May was a particularly exciting month for the Biznews Global Portfolio. The portfolio has not only delivered 31% annualised growth since its inception in December 2014 but there was a change in the stock mix. The two biggest drivers of this growth, the portfolio’s two runaway stocks are Amazon and Google, lead by the great minds of Jeff Bezos, Larry Page and Sergey Brin. But IBM has been a laggard, and after Berkshire Hathaway chairman Warren Buffett cut his holding by one third, Biznews decided to follow his lead, but sold off the entire stake. The other exciting news is the portfolio has a new edition, our new China. Tencent has been added to the portfolio, most South Africans who hold Naspers would be very familiar with the name. But to get more insight behind these decisions, the audio has been fully transcribed below. – Stuart Lowman
Alec Hogg: Right and let’s get into it because we have quite a lot to talk about today, first of all, goodbye IBM. Why goodbye IBM? Well, I’ve been singing their praises or trying to anyway ever since we bought the stock in December 2014 at $160. It briefly went into profit, and then took a terrible dive down (as you can see on this chart) in March 2016. It was down by 25% on what we bought it at. Then it recovered and all seemed to be well and then Warren Buffett has just gone and put a pin in it. Buffett has been buying these shares since 2011. He has liked the idea of IBM. It was the very first tech stock that he bought and his feeling was that they were going to be successful in converting from the old IBM to the new one.
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He seems to have changed his mind. At the Berkshire Hathaway Annual General Meeting he dropped a bomb on the rest of us. In fact, a couple of days before the AGM, he said he had sold one third of his IBM holding. Remember, he bought in at $170 and that was back in 2011. He says he hasn’t lost money on it. He got out at around $170 and the one good thing about IBM is that it is a nice dividend payer. So, from our perspective, today pulled the trigger on IBM and sold it out following Buffett. Why? Well, it’s not that I slavishly believe everything he says, but I can assure you that when Buffett makes a decision to sell one of his top five holdings, he will have done his homework and he wouldn’t necessarily have shared all the reasons with us.
He’d have gone through, he would have had a look at it, he’d have got a good insight into it, and he would know a lot that the rest of us are very unlikely to pick up. He has, however, gone very big into Apple. It’s now his second biggest shareholding and apparently, he’s still buying the stock, so very happy that we can stick around with him on Apple. In fact, we got in earlier than him and probably had a better share price than he bought in at, but the fact is IBM is now out of his portfolio, so goodbye IBM in our portfolio as well. Clearly, that frees up around 7% of what’s in the portfolio (quite a lot of cash for us) and we’ve made a decision today.
Those of you who are fastidious readers of my daily Worldview on the BizNews Premium will have seen that we spoke about Lloyds Bank earlier in the month. We haven’t yet made a decision on Lloyds Bank. I’m still looking through it. I do think that at the current price of the Rand against the Pound, it’s probably, even if it’s just hold steady, it’ll be a very good bet. I do like that fact that it’s trading at book value. I also love the fact that Lloyds has repaid all of its debt that it borrowed from the government. It brought back all of the outstanding debt there. So, it’s now a 100% government-free business after the disaster that it and many other banks hit during 2008, but I’m still not sure yet if that’s the right place to put our money, but what I am sure of, is that this is the right place to bring into the portfolio.
We’re going to be allocating 8% of the portfolio to our new China. The gentleman in the picture there should be well-known to South Africans, given that he has made a massive contribution to the wealth building of South Africans over the last five or so years. His name is Mr Huateng Ma, or better known as Pony Ma. He is the Chief Executive and founder of Tencent. Tencent is the company owned, or the biggest shareholder in Tencent is Naspers. Naspers’ share price is only at about 80% of the value of its Tencent shares. So, buying Naspers is a cheap way into Tencent. The problem with investment holding companies like this, and that seems to be what Naspers has become, sure we can have a look at all of its other assets, but judged next to Tencent, they really are small. Investment holding companies tend to always trade at a discount.
On the other hand, why do we like Tencent? Well, I wish we’d bought the shares when Naspers did. That of course was impossible because that was back in the early naughties. We also wish we’d bought the shares pretty much any time up until now. Earlier in the year, as you can see from this graph, the shares were trading around $170 Hong Kong Dollars that is. We finally pulled the trigger today and we’ve bought in, as you’ll see in a moment, at $265, which is where the shares are trading this morning. The code for Tencent is interesting. It’s 700:HK. The Hong Kong market do make codes a little different or hold their codes a little different, but you put that into Google and it’ll bring you the latest share price.
You can also see that Tencent has improved in its price in the last month quite nicely as well, but I’m still of the opinion (let’s just go back to that) that Tencent is still offering unbelievable value. The reason for this is that judged against the United States equivalents, Tencent is trading at good value. Let me just tell you a little more about this company. Even though Naspers does have a big share and many South Africans will know about it, the reason why Tencent has so many fans in China is because and you have to kind of pause and listen to this, it has 938-million active people on WeChat. I’d just think about that for a minute. In the United States there are what, 300-million people in total, maybe say 220-million economically active if you want to really stretch the point.
So, there are 938-million people in China who use the WeChat app actively and what is so big about this is that if you have a cell phone in China, you don’t, as we do everywhere else in the world, if you have an Apple, you go and buy another Apple cell phone because you have all the apps there, you have the operating system, you work of IOS or if you have a Samsung phone you’ll work of their operating system, which is Android and so on and that makes Android, which is Google and IOS, which is Apple pretty powerful because most people, when you sell and Apple iPhone, you tend to buy another Apple iPhone. In fact, all over the world, outside of China, the case is that if you trade in your phone or upgrade one Apple for another, that the chances are, that you have an 80% chance of buying another Apple. The reason for that is you want to stick within the environment.
That makes Apple extremely powerful. In China, there is only 50% chance that you’re going to buy another iPhone and that’s a huge difference. The reason for that, is Tencent, or WeChat, which is an App which everybody uses and WeChat works exactly the same on Apple phones as it does on Android phones and essentially you’re in that universe. So, if you’ve listened over the past few months to the reasons why I really like Apple, because of the ecosystem, because once you’re in the Apple system, you tend to buy another Apple computer, another Apple phone, another Apple iPad. You use Apple iTunes and so on, you use the App Store.
It’s a similar thing in China, but of course, China has a far bigger population and China’s GDP per capita growth which is only about $8000.00 at the moment, is heading towards $15 000.00. Of course it has to get a whole lot further to get to anywhere near the United States and if you have that market sewn up, well, when I was growing up as a young boy, I remember entrepreneurs at that stage saying, “All you needed to do was to invent something that one person in China will buy once”. Well, Tencent has something that people in China are buying lots and lots of. The results all right earlier, in fact, on the 20th, which is the end of last week and that was for the most recent three-month period and the revenues at Tencent are growing 55% year-on-year.
You have to get your head around these things, these numbers, this exponentiality, $938-million people using WeChat, the revenue’s up 55% a year and it’s almost like they have all of these dials that they can just start plugging into. When you have such a big user base, you can be incredibly aggressive in your pricing and still make pots of money. They make most of their money at the moment through mobile gaming. The revenues there were up 57%, but they’re moving into new areas, they’re moving into the cloud. Remember, that’s where Amazon is making a lot of its money, the revenues from the cloud and from online payments, at 225% up year-on-year. If you go into a store in China and you, well certainly in the cities and you want to buy something, you use your phone to buy it. You don’t use a credit card as we do in most of the other parts of the world.
China is ahead in many things and Tencent has made it possible. The PE ratio worries a lot of people. Price to earnings looking ahead is sitting at 37 times, but when you have an exponential company, 37 times very quickly doesn’t look that clever and if you think the average of, when you’re worrying about a bubble, the average PE ratio in the bubble before Nasdaq collapsed in 2000, was 50, the average for PE ratios. So, if you’re worried that Tencent is in a bubble right now, then you are assuming that the past history is not going to be replicated here. I’m very excited about this one. I’m terribly sorry that we’ve only got into it now. It was like with Facebook, I was watching it and watching it and watching it and not being able to find it at a cheap level and like with Facebook, the decision has to be just bite your lip, invest, and away you go and that’s what we’ve done.
So, we’ve bought into Tencent today and I’m terribly excited about the opportunities there. Particularly when you read through the latest quarterly results and where they’re going into. They’ve just started their own content development of these games. Its own title, this first title has actually gone to number one in the charts, so instead in the past when they make a lot of their money out of mobile gaming or not gambling, but games, now they’re making their own games as well, so there’s that. So, that eliminates the licence fee there and their second game went to number five in the charts after only two days. So, clearly Pony Ma, who has been rated as the greatest entrepreneur alongside Jack Ma (no relation) in China for quite some time, he’s the kind of jockey that you’d certainly like to put a bet on. By the same token, if you own Naspers in a South African context, you’re in very, very good company.
So, given that Naspers is essentially just a proxy for Tencent. So, we’re in Tencent, that’s our new investment. We bought the shares there. Sorry, $276, so it’s a little higher than when the results were released which was at $265, converted at US Dollar 7.78, you can see the fee there. Why are we only putting $7,000 into Tencent today? Because what we do in this portfolio, is we stagger our purchases over three months. That is an attempt to eliminate the price differences. We’ve done it very successfully in the past. The idea is, try and identify a stock that you would hold forever and then when you do buy that stock, buy it over a period of time that will eliminate the price that you might get it on a bad day, of course you could get it on a very cheap day, but I guess those are the risks that you take.
In my view, when you’re buying shares, try and stagger your purchases over three months and in this case, we’ve done our first one third of the purchase there, around 3% of the portfolio has now been invested into Tencent. We’ll buy another 3% in a month’s time and the final 3%, the month thereafter. You can see the sale of the IBM shares; we got back $15 000.00 for that. It hasn’t been great. We paid $16 000.00. We’ve had some nice dividends, which has offset most of the loss and it’s not really a great loss at $7.00 a share, but at the end of the day, it has had an opportunity cost, particularly when you have a look at the other constituents of the portfolio.
There’s the portfolio overall. As you can see, top holding there is the S&P 500 Index in Vanguard that has had a gain since the inception of the portfolio of 17%. Now, what we try to do here was two-fold. We took a view that the Rand was going to be weaker. We’ve been correct in that assumption and we also took a view that we could stock pick our way to some shares that would do better than the index overall and in most cases we’ve been successful in that quest. Berkshire has been the only laggard over this period. As you can see, we bought it on the 5th of December 2014, it’s underperformed the S&P Index, Berkshire up 10%. This, by the way, is all in US Dollar terms that we’re looking at right now.
We’ve done very well out of Tesla, only bought in October. Again, after staggering it over three months we managed to get in there at just under $200 a share, it’s now over $300.00 and nice to see in this period, in the last month, Metro Bank starting to come into its own. That is the UK equivalent of Capitec. South Africans will know Capitec Bank. It was in fact, recommended to me to go and do some research into this one by the Chief Executive of Capitec when I asked him why they aren’t coming into the UK market, he said “Well, Metro Bank already exists”. After looking at it, it is the kind of bank that, if you look at the Capitec performance, Metro Bank is perhaps headed in the same direction. There’s a lot to like about it and as we’ve said many times in the past, that is a share that we’ll be holding for a long time.
However, the real performance in this past month in particular were once again, Amazon and Alphabet and you can see a staggering growth by both of those stocks now since we bought them initially. In the last month, Amazon’s gone from $907 a share to $980 a share. When you own 50 of them, it’s a lot of cash you’re adding to your portfolio’s value and Alphabet has gone, in the last month, from $872 to $950 a share. So, both of those now heading for $1000 a share and both of those are amongst the top five or they’re amongst the top five market cap companies in the United States given their recent performance, but the overall portfolio there, we started with $200 000, we’re now at $289 000 in 29 months, which gives you annualised return on the portfolio of 31%.
The longer the portfolio continues, of course, or the older it gets, the more difficult it gets to achieve that annualised return of 31% or an annualised return approaching that kind of number. In this past month we saw a strong appreciation in the Rand. As you can see there, the Rand/Dollar has gone from R13.13 to R12.87 and against the Pound, a very slight improvement there from R16.79 to R16.72. It’s been terribly volatile in between. In fact, if we’d done this portfolio analysis only last week you would have had a very different picture, but in Rand terms, 31% annualised growth, very happy with that and you can see the profit since the inception is 74%. This is a long-term portfolio, so you will notice, those of you who’ve only just come in to the portfolio or only just started buying into it or replicating it, what tends to happen with the shares that I select is that I’m always early.
It was different with Tesla, that’s been a welcome difference and we’ll see what happens with Tencent, but it tends usually, when you do your research, you take your time, you spread your purchase over three months, and you almost know that the shares are going to go down for a period of time before they start moving upwards. I was hoping that would be the case with IBM. Indeed it was. At one point IBM was showing us quite a nice profit, but given what Warren Buffett thinks of it, best to move out of that one. As far as the rest of them are concerned, they’re all coming to the party now in quite a nice way, but given that Apple, for instance, we bought at $124, it’s taken us a while to put that 28% profit in Rand onto the boards on that one.
Moving onto the individual stock performances and you can see there that the Rand, of that 74% has only given us 14% of it, so most of the appreciation in this portfolio has come from the rise in the stocks themselves, Amazon shooting the lights out since December 2014 when we bought in there, an incredible run and part of the secret of investing in shares is to select your stocks and hold onto them, don’t be impatient, don’t take profits. That’s the silliest thing in the world that some stock broker somewhere invented. I know Standard Bank actually go along with me on this one and say they want to see their clients getting richer by investing in shares and holding onto them for the long-term because then they continue to have a good experience and they’ll continue to save through this vehicle. Alphabet has more than doubled now since 2014 and those are incredible performances.
Tesla’s done terribly well. Even Elon Musk is shaking his head at it, saying he can’t believe that his company is worth more than General Motors and General Motors, by the way makes one tenth of all cars produced in the world and Tesla of course makes only 100 000 cars at the moment, but I’m not that surprised people are looking into the future and Tesla’s one of those exponential companies and we have a lot of those in the portfolio. The only two holdings that would not qualify in that regard would be Vanguard, which is an index tracker that gives us a bit of stability on that one.
Berkshire Hathaway, Warren Buffett’s company, that has been an underperformer as you can see relative to the rest of the portfolio, but it’s a nice solid base and if what happens in the future, we find another Metro Bank or another Tencent, that we do our homework on and decide to invest in, then clearly we would be first of all, reducing the shares in Vanguard and then reducing the shares in Berkshire, but as you know, we also have a little bit of cash to play with too, so I’m actively looking.
Moving at the profit since purchase, you can see there that Amazon.com and Alphabet are screaming ahead, but what is interesting, at the Rand/Dollar level, even Berkshire is outperforming since we purchased or first started off there. I wouldn’t be too hard on Metro Bank and Facebook because they haven’t been in the portfolio very long.
Moving onto dividend receipts, a couple of dividends paid in this past month, as we’ve just sold the IBM shares today, we did receive that $1.50 dividend payment and I think shareholders would be quite happy, those who decide to stay with IBM, that it is a good, strong dividend payer, dividends there paid quarterly. We also got a dividend from Apple, which is up as you can see in the last two years, 52 cents dividend to 57 cents and now to 63 cents for the year ahead.
Stuart Lowman: A couple of questions. Johan Myburgh just wants to know, on the IBM decision, did Buffett give a specific reason as to why he cut back the holding?
He just said it had underperformed what he anticipated and a number of occasions in the AGM, referred to his mistake with IBM. He also said that he expects to be one from two, from his tech bets and he was singing the praises of Apple, so he’s written it off as a bad decision or as a decision that didn’t go the way he anticipated and for me, that’s good enough. He didn’t go into great details and to say he was concerned that they weren’t able to transfer their old legacy business into the new area in the way that they’d anticipated. When you have a look at the numbers, they all seem to suggest that things are going in the right direction, but I worry when someone like Buffett loses confidence because he’s a long-term investor. He knows something we don’t know, that’s good enough for me.
Thanks Alec, a question from Roy. He asks, “With regards to Worldview this morning, you spoke of the possibilities of Glencore with regards to the future of electric cars, is this something you’ll be looking at as a possible purchase going forward?
Yes, definitely, not in this portfolio though. Glencore is a…I need to do more work on it, but from what I see there, as an opportunity in the electric car scenario, it certainly, because you can buy it through the JSE, it doesn’t make sense when you are investing in the global portfolio, to be buying a JSE listed share, for instance, and the same reason why we’ve now bought Tencent and not Naspers. If we bought Naspers, then you’re just using your hard currency and you’re also buying or selecting out of 400 shares, whereas internationally, there are many thousands of shares, so I’d rather keep powder dry and where you have to buy in Rands, that’s the time to be buying in Glencore, but in this portfolio it is really focused on non-JSE listed companies.
Thanks Alec, I have two questions around Bitcoin, just to get your thoughts on the concept and what’s going on.
Also in the Premium section in Worldview, I wrote about Bitcoin a while back and at that point, it was just before the brothers, the American rowers, they came fifth in the Olympics. In fact, South Africa came fourth and they came fifth, they came last in the final of that, but they were good enough to get into the rowing team and they feature very prominently in the Facebook movie as having been the guys who sued Mark Zuckerberg because Zuckerberg apparently stole their idea. That’s what they maintain. They clearly are guys who are pretty smart. They have a Bitcoin, or are attempting to launch a Bitcoin ETF and the Worldview that I wrote and Premium subscribers can just put in Bitcoin into the search bar on BizNews and it’ll come up, they didn’t get approval from the Stock Exchange Committee in the United States.
The idea was, if they could get that ETF launched, it would be a little bit like the platinum ETF and the gold ETF. There’d be so much demand for Bitcoins that they would rise significantly. My advice at that point was that Bitcoin was a very good investment, but wait for the heat to go out of it until the ETF had been decided on one way or the other. As it happens, the ETF was blocked and the Bitcoin price came down and at that point in time would have been the right time to buy. As we’ve seen lately, the Bitcoin price has shot through the ceiling and again, you don’t want to try and jump onto a wave that is rushing at that speed. So, it’s a great place to have some of your cash in the long-term, no doubt, but just sit on the side-lines for the moment, wait for the heat to get out of it.
Thanks Alec, it’s Cameron and Tyler Winkelvoss.
Winkelvoss, that’s them, yes. It sounds almost South African, doesn’t it?
Yes, and last one on the car scenario, Aureste wants to know if you have any views on the older established vehicle companies such as Ford etcetera who are also doing electric vehicles.
Yes, I’ve done a lot of thinking about that. When you have the ability to just sit down and reflect and look at these cars, the normal internal combustion engines and imagine the benefits that you get from electric vehicles. They’re cheaper, they’re smaller, they’re safer, you can plug in the software etcetera, you can’t really see a long-term future (it’s almost like newspapers in the media industry) for internal combustion vehicles. I looked a lot at General Motors because of the decision that GM made to leave South Africa, I wanted to see what context this was in and Mary Barra’s doing a fantastic job in fixing that company, but it’s another IBM, I’m afraid.
They have such a legacy to overcome, that for them to be able to take that and to apply it into electric cars puts them at a huge disadvantage when all their plant and equipment and investments have been in internal combustion engines and they’re not going to get any better, or you can’t innovate your way out of that. It’s like the guys who were making the horse buggies at the time that the motor vehicle came along 100 years ago, you can’t make a faster horse buggy, or a more comfortable horse buggy, or a cheaper horse buggy. It just doesn’t compete. It’s like the guys who were printing newspapers when the internet came along, they believed for a long time that they could compete.
If you have a look at who’s winning the internet wars, it’s companies that were never even thought of, Amazon, Alphabet, or Google, at the time that the internet was invented where AOL and Time Warner and those companies were anticipated as the ones who would be the big beneficiaries. My wife has a lovely saying; she says that electricity was not invented by the guys who made the candles. She keeps reminding us about this and she keeps reminding us to think differently as we’re growing BizNews and that’s a very similar situation and at a company like Ford or General Motors, you have a whole bunch of candlestick makers and you’re trying to expect them to suddenly become Edisons and I’m afraid that isn’t easy to do.
So no, in that side, I would rather stick with Tesla, who are completely engineered towards building electric cars and to Glencore who are going to supply the pick and shovels for the electric car boom. Those, at this point in time anyway, would be the obvious bets. The other one that we have to look at and we can talk about that in just a moment, in fact, we may go through to it, are these guys, Larry and Sergey. They have driverless cars and their driverless car business is also now being analysed as a potential spinoff from Alphabet Inc. and they’re talking about it being worth as much as 70bn US Dollars. As Amazon are the leaders in cloud, Alphabet are the leaders in driverless cars, Tesla are the leaders in electric cars. You want to get into these new industries with the number one.
We’ve seen what they call the “Gorilla Gang”, starts playing out in the new world. If you are in retailing, who wants to look outside of Amazon? Even Buffett tells us that Jeff Bezos in his opinion is the greatest entrepreneur alive today, maybe even who ever lived. He has completely dominated and is transforming the retail industry. You have a similar thing happening in China with Tencent, a similar thing happening with social media with Facebook and Google, apart from having search where they are so strong, they also have this company called “Waymo”, which is now partnered with a ride hailing service called “Lyft” and they’re going head-to-head with Uber in driverless cars or in taxis. So, would you really want to be buying Uber today?
I’m not so sure, if down the line in five years’ time, you’re going to be replacing what Uber’s giving you by using Lyft and getting a Google car to come along and fetch you. The other day on a trip into Europe, we went to Heathrow and parked at a parking garage or a parking area some way away from Terminal 5 and you got a good discount to do it. We then hopped into a pod and the pod took us through to Terminal 5, all free, they’re part of the service and this was a driverless pod that was on rails.
Now driverless cars are going to be exactly the same thing. You’ll call the driverless car to your home, there won’t be a Hussain who welcomes you into his vehicle, it’ll be R2D2 or somebody along those lines, so it comes back to that whole situation of where the future lies, how you can see the future. No one knows exactly how the future is, but if you read another one of my recent Premium Worldviews, was the report that Jeff Bezos sent to his shareholders this year, talking about how Amazon always stays in day one and he said the two big themes, you don’t have to be too clever, just go with the big themes at the moment and the two big themes are machine learning and artificial intelligence.
Those two themes are changing the world as we know it and as long as you are investing in companies that have got that, they understand machine learning and/or artificial intelligence, you’re on the right track. So there’s Alphabet, as you can see it’s had a fabulous run in the last month back to a new all-time record and you know, this is a stock we’ve held since December 2014. There have been many times that you might look at it and think ooh 30%, 40%, 50%, that’s not the reason why you buy shares. You buy shares to have a slice of the company and you buy into a company that you believe is worth holding forever. This one’s worth holding forever.
There he is, the greatest entrepreneur alive (Charlie Munger, at the Berkshire AGM, said he’s a different species), Jeff Bezos. Amazon’s had another pretty good month for us, getting comfortably above; it was above $900.00 a month ago. It’s now nearly $1000.00 a share from $907.00 to $980.00, so the reasons are pretty well articulated. Anything Amazon does nowadays seems to be touching to gold. There are just a couple of little things I’d like to pick up on though, when you talk about machine learning and AI, Amazon’s system called Alexa, now again, you look at IBM as a contrast, IBM has Watson. Watson’s really good and it’s something that they’ve been working on for a long time. They had the lead, and perhaps it’s the culture of the company, they couldn’t kick on. Watson is not the new Alexa. Alexa’s the new Watson and it’s been taken to a different level.
UBS Wealth Management has done a deal (just to give you an example of how this is working) with Amazon, on Alexa, so that UBS Wealth Management advisors and soon their customers are going to be able to ask Alexa questions like, “What happens to the US stock market if US interest rates go up?” and then they will get the UBS team to formulate the answers to this and of course Alexa will pull it out as an opportunity to serve their customers better. That’s a company, by the way, that I’m going to be looking at a little bit closer. I’ve had a fantastic engagement with UBS here and they really are, it’s one of those businesses that, when you start interacting with them, you realise they truly are at a different level.
They’ve been through difficult times, but it’s unbelievable client service, but it’s also interesting that they would be the ones now building up a business like this with clients. It just gives you an idea of the opportunities that exist for a company like Amazon, in an area of the business you don’t even think about on artificial intelligence and selling that or serving that in financial services, where financial services at the moment, you go to a financial advisor who themselves has to go through a whole learning process. How much better, to be able to tap into the world’s best and that’s what UBS is looking at, very interesting. An interesting world we live in, but Bezos’ company continues to move in the right direction and well, there’s no bubble as far as I’m concerned when you’re changing the world.
Thanks Alec,  I suppose while we’re in the technology space it’s a good one to bring up, Mokete wants to know your thoughts on Twitter.
I love the business idea; I just think they battle to kick on there. It’s very surprising that Twitter hasn’t managed to make a really good business model out of that enormous base that they’ve built. I don’t know it well enough. I do worry though that it could be another Blackberry. When Blackberry came in, they were revolutionary. There was a period where Blackberry looked like it had the world at its feet and for some reason it was unable to kick on, it was unable to adjust to take full advantage of the leave that it had and Twitter, by losing a lot of the early people who were along there, I know they did bring back the chief executive from the early days recently, a little bit like maybe what happened with Steve Jobs going back to Apple and hopefully he does the trick.
For me, I’d like to see some impact of that, I’d like to see some reflection of his re-involvement and the way that he’s not managing to fulfil his ambitions, but Twitter was a real disappointment. It has been a disappointment. It should be one of the giants of the tech industry, given its innovation and the incredible service that it’s offering, but it just hasn’t cracked it yet. Who knows, it could be around the corner, so let’s keep watching that space.
Thanks Alec.
Right, let’s go into Berkshire Hathaway. Warren has very rarely been a laggard, I guess, in anybody’s portfolio, but he certainly is in ours at the moment. As you can see, Berkshire has been disappointing again in the last few months. You always get that little uptick, you can see it there after the AGM, the faithful go to Omaha, they listen to Warren and Charlie, they get excited, they go and buy some more shares, and then it starts tapering down again. We’re not going to sell the stock; it’s not that kind of a share. This is a fantastic business; its inherent value is way more than where the share is trading at the moment. A lot of the companies that were brought into Berkshire Hathaway are being reflected at book value, which would be from many years ago and they’re worth a multiple of that.
Why the market doesn’t like it, well it’s not an exponential stock; it’s not hitting those 55% revenue growth rates that we’re seeing from Tencent. It’s not going out there and capturing the world and that’s why the rating will be what it is, but it’s a good, solid, strong base of our portfolio and it’s a little bit of defensive value if you like. Here’s a stock that I continue to like a lot, thank goodness because we could have been tempted after buying in here, when the share price went down to selling out. In fact, at one stage it went down to $90 a share.
Well, looking a lot better today is Apple at its current share price of $153 a share and so is our purchase price, which has now gone back very much into the black. Apple is one of those shares that almost will be indefinitely undervalued and the reason for that is that it is so big, it’s the most valuable individual stock on earth.
The scale of this organisation is just so enormous and the real value of Apple is not what you see on the number of iPhones that it sells, but it’s more the question of what it is able to do with the environment, in my view anyway. That’s what I’m buying into. or have bought into the environment, the area that, once you become an Apple user, you stick with it, you will buy more products from Apple in the same way as Amazon Prime is giving you a way in to benefiting as a member, as it were, if you’re a member of the Apple Club, it’s very hard to break out and to use anything else, particularly if you’re outside of China.
Now an interesting point on China and why the Apple share price has been going up recently, (and this is a massive generalisation) but the market in China is very aspirational. It is a country, remember, that’s growing at 6% GDP a year and as people become wealthier, they want to show others that they’ve been successful. One of the ways of doing this is through or has been through Apple phones. In fact, a couple of years ago sales of Apple iPhones or the revenue generated in China, remember Apple makes about 60% of its revenues at the moment from sales of iPhones. So, the sales of iPhones in China were as high as they were in the United States or in the Americas.
That’s transformed dramatically because of the WeChat or the Tencent factor, if you like because now you don’t really need to have an iPhone to access your operating system, which in China the de facto one is WeChat, but it’s also because the latest Apple phones have not been much of an upgrade, they haven’t been anything that you can show off. If you have an Apple iPhone 5, it looks like an iPhone 6 pretty much, and they’ve been around for a while, so if you’re aspirational, there’s not much to flash around, similarly with the 7. However, the most recent improvement in the share price has been put down to the launch of Apple iPhone 8, which early insiders say is going to be quite sensational.
Now that could give you a rocket back in China and take sales at the moment, about $10bn a quarter versus half only they are of what’s going on in the Americas around $20bn even $30bn a quarter, that that could actually rejuvenate the Chinese market and a lot of what’s going on at the moment is China, so that’s another ballpoint incidentally for GenCorp who are very focused on China as well, but it’s not in this portfolio. Interesting stories, when you bring all the dots, as the former finance minister reminded us, just join the dots, when you join the dots together, this one starts also looking very appealing and iPhone 8 is going to be the next big kicker for Apple that comes well, not too long into the future. There’s no specific date, but they’re working hard on it.
Facebook’s had a quiet last month. It slipped down a little bit and then bumped up back again. It is a company that I did quite a lot of work on. I went through the conference call in some detail. Zuckerberg knows what he’s aiming for. We did discuss this last month, but it is a company that’s been rejuvenated by mobile. Its focus has been on mobile advertising and if you have a look at the use of mobile phones and how they’re becoming increasingly important for people, it’s the most important device, and if you are completely exposed towards it as Facebook is, then you are on the right track at the moment. So, social media is continuing to expand, Facebook is massive, it’s the gorilla in the space.
If you were to look 50 years ahead, maybe others will be able to build, maybe not as long as 50, say 30 years ahead, will be able to build competitors to Facebook, but usually when you have market dominance like this, it’s yours to lose and they don’t seem to be showing any reflection of arrogance and complacency which are the two twin demons that start tripping up companies which do have market dominance. So, for the moment Facebook is on a rip and likely to continue and here’s our boy from Pretoria Boys High, Elon Musk, who continues to excite the world. It’s an interesting stock this one. We were fortunate enough to buy towards the end of last year and at that point in time, the market was down rating Tesla because there were concerns of the acquisition that Tesla was making of Solar City.
Now that’s gone completely off the radar. SolarCity, which is a company that installs more solar powered operations in the United States than any other, funded by Elon Musk and started by the Rive brothers who are his cousins. They all grew up together in Pretoria. They did a pretty good job of it, SolarCity’s been merged into Tesla, the idea there being both of them needed batteries and needed to invest heavily in batteries and in similar technologies, so it made a lot of sense for them to get together. Lyndon Rive has decided, however, to leave SolarCity, to go off and do his own thing again. His brother’s still sticking around, working with Elon Musk.
In the last little while, in the last month or so, the share price after surging, Tesla has been bumping around in this level, it’s partly due…that surge, by the way, was after Musk said that Tesla would be producing or be going into mass production of electric cars and now the investors after getting very excited about that and redoing their numbers are holding off to see whether or not it is achieved, but it’s a good long-term bet and as we mentioned earlier, we were talking about motor vehicles, if you’re going to go with electric cars or you believe the electric car story, you’ve got to have Tesla in your portfolio.
We’re very fortunate, we’ve bought it in here at around the $200 mark and even at these levels it’ll be very happy to be buying them for a long-term and here’s a stock that Metro Bank, the South African equivalent is Capitec, a low cost bank, the first High Street Bank in the UK to open in something like a hundred years and again, when you walk into their branches, it’s a bit like the Capitec experience. There are retailers there, bright young people who are looking to serve the customers, sell to the customers, not making them sometimes feel uncomfortable. All banks are changing, but Metro is targeting the retail market very aggressively and doing a pretty good job with it in the UK and the share price is starting to reflect it. We’ve owned this one since November.
As you can see, we bought it just after it had that little bit of a run or while it was having a bit of a run in November and then it just amplifies what I said earlier, about a period, not getting the timing absolutely right. We bought it around about here, £32, £33 a share. It went down for a period of time. Now if you’d been a trader and you had stop loss levels, you would have dropped out when it broke below the moving average line. I like to put these moving average lines there just to show that sometimes technical analysis can really catch you up, but it’s come back in and at the moment it’s at an all-time high of over £37, so it’s done well for us and starting to contribute well to the portfolio and there it is. Just to close off the presentation, the portfolio in Rands is up 74% since we started, that’s an annualised return of 31%.
As you can see we’re sitting on cash now of about R450,000. Of that amount, another R200,000 has already been earmarked to be invested in Tencent, so we’ve made the first R93,000 investment there. In a month’s time we’ll put another R93,000, R94,000, actually we’ll be working in US Dollars, so we’re putting the US Dollars in, another $7,500 and doing the same again in the following month. I’ll be having a look once more at Lloyds over the next month, hopefully come to a conclusion there, but we’re always on the lookout for good stock opportunities, that you can be sure of and that’s our presentation for today.
Just to finish off there, on the Rand, you can see although it’s come back strongly on anticipation that something dramatic can be happening with Jacob Zuma, the President; the Rand is still very weak relative to where it was in 2014 when we started the portfolio. So, the original premise that the Rand will be weakening over time because of poor economic policies still holds and it’s well, very appealing. If you’re a long-term investor, at R12.87 or R16.72 to the Pound, to be making your investments into hard currency right now, you’re getting a lot more bang for your Rand than you were getting only a few months ago, Stuart?
Thanks as always Alec. Just also a reminder that we’re going to launch the SA portfolio webinars in two weeks’ time, but we’ll send out further communication around that.
Yes and one last thing, I will be coming through to Durban, Cape Town, and Johannesburg in mid-June and we have 20 seats at each of those centres for our Premium subscribers. So, when you see the mail, which we’ll be sending out in the next day or so, for you to come and join us. Please act quickly because we only have 20 seats. These are Standard Bank events, but they have very kindly given us 20 seats for our Premium subscribers at each of those events, so take advantage and come and have a chat and see how to invest in a post junk world.
Who knows, if Zuma goes, apparently the junk rating is not going to be extended to domestic debt. That’s the theory, or that’s what people are saying at the moment. I’m not so sure. I think that the second shoe is still going to drop and when it does, and just very briefly, on that to close off with, when the junk rating came through, it was only on foreign debt. Now, foreign South African government debt is not really relevant. That’s a US Dollar denominated or Euro denominated debt. It’s only about ten percent of government borrowings, very small in the grand scheme of things, or sorry ten percent of what is held by foreigners of South African government debt.
The real big part is in South African Rand debt, 90% of that, and depending on who you talk to, it’s somewhere between R150bn and R250bn of that, which is owned in portfolios which will be forced to sell that debt if the domestic rating goes to junk. So, it’s very much on the cusp at the moment. The traders are going in there, saying that “Zuma will fall, so let’s buy the Rand”, the geopolitical situation says, “Watch out” and certainly as far as just the bold economics, pure economics are concerned, if you get an outflow of between R150bn and R250bn forced out of South African debt, well the impact on the Rand is obvious.
So, for me, if you are looking to invest your Rands offshore, this is a pretty good time. Of course, there’s always a risk that the Rand could go to R14.50, R15 against the Pound, who knows and perhaps, to even R11 against the Dollar, but the risk would tend to be on the other side, that it’s likely to be weaker, particularly given the economic fundamentals than it is going to be stronger if you would take a long-term view.
