#5 – Lucy Macdonald The Pianist

Lucy MacDonald is the former CIO of Global Equities at Allianz Global Investors where she worked for almost 20 years and managed £5bn or $8bn of assets. She is currently a NED on JP Morgan GEM Income Trust and has her hands full, taking care of a new puppy. Lucy has 30 years of experience in financial markets and is exactly the sort of guest we are hoping to have on the podcast – a wealth of experience, semi-retired, and not afraid to speak out, as you will hear.


In this podcast, MacDonald explains her really unusual route to finance, her approach to running successful portfolios, how to run a team of fund managers and analysts and how a woman copes in a man’s world.


Lucy MacDonald is the former CIO of Global Equities at Allianz Global Investors where she worked for almost 20 years. She headed up the Global Equity Fund Management team, which managed over £5bn of assets in mandates for institutional and retail clients around the world. She was also the lead manager of the Brunner Investment Trust. She has strong views on and considerable expertise in ESG and on the role of women in finance, which we discuss in the podcast, along with her unusual route into fund management.


Lucy started at Barings and her interest was sparked by conversations when she was playing piano in a bar, as a music student. A lovely story, early in the podcast.


Lucy reached the level of CIO Global Equities for this giant asset manager. In the podcast, she explains her approach to running a successful investment team.


As a younger member of the team, Lucy learned some lessons from the Barings collapse – that her superiors didn’t necessarily have all the answers. Her takeaway – do your own research.

Barings was a great training ground though, working with the future principals of some of London’s future top hedge funds – Sloane Robinson, Thames River Capital and Odey Asset Management (yes, Crispin himself).


Lucy’s advice is simple, albeit perhaps difficult to execute: Get a good boss.

She explains that your first boss can have a profound impact on your career, so you need to make sure they are someone who can properly teach you.


Lucy places emphasis on avoiding groupthink. She used blind voting. It means a wider dispersion of opinion and often creates additional debate which is helpful in arriving at the right decision. Her 3 tips for avoiding groupthink:

1)      Leader goes last and does not influence others

2)      Diversity of inputs (gender and background) is important

3)      Blind votes


Lucy MacDonald ASIP is the former CIO of Global Equities at Allianz Global Investors where she worked for almost 20 years and managed £5bn or $8bn of assets. She is currently a NED on JP Morgan GEM Income Trust and for the last several years has been a member of the CFA UK Advisory Council. She was the lead manager of the Brunner Investment Trust from 2016-2020, having previously managed the overseas portion of the Trust since 2005. She is a member of the Nomination Committee for the CFA UK board and sits on the CFA investor panel. Lucy is known for having strong views on ESG and on the role of women in finance, both areas in which she has considerable expertise. Lucy graduated from Bristol University with a music degree.



Lucy recommended two books:

Thinking Fast and Slow by Daniel Kahneman. Knowing yourself and the other people you are working with helps performance.

Against the Gods Peter Bernstein. The History of Risk.


Steve met with Lucy to talk about her approach to ESG, which she touched on in the podcast. This was part of a research into a possible new course which he has not yet constructed, as there is a huge amount to do, but may do at some point. When Lucy retired, they stayed in touch, Steve asked her to review his book and she kindly offered to appear on the podcast.



00:02 – Introduction to Behind the Balance Sheet
08:24 – Lessons from the Financial Crisis
23:48 – The Importance of Diversity
34:13 – Combining Logic and Gut
48:42 – The Evolution of Dividends
59:33 – Long-Term Investing and Risk



AI-produced and lightly edited

STEPHEN CLAPHAM: Hi, welcome to the Behind the Balance Sheet podcast where we meet leading investors and commentators and educate ourselves about the world of investing and the world. Our mission is to remove some of the mystique around investing and improve our understanding of what makes a successful investment or indeed an unsuccessful one. Our goal is to inform, educate and entertain.

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STEPHEN CLAPHAM: I ask them because I use the research platform almost every day for equity analysts. It’s in many respects the ideal tool. If I didn’t have a professional platform, I would need several different software systems. Cento saves me a lot of time and ensures my research can be done in one place.

STEPHEN CLAPHAM: I like it because first, the data is reliable and it aggregates all content. Second, it’s easy to use and much more intuitive than other platforms I’ve used. And third, it’s features I’ve never seen in other systems. My favorite one is the ability to go into a 10-K and extract the history for a particular data table.

STEPHEN CLAPHAM: If I want to see the trend in a parameter. And I often do this, I snap my fingers without having to dig through multiple 10 KS. It’s faster and easier. But most important is the price. There’s a huge price advantage over other systems if you’re a smaller fund or even a larger fund equipping analyst.

STEPHEN CLAPHAM: Cento is definitely worth looking at visit Cento dot com forward slash BT BS for behind the balance sheet for more info and you can even get a two week free trial. Lucy Mcdonald is the former Chief Investment Officer of Global Equities at Allan’s Global Investors where she worked for almost 20 years and managed £5 billion or $7 billion of assets.

STEPHEN CLAPHAM: She’s currently a non-executive director on the JP Morgan Global Emerging Markets Income Trust, as well as taking care of a new puppy. Lucy’s got 30 years of experience in financial markets and she’s just the type of guest that we like to have in the podcast. She’s got a wealth of experience.

STEPHEN CLAPHAM: She’s semi retired and she’s not afraid to speak out in this interview. She explains her really unusual route to finance her approach to running successful portfolios, how to run a team of fund managers and analysts and how a woman copes in a man’s world. I hope you enjoy this episode.

STEPHEN CLAPHAM: Thank you, Lucy. Hi. Thanks very much for coming on the podcast. Really nice to have you listen, you studied music at Bristol University. It’s quite an unusual background for somebody that’s been in financial markets. What made you want to come into, into the city?

LUCY MACDONALD: I had no idea about the city at, at that age until I had actually started playing the piano in a wine bar when I was a student. And it happened to be a wine bar where there a lot of stockbrokers. And so through talking to some of these stockbrokers, they told me about the city.

LUCY MACDONALD: And I thought, well, that sounds quite interesting. And so when I left it was big bang time, it was sort of mid eighties. Everybody was headed up towards the city.

LUCY MACDONALD: And so I sort of thought, well, that’s worth looking into and, and so I, I went up there, I got a job working for the chief economist at Bearings. And that was a very interesting place to be because I had a very good vision into the different parts of the city. So, you know, we were servicing the corporate finance and trading and the fund management.

LUCY MACDONALD: And so I could see, you know, the, the culture of each of those sorts of activities and I was really interested by the fund management.

LUCY MACDONALD: And I also felt the culture there was, was sort of more aligned to, you know, where I was coming from and it did seem a little bit more open, slightly more diverse, I mean, not hugely but, but relative to the others it was. And so so, I got myself qualified as an analyst. So I did that in, in the evenings and, and then persuaded somebody to give me money to manage.

LUCY MACDONALD: And once you do start managing money, then it is a bit like maths because, you know, the, the results are there. And, nobody can really argue with them. And so, so that’s really how I got going. So it was pretty random.

LUCY MACDONALD: But I have to say at the time, I mean, there was a huge diversity of, of backgrounds, of academic backgrounds, of people who, who were working in finance management then, you know, I was working with, with historians and, and people who had studied English as well as, you know, people who had come through from maths and economics and, and it was a very, very fertile economic and intellectual debating area.

LUCY MACDONALD: So I found that a very good, you know, starting point for, for the the profession.

STEPHEN CLAPHAM: And of course, Bearings at that time, if I remember it was, there were some brilliant people there. I remember Andrew Parry Malcolm Herring, some really amazing investors. It must have been fantastic working with them.

LUCY MACDONALD: It was a good stable also. I was sort of on the next to Chris, some of the, the early hedge fund managers as well, those who went off to start the Thames River. And also some of the, the partners that who started slow as well. So there were some very smart people there. And that was, was a, a very good training ground.

LUCY MACDONALD: And then we had, you know, the Bearings crisis in, in 1995 and that was a real learning experience from, from all all points of view and I had just gone back to work, having had my, my daughter Eliza and so I had just gone back to work. I was there for a, for a few months and then my employer went, went bust and it was a, a huge sort of you know, lesson from all sorts of, of perspectives.

LUCY MACDONALD: And you know, one was really that you had no idea what was going to happen next in life and nobody had forecast that. And so that was quite useful from a, you know, humility point of view of, of, you know, how to manage money, but there are other lessons as well, you know, that were very useful later in, in my career.

LUCY MACDONALD: So, you know, financial leverage, you know, a bank that is over levered doesn’t really take much to, to upend it. That was a very useful lesson, you know, going into the, the financial crisis, looking to be able to avoid the, the, the banks which were, were overleveraged importance of, of the, the financial, you know, reputation brand.

LUCY MACDONALD: Now that’s obviously important in, in everything, but in, in finance, it’s, it’s the most important thing that, you know, trust element and brand and, you know, with Bearings, being able to just phone up and saying, saying, you know, I’m from Bearings that would open the door and then the very next day, you know, you are suddenly a global laughing stock, you know, just absolute pariah and, and the idea that anybody would give you money to manage was, was, was hilarious.

LUCY MACDONALD: So that was a very good, you know, learning point.

LUCY MACDONALD: And then I think the third one, which, which was from as an investor and an analyst with the importance of doing your own research, you know, primary research and not to just, you know, believe what your apparent elders and bets were telling you about a situation and, and that, that is just incredibly important as an investor and you, you start off, you know, you are, you do, you know, assume that other people who’ve been doing it a long period of time, know what they’re talking about.

LUCY MACDONALD: But, but, you know, they didn’t and, and you know, our, our elders and investors were, were completely and totally blindsided by what had happened. And that was you know, really interesting. And so, although it was a little bit shocking at the time, there were some very useful lessons that came out of it for, for my, my, my career after that, which, which I, I think were a help.

STEPHEN CLAPHAM: It’s funny, isn’t it? Because I remember around that time talking to a former colleague of mine who joined Bearings in the Singapore office. Yeah. And, and I actually I tell a lie, I think he was in the Tokyo office, but he said it was quite commonly known that there was something bizarre happening in Singapore and he, he couldn’t understand why the people in London hadn’t asked more questions.

LUCY MACDONALD: Well, I think the, the, the audit were asking the questions, but the answers that they were getting back from Neeson, were, I think, confused them to some extent and he was obviously, you know, quite a good at concealing the, the, the, you know, the real situation.

LUCY MACDONALD: So I think there were people halfway up who had suspicions that things weren’t right, particularly obviously because the amount of cash that was going out, in that direction, for the margin calls and, they had suspicions but they didn’t raise them further up because there was that, well, everything is going fine, you know, making a profit.

LUCY MACDONALD: He made all the profits, you know, for that year came from, from, from Singapore. So, so again, there are more and more lessons there and particularly about how, you know, the front office and back office should, should and should not be working together. So, so a lot, a lot of, you know, case history though, it’s funny, isn’t it?

STEPHEN CLAPHAM: Because we’ve seen so many frauds in, in our career that and each time, you know, when you look back on it, there’s something slightly obvious about it. You know, there is all the money is being made in the smallest office in the world. Why, why is it?

STEPHEN CLAPHAM: And why would somebody be be able to do that. And so many times we, we see this and sometimes I think it’s more, it’s easier to spot from outside than it is from, from inside. It, it, it’s, it’s very funny. So, tell me, how did you end up at all?

LUCY MACDONALD: What was the, what was the catalyst that made you leave Bearings or did you see all the, well, I, I was really looking to invest globally but on a bottom up basis and I had shifted, you know, from doing UK only to, to doing, you know, global investing Bearings was a very sort of top down asset manager.

LUCY MACDONALD: And so it was very much, you know, we, we like, you know, Hong Kong will allocate money over there and, and invest it there. And I felt increasingly that that was the wrong way to do global investing. If you were going to have a, a concentrated high alpha, you know, global portfolio, you needed to have, have you know, concentrated stock picking and therefore you needed to have start with the stocks.

LUCY MACDONALD: And it was obviously the wrong way up at, at bearing. So I looked where else could be that could be done. And at that time, Dres N R C M as it was had just started up a, a global research platform and that was looking at companies across borders so you could compare and contrast, the Nike and Adidas and really look at them on the same basis and compare and contrast and then build concentrated portfolios.

LUCY MACDONALD: So that seemed to me to be attractive. So that, that’s, you know, why I went and, and also there was also something called grassroots, which was looking really sort of deep down non financial research into, you know, products.

LUCY MACDONALD: So, you know, when the, the ipod and the ipad came out, then the grassroots would really look and, and see what the response was to these products and that was really very attractive as well. So it was resources and global resources and the ability to build portfolios in that way was, was very attractive.

STEPHEN CLAPHAM: That’s very interesting, the grassroots idea where they were looking at product design and product and market research as to how the products were being received. How, how did that help you in investing decisions?

LUCY MACDONALD: Well, it really the risk in investing is, is, you know, you don’t know what you’re doing, you don’t know what you’re investing in. And so the more that you can, you know, reduce that thicket of ignorance and the better. And so being able to really understand what the customer responses are to the products and services of the companies that you’re investing in does does you know, reduce that, that risk around it.

LUCY MACDONALD: Now, you can never know everything. And there has to be a point where you then stop and say, ok, well, you need to make a decision about this. And as I say, from my bearing experience, you never know what’s going to happen next. So it is a question of, of, of just, you know, having enough information and understanding to take a view and, and the ability to go right down on the ground.

LUCY MACDONALD: So, you know, talk to oncologists, if you’re investing in a, you know, a cancer drug, or talk to cardiologists, you’re investing in a stent, you know, this kind of thing that you can do really does, does help when you are understanding what you’re investing in and getting all those different perspectives, you know, around the company from, you know, from different different people and stakeholders that’s very, very important.

STEPHEN CLAPHAM: So, so I found it extremely useful when you had the resource like that, did that mean that you didn’t need to use things like expert networks because you had it like your own internal expert network. Was that, was that the way to think about it or?

LUCY MACDONALD: Yes, it was internal expert network, but we did use external expert networks too. And then increasingly as, as, as time went on and the more data was available, we used data scraping and then, you know, we would use natural language processing or anything that was, was going to add to your understanding of, of the company that you’re investing in its products and services, and its market.

LUCY MACDONALD: You would use, why wouldn’t you use it? You know, and I think that’s, you know, there’s often AAA sort of real focus on what our internal resources are. We must only use and trust these.

LUCY MACDONALD: Well, I think, you know, you could use whatever is out there and some of the, the younger, you know, analysts and people that we were taking on to the team and to the, the, the, research would start with, with Google, you know, they would start with Google work backward store, the report and accounts, they would use the report and accounts as well, but they would start in a completely different place and that I really liked, you know, within my investment team is to have those, you know, diversity of backgrounds, but also diversity of, of the way of thinking and the way of approaching an investment and, and that, you know, gives a much better, you know, discussion when you’re talking about, you know, a particular investment because you’ve got people coming from all different, you know, places.

LUCY MACDONALD: And, and putting different emphasis on, on different parts of, of the resources that, that are there.

LUCY MACDONALD: But, you know, when, when we think about, you know, our careers and, you know, the 30 years, you know, what’s happened, I think technology has been, you know, the biggest change, that’s, that’s happened over that period and, you know, remembering going off to, to the Department Of Trade And Industry with a huge brick of a cell phone to, to phone back when the, when the trade figures came out, you know, that’s, that’s sort of, you know, where we started and then, and then the internet, you know, appeared and suddenly there was this absolute light bulb of this is going to be extraordinary for investors because you’re going to get access to all of this different sort of information.

LUCY MACDONALD: And then working out, you know, as, as you go through, well, how are you going to deal with all this information? Because not all of it is, is equally valuable.

LUCY MACDONALD: And these are the skills which the young people are now coming through are, are, you know, having and, and, and using a lot more the ability to analyze new data and to, to filter what’s important because for an investor, you know, you have limited time and you need to, to really be able to focus on what’s important.

LUCY MACDONALD: And the more there is out there, the more difficult that task is which is where you absolutely have to have new technology. And the other useful thing actually from, from Bearings was the fact that the economics unit was also the quant unit because the economists could add up.

LUCY MACDONALD: And therefore, you know, they were first the computers and therefore, I had right from the beginning of my, my career was using, you know, quant and using quant for filtering and, and understanding, you know, how it could be used.

LUCY MACDONALD: And so I never had that sort of, you know, conflict that fundamental investors occasionally have with quant because I’d always used it and always see the point of it.

LUCY MACDONALD: And that’s obviously been the other big, big change related to technology, which happened during our career is, is the, the rise of passive and that is still having a very big impact on the whole industry and we’ll continue to do so.

LUCY MACDONALD: And it’s sort of different ways of, of, of getting to a very similar sort of result now as an active investor, I always, you know, found it’s, it’s it’s, it’s a challenge but it’s not a challenge you mind having because it’s, you know, it really makes people focus on the active part of, of what you’re doing.

LUCY MACDONALD: And so it, that always seemed to me to be quite a positive thing because as a, you know, very active investor, because we had you know, portfolios which were 90% active, 30 30 stock global portfolios, they were extremely active.

LUCY MACDONALD: So it sort of highlighted what you were doing was actually different to passive. And so there was no index hugging going on.

LUCY MACDONALD: And I think that that passive trend is going to continue because in, in many asset classes, it is, is it produces better results and cheaper. Not all. And in global, the media managers still outperform. So it still makes sense to be active in global.

LUCY MACDONALD: It makes sense to be active in emerging markets in smaller companies. And in some, some times during, you know, a market, the active managers will find it, you know, better to do. But, but there are large swathes of, of equity markets where passive does as as well, if not better than that.

STEPHEN CLAPHAM: It’s funny you were just taking me back to my first day when I started at the stockbroker and I was shown to my desk and I turned around to my boss who, Bob Cole, who founded Mick and Carl, who he invested relations firm. I’ve said to Bob, I said, is it possible? Could I have a computer, please?

STEPHEN CLAPHAM: And he turned around to me and he said, do you know how to work a computer? I said yes. And he said, well, what kind of computer would you like? And when I tell that story to young people coming into the industry now they can, I mean, they can’t conceive of a world without computers and it can use the word.

LUCY MACDONALD: I don’t think they do. They, they call it a computer. Yeah, exactly.

STEPHEN CLAPHAM: But I remember. So you were very lucky because you must have been quite advanced to have a computer on your desk.

LUCY MACDONALD: Well, I was just in the right place. That’s where the computers were. Although it has to be said that the, the, you know, some of the products which the quants were producing at those times were experimental and didn’t necessarily do, do what they were meant to be doing. So, so the portfolio insurance, for instance, during the, the the crash in, in 87 was was not, not entirely successful.

LUCY MACDONALD: But that’s what happens, you know, at an early stage of experimenting of, of seeing, you know, what works, what doesn’t work. And, I think, you know, watching and seeing how Qantas is, is used now. And, you know, there are still many products which just, you know, fail because they are based on, on the wrong assumptions.

LUCY MACDONALD: And so you, you still need, you know, a lot of sense in there as well and, and even now when computers and, and, you know, a I is, is, is so, so, so, intelligent, it still gets things wrong and there’s still basic things where humans can, can add a little bit of value and, and I think we’re still still, you know, there’s some, some point in still having a few humans in, involved in, in the exercise of, of fund management, particularly while while companies themselves are still managed by humans then, you know, and the end clients are still humans, then you need a few people, involved with that, that sort of trust element to work.

STEPHEN CLAPHAM: We always need people to work with the computers. I, I feel so I feel, I feel quite safe. But tell me when you, you started in the economics department, has that colored your attitude to Macro? What, what part does Macro play in your thought process and in your investing process? And do you think that has been colored by your experience, good or bad by starting up working in the economics area?

LUCY MACDONALD: I think, it really proved, you know, to me that, you know, rather like the Bearings experiences that, that nobody really knows what’s going on and in the future and so, so huge, you know, incredibly complex models, you know, econometric models are produced, and, and fiddle around with and, and they never actually tell anybody what’s going to happen next and, you know, they give a, a sort of a, an intelligent guess of, of, you know, how things might work.

LUCY MACDONALD: But, but, you know, as we all know, the world is, is so much more complex than any of these models and, and it’s involved with people, you know, who, who do all sorts of bizarre things.

LUCY MACDONALD: And I think, you know, the L T C M was a very good example, you know, of that where you have these brilliant people, these, you know, academics who started up their hedge fund and, and, they sort of failed to, to really put it into the equation that, that, you know, when they themselves became, you know, part of the reality actually changed the dynamics of what was going on in the market because they had this, this sort of incredible impact on, on, you know, how, how people would behave.

LUCY MACDONALD: And so they failed to, to really see that and then they failed to see how many of the assets would actually work together because these things change, you know, correlations change through time. So, I think that was a really interesting, you know, example of, of, of how things can, can go wrong and how, how even the most brilliant people have, have very little idea about how things are going to work in practice.

STEPHEN CLAPHAM: That was another issue of leverage as well, wasn’t it? I mean, that that was the real problem with L T C M. It’s funny, I mean, the, the, the fact that they, they use such extraordinary levels of leverage without any of these brilliant people questioning it is, I suppose it’s a classic example of group think where there isn’t somebody standing back and asking?

STEPHEN CLAPHAM: Well, are we doing the right thing? How did you manage to as well? Yeah, but but that, that group think is very difficult in a large asset management organization, isn’t it? I mean, how did, how did you handle that sort of thing at all?

LUCY MACDONALD: Increasing diversity wherever possible? And I think that’s something which has not changed enough in, in our times, you know, in, in the city over that sort of, you know, 30 year period.

LUCY MACDONALD: But I think that there’s more diversity of, of nationality than there was when I started, you know, when I started, it was very, very English male, you know, there was a sort of a public school, you know, and then there were traders, you know, and that was, that was it.

LUCY MACDONALD: There are a few women sort of, you know, lurking around some in, in, in senior positions. But, but not, not many at all.

LUCY MACDONALD: And, that’s, yeah, there’s, there’s different nationalities now, but then the percentage of women managing, managing money, is exactly the same as it was when I started, which is, is really extraordinary. Yeah. Yeah, it hasn’t changed, it hasn’t changed.

LUCY MACDONALD: So all of the, all of the, you know, the efforts that have been made and that the funds globally are still, it’s under 10% managed by women and, well, there are many, many reasons why it is. And, it’s, it’s, you know, systematic that, it’s just the women come into the, into the system and they start, start off. Well, so if you look at the C fa, there’s, there’s a quite a decent gender split there.

LUCY MACDONALD: But they get to manage some, some small funds and it doesn’t get much further and that’s still, that’s still the case now. Quite a lot is being done now to, to change it.

LUCY MACDONALD: And I think things like having a a policy of more systematic hiring makes a big difference. So, so what we found made a difference was when you made the decisions about hiring, about promoting and also about, you know, about, you know, shifting people on if you made those more systematic and got a broader group of people making the decisions that shifted the needle.

LUCY MACDONALD: And so I think it goes back to the fact that decisions historically being made about, you know, who was hired, who was promoted to manage the money, who was given more money to manage, you know, these are made by too few people and the people and they weren’t sort of diverse people. So if you get diverse groups of people making these important decisions, then you get different outcomes.

LUCY MACDONALD: And that was a real sort of learning of the process was that, that’s the only way you can shift it because historically, you know, the decisions have been made about who would get a bigger fund, you know, who would have, you know, more money coming in were made by very, very few people and they would give them to people that they themselves felt comfortable with and they didn’t tend to be different from themselves.

STEPHEN CLAPHAM: But surely this is exactly the environment in which the, the money talks, you know, the performance talks.

LUCY MACDONALD: So not, not, not absolutely because it should do and over time performance does make that is, is, you know, the big determinant. But if you look at, at women managing funds with similar performance to men and this, I think City Wire did this analysis that the men would have more money to manage than the women for the same performance.

LUCY MACDONALD: Something to do with the fact also that, you know, that the men are more successful in raising the funds. So, so the women are equally, you know, when you look at all the stats, the women are equally capable of producing performance, but they, they don’t seem to raise as much money as the men do for the same performance.

LUCY MACDONALD: And that’s the real, you know, that’s a real important thing. So, so at the end of the day, you know, when you go out, you know, marketing and that’s also because the, the, the gender issues is there in the intermediaries as well.

LUCY MACDONALD: So that who makes the decisions on who managed the money in the first place, who makes the decisions on who gets more money and, and it, so it, it’s carried on anyway, I I am more optimistic of, of, of a change now because there is more focus on it and there’s, you know, more focus with the diversity project, there’s more focus through, the various, the E S G, that is, is part of everybody’s investment process themselves.

LUCY MACDONALD: They can no longer go along to, you know, to as owners, and talk about E S G if they themselves haven’t got some diversity there as well.

LUCY MACDONALD: And also if they’re asking for companies to be more diverse, then, then, you know, if you just have, a group of people coming along from a farm management, you know, company who look all exactly the same, then that doesn’t, you know, really bode very well for them being able to persuade companies to be more diverse.

LUCY MACDONALD: So I, I think it will shift, and more systematic decision making through the motion process who gets the money, who gets more money to run, who is allocated money?

LUCY MACDONALD: I think it, it should, it should shift but it’s taken a very, very long time. The, the data shows that a mixed team of gender, you know, is, is, makes sense and adds adds value. Which does that, that sort of, you know, seems to make sense, isn’t it?

STEPHEN CLAPHAM: Yeah. No. And, and it’s not just mixed in general, it’s mixed in backgrounds and experience makes a, makes an enormous difference. It’s been interesting moving on to training and I’ve been very interested to observe how different firms work.

STEPHEN CLAPHAM: So when I, when I go in to do my forensic a candy course, I kick off with an exercise and you see immediately how the business is organized and how the people work together because some firms, they will, they will start all talking as a group. Some firms, there will be two or three people will work together. Some firms will all do it individually.

STEPHEN CLAPHAM: And the thing I found really, telling is where you’ve got the most senior person in the room, what they, what they say or do and the, you know, the re really effective investors, I’ve been doing the course with you almost don’t hear them because they’re pushing the younger people to speak first and not to be, not to be scared of voicing their opinion.

LUCY MACDONALD: And that is incredibly important point. And I think culturally having a an environment where as a, as a leader and as a boss, you just sort of take that hat off when you go into the discussions about an investment is extremely important and being able to do that and, and enhance the, the debate and then the final decision is, is very important.

LUCY MACDONALD: One thing that we found very useful was something that, that, that that I introduced after reading a book called how we Decide by someone called Joan. I think it was taken out of print. But it’s suggested that having voting, if you’re going to be voting as a team, if you took it, so it was blind and nobody knew how anybody else was voting, you got a better outcome.

LUCY MACDONALD: And so I thought, well, let’s, let’s give that a go and that, that’s, that’s what we did and it really did have a huge impact and it was because of that factor of, of, of people being aware of, of the boss, you know, and, and, and how are they voting? But not just that, it was also a bit of give and take in the different votes.

LUCY MACDONALD: So, you know, if I support you on this stock, then maybe, you know, you can, when I bring my idea up, then you’ll support me and, and a lot of it is, is unconscious, people only know they’re doing it but they are. And so they’re making these trade offs. So they’re not actually really thinking, you know, me myself, what do I think about this stock?

LUCY MACDONALD: And that’s one way of avoiding this group think, you know, that, that you were saying is, is getting everybody to think they get all of the, that discussion and debate done and then everyone go back and just on their own think, do I want, you know, this to buy this stock myself today?

LUCY MACDONALD: And then you get that good mix of, of the, you know, left right brain. And the old, you know, the, the sort of, you know, thinking of how the best way to decide, you know, using your experience, but also the, you know, the logic and, and that I think works well.

LUCY MACDONALD: And the other thing I found was that, it’s, there are some, you know, when you’re presenting a stock idea for a, you know, an investment, it’s easier for people to agree to a, the rational, you know, case. And so the, the logic of a, of a case, people can agree to because they think, well, I can explain, you know why that is, but if they’re having to explain their gut, they feel much more uncomfortable about that.

LUCY MACDONALD: So, so that’s why the individual decision making it makes sense and then you put that together and collate it together because people listen to that and they should listen to their gut, particularly when they are, you know, experiencing their guts being doing a lot of work over the years, then they should listen to it.

LUCY MACDONALD: But you’ve got to balance that up and you can do that if you’re, you know, by yourself thinking and then, you know, deciding it’s much more difficult to do that in a group because you’re saying, well, you know, I feel this is the right thing to do and everybody goes, OK, you know, whereas the logical part is very easy to explain to everybody.

STEPHEN CLAPHAM: So, so I, I thought that was, was helpful too in, in, in when you make the decision and when you introduce that kind of blind voting, how did it shift the, the balance because I imagine that previously you’d have bought something and four out of five people or three out of four people have been in favor of it.

STEPHEN CLAPHAM: Did you go much closer back towards 50 50 or 60 40? When people didn’t know how other people had voted? Was there, was there more division within team or did it not change that much?

LUCY MACDONALD: You got, you got more, dispersion of, of votes and that was the idea. But it, it, it never, you never sort of stopped there when you just did the vote because if people disagreed with something, then you want to know why and then that could lead back into the, the discussion again, because often again, it’s, it’s sort of you, it’s only when you get away from something you think about it yourself, you think understand that.

LUCY MACDONALD: I think I’ve got to ask that question again. I don’t feel comfortable enough with it. Whereas if you’re all sitting in a room together, people might not feel comfortable enough to actually say that now in a good group that’s been working together, good team that’s working together for a long time. One would hope that they, they would feel comfortable enough.

LUCY MACDONALD: But even so, you know, there are, you know, things that people don’t necessarily want to share things they don’t understand. And so it’s good to be able to get away and then think about it and then go back in again, because you’ll probably find that somebody else didn’t understand it either. And just didn’t, you know, feel very, very brave about saying.

STEPHEN CLAPHAM: So, you know, it’s always, it’s always embarrassing to admit, a lack of knowledge and people find, I think, find that in incredibly, incredibly difficult.

STEPHEN CLAPHAM: And I mean, have you got any advice, have you got any sort of advice on for younger people who are perhaps more junior members of a team as to how to be better at contributing to that process? If you don’t have a blind vote and you don’t have a more understanding leader who’s stepping back and not leading the debate.

LUCY MACDONALD: What, what would you do if you were a young analyst today to make your view heard and to make play a bigger contribution in these sorts of teams, find a good boss, I think is, is one thing which I, I actually say to all young people if, if just get your, get your a good boss when you start because that’s gonna make a huge difference.

LUCY MACDONALD: You know, if you, if you’re in a, in a situation where you have a boss who will not listen to you and, and just, you know, discounts what you say or, or sort of, you know, ridicules what you say at the worst, then if you can find yourself in a different, just find yourself somewhere else to be frankly because you, you know, it is, it’s just too much like hard work.

LUCY MACDONALD: I think there are, you can always find your way around to find other mentors if you’re, you know, if your own particular, you know, boss is not particularly helpful, find other mentors around who will, who will then intercede for you, help, help you.

LUCY MACDONALD: And, and obviously, you know, work with your other senior senior teammates network. The people who I’ve, I’ve, you know, seen really, really work in the organization’s network furiously with their peers, interact. You know, ask questions and, and technology really allows you to do that as well. So, so the sort of the social networks that we, we use internal and external organizations allow you to really reach out to people.

LUCY MACDONALD: Even if you, you know, you’ve never met them, there’s a certain amount of information about you on these networks which allows someone to be happy to take, you know, a call with you. And, so you should use it and just, just network furiously with good people, obviously.

STEPHEN CLAPHAM: Yeah, it’s funny. People are very approachable. I just did a podcast last week with a young man in Toronto and we were going back and forward about times and he was very difficult on the times. And I said, well, you know, why, what, what’s the problem?

STEPHEN CLAPHAM: And he said, oh, I won’t be home from school then and he was, he’s actually just turned, he just actually just turned 17. But the, the, it’s amazing how much, how willing people are. I think today to help and to, to, to respond and my message to anybody is if you, you know, if you’re 16 and doing a podcast don’t be scared to reach out to people one thing.

LUCY MACDONALD: And I think they are, they are, they are, the younger generation are pretty good about, about sort of, you know, reaching out.

STEPHEN CLAPHAM: And actually you’re unusual because you’re quite good at using the networks.

STEPHEN CLAPHAM: You were quite unusual for someone in your position but being very visible on things like linkedin, would I be interested if you, I mean, did you get any benefit from doing that or was there it just part of the marketing for the investment trust or what? Why did you, why, why did you do it? Because it must, must have taken your time is you’re good at doing it.

LUCY MACDONALD: Well, well, thank you, Steve. I started it well, started doing media. It was just, I was asked by Bloomberg to, to do it and this was, was, 15 years ago, something very few people were, were, were, doing it from at all. It was, it was quite unusual.

LUCY MACDONALD: And, I thought, well, I’ll give it a go absolutely terrifying at first to do live television. I mean, you know, nothing else is more frightened than that. And, so I found it was a quite a good skill to be able to have because, you needed to be able to answer anything.

LUCY MACDONALD: And that was quite helpful for the client meetings as well, where, where you get all sorts of, of questions coming at, you sometimes, you know, quite bizarre, that you would need to be able to, to, to answer. So, so from that I found that quite useful and then that sort of led on to other, you know, social networks.

STEPHEN CLAPHAM: So let, let’s change tack because you, you managed the Brunner trust and the Bruner Trust had, I think 48 years anyway, nearly 50 years of dividend growth.

STEPHEN CLAPHAM: And I’m just interested in understanding what you think about dividends, what you think about what the challenges in running a trust where if you, if a dividend doesn’t grow, everybody’s going to be very, very upset and just, you know, dividends more generally as a component of total return, how, how important are they to you and what tricks or tips do you have? Can you share and how we should look at them?

LUCY MACDONALD: Well, as a, as a, you know, end invest, dividends are a very nice thing to have. And certainly from, the, the runner, investors, they really liked the, you know, having the dividend and, and we made it quarterly so that it could be a real part of, of income and, you know, with no income really available anywhere else from any other assets, then the income from, from equities became that much more important.

LUCY MACDONALD: And so from that perspective, I think the certainly something which is appreciated by, by the investors running the trust, you know, with the dividend, it was, was not that difficult because of the, the level of reserves.

LUCY MACDONALD: And so, you know, the lovely thing about investment trust is, is so many of them have, have, have good service because they’ve been around for such a long time. And so there was over a year and a half of, of reserves, which was there, if it was ever needed, it wasn’t needed very often.

LUCY MACDONALD: But that was there to, to, to help support that growth now, not, you know, all trusts have that. And so, so there’s a, a little bit more pressure on the, the underlying portfolio to, to deliver in that situation. But for Brunner, it was, it was relatively comfortable for, for the other funds that I I ran.

LUCY MACDONALD: Most of them dividend wasn’t really an issue because they were, you know, running a capital, you know, out performance really was, was the, the the objective and therefore it was all about, you know, outperforming your index and the, you know, the dividend wasn’t a big part of that.

LUCY MACDONALD: I mean, the dividend, as we know, makes a big contribution to the return over a long period. Of time, but over the 13 years that we tended to be measured, the dividend was not a big part of it. And so, so it didn’t tend to be a big, a big focus.

LUCY MACDONALD: I think the interesting thing that happened over the, the time that I was managing the funds though was that the dividends started to come out from different places. And so, you know, historically, it would have been very much in the, the more mature parts of the market and the financials utilities, you’d find decent yields.

LUCY MACDONALD: But then increasingly over time, it started in the tech sector started to produce some, some dividends. And Microsoft Apple would you know, start to produce some dividends and the cash was there to, to keep that coming. And so I think that gave a different perspective just to investing in some of those areas too.

STEPHEN CLAPHAM: Yeah, I’ve always been I always thought it was quite funny.

STEPHEN CLAPHAM: I, I had a client who said he liked companies that had a high dividend payout because it stopped the management doing anything too stupid, which I always thought was quite, was quite an amusing thing about it, but I always get slightly concerned when people express valuations in the form of dividend yield because that seems to me and incredibly dangerous way of looking at it.

STEPHEN CLAPHAM: I’ve always liked the idea of a company with quite a low starting dividend yield, but you had growth because I always thought that beats something with that doesn’t always, of course. But given the choice, I would rather buy something that was growing and grew its dividend because over time I would end up with a, with a better income.

STEPHEN CLAPHAM: You you wrote an article for one of the financial magazines a few years ago, which talked about your investment philosophy and it said, managing an investment portfolio requires strong, fundamentally based conviction, balanced exposure and valuation discipline, which I thought was a great summary.

STEPHEN CLAPHAM: But can we just talk about this? I mean, when you say strong fundamentally based conviction, what, what does that mean in practice?

LUCY MACDONALD: Yeah. Well, going back to, to, you know what we’re talking about getting good research, having the resources to do that research globally making those comparisons and then having, you know, some, some non financial on the ground really checking that, that your models are based on reality.

LUCY MACDONALD: That’s what I mean by, by, you know, the fundamentals. And so you make your decisions based on, on really good research as good as you can get. And so that’s that part of it, a diversification. Well, making sure that, that, you know, your portfolio is not all based on one or two, you know, macro you know, forecasts.

LUCY MACDONALD: And you did ask earlier actually about my, my view about, you know, economists and, and, you know, coming from that and you said that most of these, these models don’t come out with anything that that’s bears any resemblance to reality in the end.

LUCY MACDONALD: I think your portfolio has a lot better chance of being diversified from, from a corporate point of view because companies are very different to each other. Even in the same industry, they could be, be very different to each other.

LUCY MACDONALD: And so you get very good diversification by, by putting these different companies together and making sure when you do look at the outcome at the the performance and the attribution, that’s, that is really doing what you say it would do. So, so whenever we had, you know, good performance coming out of the portfolio, you want to see it was coming out of a number of different places.

LUCY MACDONALD: So, so a healthcare company over here, you know, a Chinese internet company over there, European industrial over there and all, you know, different sources of alpha, not all correlated.

LUCY MACDONALD: And that’s really what you want to produce because that’s what you can do in equity markets. It’s the wonderful thing about equities is you get that incredible diversity within of, of, of industry but also a country. But then business model and management, you know, all of these things can, can really spread your risk.

STEPHEN CLAPHAM: I I mean, you mentioned earlier, I think 30 30 stocks global diversified. Why do you think more people don’t adopt that more concentrated model? Because people like Terry Smith have been, you know, demonstrated very, very good success. You’ve been very successful with a model like that.

STEPHEN CLAPHAM: I mean, do you think 30 is the ideal number? And why do you think there are still portfolios around that are so, so much more diverse than that? And what do you think you miss out on by having the, the concentration? Is there any, do you miss out on anything you you can manage money in different ways?

LUCY MACDONALD: Obviously more, more concentration has been coming through in the last say, say 10 years. So when we look at the, you know, competitors that we had, they were doing very well, a lot of them were more concentrated. So I think it was, it was sort of going that way.

LUCY MACDONALD: Now they’re still among more quant based funds, they tend to be, you know, a broader, you know, more, more stocks. And if you are picking up a lot of smaller companies, then you can still get a decent amount of both diversification and also produce an alpha.

LUCY MACDONALD: But if you have 200 stocks that are sort of hit to large, then you’re going to be closer and closer to the index, more difficult to, to really generate alpha out of it. So it depends what your stocks are, but that trend towards concentration seemed to be happening.

LUCY MACDONALD: Now, obviously, the more active your fund is the better you’ve got to be because, you know, you can’t afford many mistakes in a, in a portfolio that that’s concentrated. And so I think the trend towards, you know, quality investing, which has happened over the last few years as well is, is related to that. So you’ve got to be absolutely sure about the quality of the businesses that you’re investing in the quality of returns.

LUCY MACDONALD: The, you know, resilience of the business model, the track record of the management and their capital allocation, all of these things. Plus now, you know, E S G as well as integrated as part of that, you know, looking at the quality sustainability of the business, these things are more important because if you only have 30 stocks in there, you can’t afford one blowing up.

STEPHEN CLAPHAM: Tell us about your your approach to E S G W because you’ve got quite an interesting approach to it and it’s not one that involves labels just can you just spend two minutes explaining?

LUCY MACDONALD: Yeah. It was very fortunate to be at alliance you know, for, for 19 years when an alliance was, was really quite early with the trending towards you know, sustainability and an early signatory of the, the UN pr I. And we had sustainability analysts, you know, working with us, you know, all all of that time. And within my team, we were running the sustainability funds for all of the period that I was there.

LUCY MACDONALD: And it started off as, as a really quite a, a niche activity shall we say? And the E S G sustained that analysts were not taken particularly seriously internally or, or I think for the industry as a whole. So it was a sort of interesting niche activity that no one really expected to generate too much alpha. But it was a different way of looking at things now.

LUCY MACDONALD: So it started off sort of in, in that, that kind of space. But as time went on, you know, more and more of these issues were, were, were, you know, coming up in the corporate the meetings that, that we had and beginning to, to have more resonance and I think the big watershed I think was, was the, the, the financial crisis.

LUCY MACDONALD: So through that and coming out the other side, people really begin, you know, began to think more seriously about some of these issues. And so from, from being a bit fringe, it became much more central. And for us, we had been running the sustainability funds. And we’ve been able to see that that there wasn’t much difference at all in the outcomes of the performance between sustainability funds and our more broad funds.

LUCY MACDONALD: And so we started just to integrate these issues into the research process for all of our global funds very early on. And so, because we had the experience, they within the team, they, they would be, we be discussing issues early at the early stage when we were talking about the stocks.

LUCY MACDONALD: And so whether it was you know, climate issues governance, which would come into our whole, you know, quality or, you know, whether it was more social issues which really rose as well, more with, with the rise of, of, you know, social media and, and the the availability of information on some of these issues was was there. So it was very, very integrated into to what we did.

LUCY MACDONALD: And I think the interesting thing now is is the availability of data and the increasing quality of data for, for these factors and having seen now and that, that you can enhance performance, not just match performance from non media S G portfolios, but you can enhance it through the use of these. And you can see that in how some of these factors are starting to, to outperform.

LUCY MACDONALD: And that’s been really been the, the the big journey over the last few years is, is is that shift from fringe activity to, to really absolutely mainstream. And the nobody is, is now saying that they’re not doing it. It’s just a question of, you know, how people are doing it. And now the next thing is obviously impact and, and so going from, you know, not doing harm to actually doing good.

LUCY MACDONALD: And from, you know, personally now the, you know, personal investing that I’m doing is, is, is sort of led by what can the social impact be and can you make money out of it? You know, so those two things now are, are now being, you know, you can measure more social impact of, of investors. Investments are, but it’s also you can really, you know, do good and make money, which is, is I think what more people want to do.

STEPHEN CLAPHAM: Absolutely. And is your approach now when you’re managing your own money, is it very different from the way you managed other people’s money when you were doing it professionally for a living?

LUCY MACDONALD: Well, it’s, it’s a lot more relaxed and, and obviously, you know, from a performance point of view, one doesn’t really care about relative performance oneself and, and as a professional investor, that’s, that’s how you measured. You know, it’s still, it’s, it’s on a relative basis but, but personally, no, most people don’t really mind too much what the index is doing.

LUCY MACDONALD: So it’s much more absolute. So that, that’s a big difference. And I think as we’ve been through a period of very, very strongly rising markets because of the, you know, free money, which is the other big change that that’s happened over the 30 years is, is the fact that, that, that money is now practically free.

LUCY MACDONALD: Then I think there will probably be as we get into to a period where, where you’re starting to put a price on money again. And then that will be, you know, asset markets will be a little bit less one way. Then, you know, people will focus again, I think a bit more on, on absolute.

LUCY MACDONALD: And, and, you know, money will be lost as well as as made and that’s not been very easy to do over the last few years. Losing money, it’s been shooting fish in a barrel really. So, so people have to focus on a relative because everything’s been going up. But as things are getting a little bit more sideways, then the absolute suddenly becomes more important.

STEPHEN CLAPHAM: Then as you said in that article, extreme valuation plus a rising discount rate can be a dangerous combination.

STEPHEN CLAPHAM: And I suspect that’s exactly the environment that we’re facing and, and it will be a much more difficult navigation and not that it’s been, I mean, it’s been easy in absolute terms, but it’s been extraordinarily difficult in relative terms, I think for, for most fund managers because you’ve been through this terribly volatile and terribly difficult period with, with COVID.

STEPHEN CLAPHAM: And I did a a course today evaluation course and you know, somebody asked me said, well, you know, what are we going to do because all the valuations are stupid.

STEPHEN CLAPHAM: And, I think, I, you know, I’ve got a lot of sympathy with people that are, that are managing money professionally because I think it, it, it’s really, really hard right now. Although the stock markets are going up and you’re making money, it’s hard to, it’s hard to beat the, the benchmark, isn’t it?

LUCY MACDONALD: To be, be the benchmark, I think, you know, over time for a long, a long period, to be, to be, you know, drive a performance, for, for quarter, after quarter year after year, which is, is, you know, what, what we do and what we’ve done, that’s, that is, it’s a tough thing to do. And, and when you look back over, you know, long periods of time, there are not that many, firms and, and teams that have managed to do that.

LUCY MACDONALD: And certainly, you know, consistently over time. And so it is, it is a tough thing to do. And so, so when you find people who do seem to be able to do it over, over a long period of time, you should, you should stick with them.

STEPHEN CLAPHAM: No. Absolutely. And it’s funny how, how they come with very, very different recipes, you know, they come, approach it very, very differently. Lucy, you, you mentioned that you worked with a group of people who ended up with some of the biggest and most successful hedge funds around. Did you ever think about doing long short? Is it just not appeal to you?

LUCY MACDONALD: We had had AAA little go at it actually just to experiment.

LUCY MACDONALD: And I really thought it was a very interesting experiment because thinking about shorting was a very good sort of feeding back into your long only discussions. You know, if you’re looking at, at the stock because if you’re sort of screening the stocks and they, they come up as a short, but it happens to be one of your long and it’s a really good question.

LUCY MACDONALD: But why are we thinking about this differently? But I never felt that shorting was my thing and, and I always felt shorting was a shorter term activity, than, than long and resting. It’s a, it’s shorting is, is a very difficult thing to do.

LUCY MACDONALD: And when we say that, that, you know, outperforming over a long period of time is quite difficult. Well, shorting and, and adding value to shorting is even more difficult, particularly obviously in the markets that we’ve had where everything has been going up because of free money.

LUCY MACDONALD: But even without that, you’ve always got the events which, which, you know, catch people out and you’ve got that sort of unlimited, you know, upside downside. And so for me, I, I always, you know, having experimented with it. And obviously, you know, at times being encouraged to go and do it, I never felt that was my thing.

LUCY MACDONALD: And I was always more interested in long term investing and, and, you know, thinking as far ahead as one could, being very humble about the fact that I probably didn’t know what was going to happen, but investing in companies which seemed to be doing, you know, on, on top of, of, of their industry and, and producing goods and services that, that people liked, that seemed to work and managing themselves in a way for the, you know, for the long term.

LUCY MACDONALD: And that was always what attracted me about investing was being able to participate in, in some of those very sort of great successes. And rather than trying to be too cute about short term valuation. And as you said, no, you know, that, that, so, so that for me was always the attraction and still it, I couldn’t agree.

STEPHEN CLAPHAM: I couldn’t agree more. I mean, shorting is just so difficult, so stressful and psychologically, incredibly different. I mean, funnily enough. I, I’ve now become very friendly with some of the big us active shorting firms and they have a very different outlook on life and it’s a very, it’s, it’s, it’s been fascinating because I’ve been involved in looking at various frauds and so on and but very, very stressful.

STEPHEN CLAPHAM: Listen, thank you so much for, for, for doing this. I should have sort of said to you in advance and I just thought about it before we came on.

STEPHEN CLAPHAM: I should close with, some questions and I just wondered, do you have a favorite book or a favorite genre that, that you would recommend to people?

LUCY MACDONALD: Well, it was a very good one written last year by, someone I can’t remember but not money method. It was like that.

STEPHEN CLAPHAM: And if you were starting out in the industry, what books or practice or training, would you recommend to somebody that was, that was coming into the industry? Now?

LUCY MACDONALD: Is there, well, there are, I mean, there are a couple of books that I found really, really help. I think that the Daniel, can we talk about thinking, you know, fast and slow that the behavioral understanding how you yourself make a decision, how people make decisions and, and how, you know, a group of make decisions.

LUCY MACDONALD: I think that’s really important as an investor. So knowing yourself, but knowing the other people you’re working with and how, how you make those decisions, which we talked about quite a lot. I think that’s, I would definitely make sure that I really, you know, understood that what I found really useful as well was against the gods by Peter Bernstein.

LUCY MACDONALD: And that’s really the history of risk and, you know, humans and risk and for investing, you know, all it’s all about, you know, measuring assessing risk and that I found a really useful book. So I, I’d recommend that as well and he also sort of comes to the, you know, the, the conclusion that so people know what’s going to happen.

LUCY MACDONALD: But you, you have to be really think, you know, in scenarios about what’s about the future and, and try and weight those scenarios sensibly. And so I think that’s that’s useful as well. So those, those, those are sort of things that I would, I would point towards brilliant.

STEPHEN CLAPHAM: Well, that’s a fantastic recommendation. And thank you so much for coming on. It’s been a pleasure as ever talking to you and thank you for all that useful and good advice.

LUCY MACDONALD: Absolute pleasure.

STEPHEN CLAPHAM: I loved how Lucy ended up in finance playing a piano in a bar and the stockbrokers seemed to be having fun and I thought the lessons she drew from the Collapse of Bearings were spot on. I really enjoyed talking to her and I learned a lot and I hope you did too.

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