Ep501: Paul Smith – Figure Out Your Secret Sauce First

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Quick take

BIO: Paul Smith is an independent corporate director and private investor with significant experience in the Financial Services and Investment Funds industries. He served as President and global CEO of CFA Institute from 2015 to 2019.

STORY: Paul and his friends put in money to start a hedge fund seeding business in Hong Kong. The financial crisis hit just when they had received about 40% funding and had to pay back the investors who chose to get out. The partners had to close down the business and lost quite a substantial investment.

LEARNING: Have a unique business model that investors will want to back. Don’t have a highly concentrated shareholder base. Get your business to at least $3 million as fast as possible to survive.


“Don’t allow the excitement of a startup to cloud your judgment.”

Paul Smith


Guest profile

Paul Smith is an independent corporate director and private investor with significant experience in the Financial Services and Investment Funds industries. He served as President and global CEO of CFA Institute from 2015 to 2019.

He currently serves as a member of the Oversight, Policy, and Governance Committee of the Financial Reporting Council of Hong Kong. He is a Hong Kong Securities and Futures Commission’s Products Advisory Committee member. He is a founder of the Sustain Finance initiative and a trustee of the China Insight Foundation.

Worst investment ever

Paul made a substantial amount of money from the sale of a business he owned, and he decided to quit his job and go out on his own. He set up a hedge fund seeding business in Hong Kong that he and a couple of other individuals funded with their money. Paul invested seven figures into the business.

The plan was to set up the infrastructure behind a regulated asset management company, then go out and raise private equity-type investments to fund an investment vehicle. The investment vehicle would then, in turn, go out and seed investment managers. The partners raised money from a couple of institutions and some family and friends.

The fund got regulated, and they began to seed managers, mainly in Asia but scattered worldwide. The company was about 40% invested when the 2008 financial crisis hit. Their institutional partners pulled the rug from underneath them. They paid the institutional partners back and unwound the business. As partners, they took quite a hit when the company ended.

Lessons learned

  • When looking for investors, make sure you have a unique business model worth backing.
  • Your shareholder base shouldn’t be too concentrated.
  • Raise enough money for your business for it to survive.
  • Resilience is vital when running a business.

Andrew’s takeaways

  • If you can’t find any uniqueness in what you’re doing, then be good in execution, or work with someone unique.
  • You’ve got to get your business to between $3 to $5 million in revenue as fast as possible because that is how you’ll afford everything that makes you a professional company that can survive.
  • Sometimes the success of your business depends on your timing into the market.

Actionable advice

Don’t allow the excitement of a startup to blind you from implementing the lessons you’ve learned. Check your excitement and keep learning.

No. 1 goal for the next 12 months

Paul’s goal for the next 12 months is to try and get Sustain Finance more firmly established and get some corporate sponsors to help with that. He also wants to hire more researchers and significantly impact China’s asset management community.

Parting words


“Remain curious. Keep asking yourself why other people are different from you in a non-judgmental fashion.”

Paul Smith


Read full transcript

Andrew Stotz 00:02
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community. We know that to win in investing, you must take risks, but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives. To reduce your risk, go to my worst investment ever.com right now today and take the risk reduction assessment that I've created from the lessons I've learned from all my guests. It's time to start building wealth, the easy way by reducing risk by low risk takers. This is your worst podcast host Andrew Stotz, from a Stotz Academy, and I'm here with peecher featured guest, Paul Smith. Paul, are you ready to join the mission? I'm ready to rumble Andrew. Let's hit it. Let's do it. All right, let me introduce you to the audience. Paul Smith is an independent corporate director and private investor with significant experience in the financial services and investment funds industries. He served as president and global CEO of CFA Institute from 2015 to 2019. He currently serves as a member of the oversight Policy and Governance Committee of the financial reporting Council of Hong Kong and is a member of the Hong Kong Securities and Futures Commission's product Advisory Committee. He is also a founder of the sustain Finance Initiative, and a trustee of China insight foundation. Paul, take a minute and tell us what is your unique value you bring to the world?

