if you put the question to Steve and receive an answer I'd love to hear about it.

As an aside I know a few people who make it their business to look into dodgy companies and find shorting opportunities. I know that they are very, very careful not to make public statements which could end up in court (even if they're later proved to be right). This really is an area within which an individual needs to tread carefully.

Perhaps we need some sort of anonymous whistle-blower type scheme where individuals can post comments that could otherwise land them in hot water!

Blog: Ambling Randomly
| Link | Share | 1 reply
TheShareWhisperer 25th Jan 17 of 22

In reply to post #440253

I dont know who Steve is so no plans to put the question to him, I'm only reading your article claiming that he can spot frauds, and trying to find the actual the actual evidence that he can. So where is the evidence that he spotted Patisserie as a fraud before the company actually fessed up ? Did he write an article, did he short it, what other frauds has he identified ? Just saying.

Just saying.

| Link | Share | 1 reply
Damian Cannon 25th Jan 18 of 22

In reply to post #440543

OK no problem. There's no real point in going round in circles on this point!

As an aside I was going to say that I haven't claimed that Steve can spot frauds - merely that he runs courses which can help people to spot patterns in the accounts that may be suspect. Splitting hairs perhaps but I think that it's nigh on impossible to definitively identify a fraud while it's happening unless you're on the inside.

However I have noticed that I unintentionally over-egged the pudding by referring to fraud in the article title and in the description of his forensic accounting course. This wasn't right and I've made some edits to remove this hyperbole.

Cheers,

Damian

Blog: Ambling Randomly
| Link | Share
JohnWigg 25th Jan 19 of 22
1

It's a valuable point (per Gromley) that researching possible frauds before the event would take up too much time if deciding to invest.
However, if one think just doesn't look right a big investor (such as a hedge fund) could follow up initial doubts with a full investigation with a view to instigating a large short position. And for "ordinary" investors, that in itself would be fair warning.
Have people come across Benford's Law:
https://en.wikipedia.org/wiki/Benford%27s_law
Jump to Accounting Fraud detection.

| Link | Share
Damian Cannon 19th Feb 20 of 22

Just to follow up on this - I'm attending Steve's course this Friday in London where he'll be doing an introduction to analysis and accounting for investors.

I'll be writing up the course afterwards but if anyone is free on Friday, and tempted by what's on offer, then I believe that Steve still has a few spare places.

See https://behindthebalancesheet.com/site/page/training_for_private_investors 

Blog: Ambling Randomly
| Link | Share
AnonymousUser605348 2nd Mar 21 of 22

I think this is the sort of thing I'm looking for. Total under-the-hood stuff. Surely this is the only way to get far ahead the rest of the pack. I don't know though, is this really better than the hundreds of books of financial statement analysis and forensic accounting? Let us know what the course is like?

Cheers,

mario64

| Link | Share | 1 reply
Damian Cannon 11th Mar 22 of 22
1

In reply to post #453848

I've just posted my summaries of both courses. On the day we covered probably 50x more material but there's only so much that I can disclose!

https://www.stockopedia.com/content/introduction-to-accounting-for-investment-analysis-456588/

https://www.stockopedia.com/content/introduction-to-equity-analysis-456593/

Blog: Ambling Randomly
| Link | Share

Please subscribe to submit a comment





Stock Picking Tutorial Centre


Related Content
Mello 2019All you need to know
Mello 2019....All you need to know !
Events and Meetups 27th Feb

ShareSoc News
ShareSoc News
Learning to Invest 30th Nov '17

Risk management and robust portfolios
Risk management and robust portfolios
Stock Screening Mon 3:51pm

Fantasy Fund  Technology Trend
Fantasy Fund : Technology Trend
Stock Picks 11th Mar

How to Trade in the Zone Lessons
How to Trade in the Zone: Lessons
Behavioural Finance 25th Apr


Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis