By Sean Peche of Ranmore Fund Management Limited
“If I switch from my Growth Fund to your Value Fund,” said a potential client the other day, “I’ll trigger Capital Gains Tax.”
“Well, CGT is going to get triggered eventually, so better at 20% than your 45% marginal rate when the next Government gets in,” I mumbled.
But that aside, let me tell you a story…
In the first year of my career, there was a little company growing like a weed in the South African sun – Macadams. It wasn’t tech. It wasn’t media. They manufactured large industrial ovens. Franchises were all the rage because sanctions meant none of the international franchisors could operate in SA, so we started our own O’Hagans Irish pub chain, Debonair Pizzas, Spur (sit down) burgers, Steers takeaways and don’t forget Nando’s peri-peri chicken – oh yes, Nando’s started in South Africa!
Pie shops were also popular because pies can be profitable – the quality of ingredients is hidden from sight, so you can boost the margins with more mushrooms and less chicken. More kidney, less “steak.” You could get heavy-handed on the gravy and the thick-cut pastry. And what’s the cost of a few peas and carrots? Pies use lots of electricity, but that was plentiful and cheap back then when “loadshedding” was the name for your diet after eating too many pies…
Of course, pie shops need ovens, so Macadams’ sales “rose” accordingly – tripling in four years with earnings per share growing seven-fold and then came new “growth drivers” – exports to China & pie shop expansion through Africa. Imaginations went wild – these new “avenues of growth” required a larger factory and extra columns in Excel (or was it Lotus123?) +30% p/a forever – had there been rocket emojis, they would have launched.
One of the employees at the company I worked for, owned shares in Macadams which he’d bought for pennies and his unrealised profits had risen faster than shortcrust pastry at 180 degrees. “Why don’t you sell?”, I asked. “Pies, sorry, share prices don’t rise forever” (I like to think), I said. “The factory is running at full capacity and getting new factories up to speed is easier in spreadsheets than reality.” “I will in six months” he replied, because by then I’ll have owned the share for five years and I won’t have to pay any Capital Gains Tax” (those were the rules back then).
But then the recession hit and the factory expansion stumbled and the new ERP system bugged and maybe people figured out that the pies were just peas, carrots, and the odd kidney, in lots of gravy. Because it was as though someone opened the share price door midway through a bake causing it to “flop” – 90% in 5 months – from R18.61 to R2.45 and along with it, ALL my colleague’s Capital Gains. Of course, he never had to pay any tax, but I’m sure he wished he had.
So maybe focus more on the 80% of the gains you get to keep than the 20% you have to pay.
Especially since it’s NOT ONLY your gains at risk but your Capital too.
Read more:
- Best of 2022: Insider Sean Peche exposes SA’s R320bn Balanced Funds ripoff – how Big Three unit trusts fleece savers
- After scoring an A for 2022, Sean Peche shares his 2023 investment “Surprises”
- ‘Lower the cost of capital and drive economic growth’ – Sean Peche Q&A
