The ultimate ‘conman’s plan’

SELLING TO MARKET

pessimism regarding our local situation may explain why local investors could relax their underwriting standards on offshore investments, empowering unscrupulous salespeople to create products which can be sold quickly and easily, with little regard to future investment prospects.

When Steinhoff’s listing was moved to Europe, Jooste effectively took full advantage of this inherent bias, with investors cheering him on. Of course, the fact that these same investors now want to sue the company for “misrepresentation” is somewhat ironic.

South Africa has also become one of the most heavily taxed countries in the world. Personal income tax rates top out at 45%, while corporates are taxed at a relatively high 28%. CGT is now in excess of 20%. Starting in 2017, dividends have been taxed at 20%. Even VAT was increased to 15%. South Africans increasingly view reducing their tax burden as a national sport. Equally, anyone promoting a tax efficient investment vehicle is likely to get a lot of support from the market. Steinhoff provided tax-efficient investing in spades, with its tax rate averaging around 15% for the 10 years from 2006.

1. Accountants, regulators and even fund managers are imposing increasingly Draconian rules and corporate governance standards. The alleged fraud didn’t happen because of a poor regulatory environment, but due to a strong appeal to incentives which caused people to suspend their disbelief. No amount of regulatory intervention will ever be able to eradicate incentive-caused bias.

2. As analysts, it pays to understand not only the numbers that represent the activities of a business, but also the human beings behind the companies. Who are they, what are their reputations, and what are their incentives? These soft issues are as important – if not more important – than the hard numbers.

3. Never ignore the outside view. Our tendency as humans is to favour the inside view. The inside view considers a problem by focusing on the specific situation and making predictions based on that narrow and unique set of inputs. The outside view asks if there are similar situations that provide a statistical basis for making a decision, and if so, what happened?

Piet Viljoen is executive chairman of RECM.