Paul Smith 01:35
Well, I think unique is a bit strong, but I'll try and do the second half of that question. I think my strength, if you like is that I've been fortunate enough to work on three continents. Born and raised in Europe in Britain, and spent my early career there, I've worked half a dozen years in the United States and 20 odd years here when I'm talking to you from my home in Hong Kong. So I think that's basically my strength that I bring to any conversation is that breadth of experience and knowledge about the way the world works. So visited over 110 countries worldwide for as a professional not as a tourist as, as a working stiff. So I think that all brings a certain breadth.

Andrew Stotz 02:29
Yeah, I mean, I was looking at a picture of CFA society, Nigeria and seem to recall that you were there.

Paul Smith 02:36
Very much. So. I think three separate occasions love Nigeria and I love Nigerians, they have a really bum rap. In the world. They're some of the nicest most committed moral people I've ever met. But like in a lot of countries, there's an element that is not so savory. But that's the one that tends to grab the headlines. And we live in a world where the negatives are always accentuated, and the positives are ignored. That's their challenge.

Andrew Stotz 03:09
Yeah, well, yeah, teaching in Thailand, I remember telling my students like, I don't understand you guys are smart, you're really sincere, you're honest, you know, and all that and then look at what happens to you when you grow up and become a politician. And we were joking around about that. But yeah,

Paul Smith 03:25
for all countries, that's a global phenomenon.

Andrew Stotz 03:29
Exactly. And unfortunately, America is leading the way in some ways. On the negative side of that, I wanted to ask you a question about being CFA CEO and your experiences president and CEO of CFA, like, what would be kind of your biggest takeaways? And I'll just, I'll frame that by saying I was president of CFA society, Thailand during that your tenure, and I'm going to give some of my kind of perspective of what I saw, but I'm curious like, what did you take away from that? What advice would you give or what lessons did you learn from that?

Paul Smith 04:01
I think that the world's not flat you know, we we live in a very connected global society, but it's very what words mean in one country means something different in another country mean something different in the third country and you take something like you know the Hot Topic ESG for instance, and forget the E but look at the s of ESG activities like gender equality, things of that nature, they mean something very different in Thailand to India to Scandinavia to North America. And so the biggest takeaway is you know, check your prejudice at the door if you like your assumptions, prejudice is the wrong word. Check your your pre assumptions at the door. Go look for yourself. Be curious. Ask the question. Why is it different here in a non judgmental fashion? The problem for most of us is that when we see difference, we rush to judgment. And I think what the CFA taught me more than anything else, is there's always a good reason why something doesn't work in another country. And you should stop. And ask yourself that question, like democracy, for instance, and something, you know, if I can, if I can have a poker Uncle Sam, you know, in the, in the great project of exporting democracy around the world, the challenges, that means different things in different countries, and the Chinese, for instance, are reminding us of that presence. And we would do well, rather than just say they're wrong, is to stop and say, Well, why do they think that let's walk a mile in their shoes and try and figure out what it is and their history, their societal makeup, but that makes them interpret that in a different fashion. And I think that's what the CFA did for me more than anything, I think I had that foundation. But I think the CFA really made me understand that there is a reason for difference. And often, it's a damn good reason. And you would do well, to try and figure it out.

Andrew Stotz 06:17
That's a great message, you know, for the listeners out there, too, because for many people, when you, when you rise to a higher level and a higher position in an organization, you're oftentimes just org managing that organization in one country. Whereas what you walked into was, how many societies are there now and, you know, around the

Paul Smith 06:40
world, 70, something like that, something like that.

Andrew Stotz 06:43
And, societies are also filled with volunteers. And so it's even more like, you've got to, you know, so that that kind of brings me to the next thing, I maybe I'll just give some observations as a as a CFA Society president, when you kind of came along on the scene, there was a couple of things that I would say, I learned by observing. And I think for the listeners out there, these are some lessons from, from my perspective, and that is, first of all, you came with a plan. You know, and, obviously, you had worked hard to develop a plan of where, what direction to go, you didn't just come, hey, let's press the flesh and all that you had a plan, you had a mission that you were communicating at the time. And I think that that was the first thing that I really took away. Whereas you can get a lot of corporate leaders or leaders of organizations that come out, and it's kind of fluffy. But I think you had a real clear plan, part of that plan was to decentralize and get more power and more energy, energize the societies. The second, the second thing is that you were accessible. So for all of not only the leaders of societies, but also members, you were always willing to listen, or you made yourself appear as though you're accessible. And I think that not only was that appearance, you know, an appearance, but also you prove that to be true. And then I think the third thing is that you supported society leaders. And that was something I saw on the society side, because when you come with a plan, you're also coming with risk. And saying, Okay, here's what we want to do and better at it. And in order for other people to implement that we kind of got to know that, hey, this is well thought through, and someone's got their, you know, our back. So those are kind of the three observations that I have, as a CFA Society president at the time. Is there anything that you would comment on that?

Paul Smith 08:34
Well, firstly, thank you. I mean, those if there were three things I'd like to be known for it would be those three. So I'm glad. I'm glad that was your, your takeaway? I guess. Yeah. I mean, you know, the only comment I would have on that is that I think the leaders that we all struggle with are the ones who don't expose themselves, if you like, I mean, I always a stupid thing. But my first love is history. And the thing that I'm most admired, I love the First World War. That's my sort of favorite topic, if you like. And all of those young men, usually typically 19 to 21, who were lieutenants in whichever army it happened to be, who led their men over the top. And what they did is they went first, and they were the highest. I mean, everyone always thinks about the private soldier, the common soldier as being the one who carried most of the burden. Of course they did, but the class with the highest mortality rate was the lieutenants, the officers, because they went first. That was their job. And I've always thought that that's, that's the essence of a leader, is that you? Your job is to do the things that no one else wants to do, and to lead from the front and I Personally, leaving the CFA is not akin to charging a machine gun nest. And I don't mean to suggest that it is in terms of the courage that it takes. But I think the lesson is the same is that if you're not prepared to do it yourself, if you are not prepared to do the dirty work, the hard work, then that roll is not for you. And always, always be out in front of your troops.

Andrew Stotz 10:24
Lieutenant goes first. Alright, exciting. Well, now it's time to share your worst investment ever. And since no one goes into their worst investment thing it will be. Tell us a little bit about the circumstances leading up to it, then tell us your story.

Paul Smith 10:39
Thank you, Andrew. Well, you know, I guess it's a private equity story. When I was very lucky, and towards the latter end of my career, I guess I was already how old would I have been, I've been about 4748 years of age, when I made enough money in a previous career from the sale of a business to decide to go out on my own and do my own thing. So slightly late in life, and I set up a hedge fund ceding business in Hong Kong called Triple A partners, that myself and a couple of other individuals funded with our own money, a seven figure sovereign in my case, and so a significant investment to try and set up the infrastructure behind a regulated asset management company, we would then go out and raise private equity type investments to fund a, an investment vehicle that would then in turn go out and seed investment managers. And this was the beginning of 2007. So we raised a bunch of money from a couple of institutions who had by far the biggest piece of that investment fund, and some family fools and friends, basically. And out, we went into the marketplace got ourselves regulated. And we began to seed vehicles with sort of 20 million lots, basically, managers, mostly in Asia, but scattered all over the world. We probably got about 40% invested when the 2008 financial crisis hit. So timing was not of the essence. And our institutional partners pulled the rug from underneath us. We paid them back. They didn't get 170 cents on the dollar, but I think 75 to 80. And unwound that business. As partners, obviously, we took a bit of a hit. In fact, quite a lot of the hit and I bought out my remaining partners staggered on for a couple of years turning that business into a sales business effectively. And in the end was able to exit reasonably great gracefully by selling the licenses to an incoming Chinese business, in fact, who wanted a platform in Hong Kong. So in the end, I escaped relatively whole of the six years of not earning anything, having a great deal of stress, losing a little bit of capital, at times a lot of capital, and really learning a huge amount about myself and about the people around me. But in the end got out of that and joined the CFA

Andrew Stotz 13:31
tell me like my scoring, that's got some questions on it. I mean, the first question is like, Can you remember any particular day when you woke up or ended the day or that you just kind of like realize this isn't gonna work? Or that the hardest what was the hardest day?

Paul Smith 13:49
The hardest day was when institutional investors, we found that they had been talking behind our back effectively to each other, we had two big institutions, which was one of the challenges they owned about 80% of the underlying investment fund, that they had got together and decided to pull the rug, and that there was absolutely nothing we could do about it when that conversation was communicated to us the feeling of powerlessness, of being unable to control your own fate. To sort of, you know, shaking your fists at the gods above, but realizing that there was absolutely nothing you could do, and that that sense of failure. And impotency was really deeply distressing and frustrating at the time.

Andrew Stotz 14:39
Yeah. So how would you describe the lessons that you learn from this experience?

Paul Smith 14:44
Why do they I think they're all sorts of technical ones, but also personal ones. Really, I mean, the personal lessons to begin with there were really that I was too old to be an entrepreneur. And that's a personal issue. I'm not saying that. You know, when you're 40 He's 70 years of age, it's too late to begin. But I'd spent 40 years 47 years in an institution effectively, and I was a bit institutionalized. And I found that I didn't have the I wasn't the energy levels because I'm a reasonably high energy guy, but I didn't have the single minded focus that you need to develop a business. And, and that at times, I think can leak into ruthlessness. You know, and I think those are for me, those perhaps were characteristics that I had when I was 25. But by the time I was 47, I'm a little bit fat and happy. I sort of I didn't have the ruthlessness that would have enabled me to push back against my partners, to be tougher with staff to really be there to have that singularity of focus that I think as an entrepreneur, you need. And so that was the personal lesson. Technically, I think the challenge for our business was that we were taking on the big boys really, in terms of finance, but we weren't enough of a disrupter, you know, we didn't have we didn't, there was not enough unique about our business model, to make us worth saving, and to make us work worth backing. So I think in retrospect, that was a problem with the very concept of what we were trying to do. If you're going to take on the big boys, you want to have a secret sauce that they are going to want to buy from you and want to emulate basically, we didn't have enough of that. So crushing us was the easiest thing to do. It wasn't enough, that was unique in our model. Our shareholder base was too concentrated. That was another issue, we should have thought through that a bit more timing, obviously, it was appalling. If you start a business, you don't need a little bit of luck. And we didn't have any, we didn't raise enough money for the fund, frankly, and we should have gone ahead, we raised about 120 bucks when our target was 250. And, you know, there was a reason the target was 250. And that was what we needed, really to hire the right people to have the right approach to have the right market impact. But we only got 50% of the way there, and we shouldn't have done it as a result of that. So I think those were the main lessons. And I think, I think the personal growth that came out of it was really something that I've always tried to live by, which is never blame other people for things for the mess that you get yourself into. And then you know what, you know, there are lots of variables in life, as I said earlier on things that you can't control, things that people do to you that you might feel were inappropriate, and Ill deserved. But the reality is, you should always say, Well, I can only fix the things that I did. I can't fix the things that other people have done. And you need to take these experiences, you need to internalize them and say, Well, what was it about me that made this venture fail? And let's make sure I correct that going forward. And so I think I took an enormous amount away from the experience in that regard that I really did ask myself some hard questions about, you know, who I am, what I really enjoy doing. And one of the answers was what I really enjoy doing is taking something that is kind of working, and trying to reshape it and focus it and drive it. And that's why I loved my time at the CFA is because I had a platform that was kind of working, but could be a lot better. And that I realized, from my prior career before I joined the CFA, that was really my strength, not starting something de novo. But taking something that's gone slightly awry, and fixing it, basically,

Andrew Stotz 19:02
so many great lessons from that. I mean, maybe I'll just share a couple thoughts. First of all, timing, you know, was the thing that made me think and for the listeners that know, know my story, we set up our coffee factory Dale and myself here in Thailand, in 1995 started our sales in 1996. And we're really looking for an amazing 1997 Until Thai baht crashed. And within months, we were living in the factory, I'd lost my job working at a broker, and we were living in one room in a factory thinking what the hell that we get ourselves into? And in that sense, I like to say that as a wiser man now, I know timing is so critical, and I wouldn't have done it. But you know, I just think that sometimes there's just a timing element that just gonna come. Yeah, it's just like randomness. You know, that just random things do happen. There is a timing element that just you know, you can't

Paul Smith 19:57
I agree with that. I think I think that kind It goes back to the young man thing as well as a young person thing. You know, resilience is key. You know, you clearly had it. I had it in some aspects but not for the business. baseflow wasn't resilient in

Andrew Stotz 20:13
the light raid a bunk up in the in one room with your best friend. Well, hey, for six months, we're going to be here, burning it out in the jungles of Thailand. And the second one, I read a great book called Your One Word, by Evan Carmichael. I think it's very good book. And my one word came down to relentless. And I think that you use the word ruthlessness, but also, you know, it's it's a lot of ruthlessness has this connotation. Like, you've got to be breaking the rules and the laws. But there's that relentlessness that, you know, if you don't? If you don't have it, do not start a business because it is going to require you to be relentless. Yeah, no, great, great work. Yeah, I think the second or the third point was that in marketing, we always talk about what's your USP, your unique selling proposition? And if you ask anybody that they'll tell you a list of five things, wait a minute, let's just look up the unique in the dictionary, and it says something only you can do. Okay, so criss cross that out, cross. Okay, so. And I think that this is one of the biggest challenges for all the listeners out there, when you're thinking about your own business, about your own career about yourself about what you're doing, you know, first of all, what is your uniqueness? Now, everybody has a unique story, their uniqueness that they bring, but you know, some people's strength is not uniqueness, some people strength is execution. And that's their uniqueness. But you know, in here, I think what you kind of exposed in yourself is that you're not going to be the one that's going to develop the next software, that's going to make fun management, the most efficient thing or, you know, or some other amazing thing. So if you find that you just can't find that uniqueness in what you're doing. It's either going to be execution, or work with some, someone or something that is unique. And that's my third takeaway. And I have one more. And that is, I always tell people, when they start a business, you've got to have a race to between three to $5 million in revenue, you have got to get there super fast. Because what you explained was we needed to get to 250 million because we needed the people, you've got to get to to a site three to $5 million in revenue as fast as possible, because that is how that is where you can start to afford to have a proper management team to buy the information systems that you need inside the company, the accounting systems, the marketing budget, all of the things that make you a professional company that can survive, are not able to be done at you know, $1 million, or half a million dollars, you will not survive at that point. You'll exhaust yourself. So timing, relentlessness, USP and three to $5 million in revenue. It's a race to that for a startup. Anything you would add?

Paul Smith 22:50
No, I think that's a great summary. Andrew, you could have been there.

Andrew Stotz 22:54
Yeah. I mean, I I know the feeling. I know the feeling. It's as my business partner, Dale who's felt a lot of the pain related to our coffee business, particularly, you know, with all the lockdowns and stopping tourism and all that we've had our revenue crushed, at some months as much as 80% down. And one day, we were out at a restaurant eating and there was this family nearby, and they had a little kid. And the kids started screaming and crying. And Dale looked over the kitty says, I know you're feeling so yes, exactly. I feel your pain. So let me let me say this. So based upon what you have learned from this experience, and what you continue to learn, what's one action that you'd recommend our listeners take to avoid suffering the same fate?

Paul Smith 23:43
Um, that's a great question. Very difficult question I met but I think I think it's don't allow the excitement of a startup. And you know, that, that, that that sense of, you're finally in control of your own destiny and you to, to blind you to the sorts of lessons that you've just taught, basically, you know, the race to free 5 million, which I think is absolutely spot on, you know, have you really got something that is unique, that is going to enable you to get to that three to five. So it's taking a breath before you actually launch to check your excitement in and to say, right, let's calm and maybe you need to do that through third party, maybe you need a wise person who you rely on just to look at what you've built, and say before you pull the trigger, just a moment of reflection. And I'm not sure even had I had that I would necessarily have listened because I think there is you know the awful entrepreneur momentum really that you're just going to roll the dice, come whatever, and hope that Lady Luck is going to bail you out of that mess that you're about to get into. And that's just Just very stupid.

Andrew Stotz 25:02
It reminds me of Michael Gerber his great book, the E Myth, he talks about the entrepreneurial seizure. Right? You just can't You can't get someone out of it. But yes, ladies and gentlemen, you're standing on the at that moment, you know, take time to go back and ask someone to give you some feedback. I think that's super great advice. And listen.

Paul Smith 25:22
Yeah, that's the hardest part. I think that's the challenge when you're trying to be an entrepreneur is that you're so sort of self absorbed, self obsessed, perhaps. So committed to your idea, but listening to someone who's telling you want it can't be done? Is it goes against everything that we're wired to, sort of do, really.

Andrew Stotz 25:45
So what is a resource that you'd recommend for our listeners?

Paul Smith 25:51
Um, I get a sort of flub that question by saying that the resources really breadth of reading, I think the challenge for I'm an arts major. And one of the things I always got asked when I was at the CFA, which is, you know, as the investment world has become a very technically driven discipline, where, you know, when I came into it in 1984, before most people were born, you know, it was full of arts majors, there was no there was because we didn't have computers, we just made it up as we went along. One of the worst for it, really, in those glorious days, and I think the thing that it certainly if you're going to be an entrepreneur, is breadth of vision. And you can't get that by just reading self help books, business books, a, you know, the Financial Times and The Economist, or The Wall Street Journal, you have to read literature, you have to read history, you have to have an interest, you have to have curiosity, and everything goes around you. So I always hate it when people say to me recommend one book to me, because my answer to that is, if you think that all of the world's wisdom is in one book, then boy, are you in for a shock. Because the world doesn't work like that. It's a very complicated place. And to truly understand it, is more than one Lifetime's work.

Andrew Stotz 27:30
Yeah, maybe the recommendation should be the encyclopedia. Well, volumes

Paul Smith 27:34
on Wikipedia in today's world.

Andrew Stotz 27:38
Yeah. I have 50 books on the US Civil War that I've read that on the top of my shelf, absolutely. It's always learning something so much I learned about strategy. And a lot of you know, that Lieutenant goes first type of thing. So fantastic. All right, what's your number one goal for the next 12 months?

Paul Smith 27:56
Well, my number one is sustained finance. That's the probono activity. It's a think tank foundation that I started a couple of years ago, www dot sustained finance.org where we are trying to talk and write about issues that pertain to asset management and asset ownership, and the sustainability conversation in all its myriad glory. So we write we research, we hold events around that. And my number one goal around that is to try and get it more firmly established, I need some corporate sponsors to help with that to hire some more researchers and have a bigger impact with acid with the asset management community in China discuss some of the pros and cons behind the sustainability conversation. Because in my view, regulators are kind of looking to the finance world to solve this problem, which is actually unfair. In that it's, it has to be a combination of all elements of society, regulators, finance professionals, society in its broadest sense to resolve and so trying to try and talk about some of those issues and to move that conversation forward. So that's my number one goal for

Andrew Stotz 29:16
Well, I'm on the website right now sustained finance.org. And ladies and gentlemen, I have a link to that in the show notes. So you can go and check it out. And for anybody out there that wants to become a corporate sponsor, there is an opportunity. Alright listeners, there you have it another story of loss to keep you winning. If you haven't yet taken the risk reduction assessment, I challenge you to go to my worst investment ever.com Right now, and start building wealth the easy way by reducing risk. As we conclude, Paul, I want to thank you again for joining our mission. On behalf of a Stotz Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Paul Smith 29:55
Curiosity, stay curious. And I know it's hard in a coma in a COVID traveled world, but go out and see for yourself. Always, always, always go kick the tires. remain curious. Keep asking yourself why other people are different to you in a non judgmental fashion.

Andrew Stotz 30:17
Beautiful advice and that's a wrap on another great story to help us create, grow and protect our wealth. Remember, ladies and gentlemen, I'm on a mission to help 100 million Well, why don't I just increase it 1 million? Let's call it 100 million. 1 million people reduce risk in their lives fellow risk takers this is your worst podcast host as I just displayed Andrew Stotz saying I'll see you on the upside.


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About the show & host, Andrew Stotz

Welcome to My Worst Investment Ever podcast hosted by Your Worst Podcast Host, Andrew Stotz, where you will hear stories of loss to keep you winning. In our community, we know that to win in investing you must take the risk, but to win big, you’ve got to reduce it.

Your Worst Podcast Host, Andrew Stotz, Ph.D., CFA, is also the CEO of A. Stotz Investment Research and A. Stotz Academy, which helps people create, grow, measure, and protect their wealth.

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