🔒 WEBINAR: Global portfolio continues to fly on weaker rand

Alec Hogg takes us through the performance and current position of the Biznews.com Global Share Portfolio Webinar, which is proving to be highly successful. If you’ve just joined in on this journey, not to worry. Hogg provides a comprehensive breakdown of how the shares are doing and how the companies, split between the likes of Apple, Amazon, Barclays, Berkshire Hathaway, Alphabet, IBM and Novo Nordisk are performing.


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The portfolio has performed incredibly well largely due to a couple of very fortunate share picks, one in particular, and then on the other hand, by avoiding the big losers. We haven’t done well on Apple but, outside of that, everything else has been pretty strong, and then the Rand. The depreciation of the Rand was our big bet right from the beginning and the Rand indeed has fallen. It’s the share price of a country, (the exchange rate) and if economic policies of a country are out of step with the other parts of the world then you will find that the exchange rate, unfortunately does reflect that and that’s exactly what we’re seeing with the Rand.

In the past month, it’s been an interesting development over the portfolio. I’m just going to take you through it very quickly. No change at the top there, with Vanguard. It’s pretty much where it was a month ago but with the depreciation of the Rand, which has gone from R14.26, when we spoke on the 28th April, to R15.79 today, (24th May). That depreciation has suddenly turned Vanguard into a big winner, so since we invested in the S&P 500 Index and just go back a little bit and understand the structure of our portfolio. We wanted to put about a third of the start of the funding and we started off with $200 thousand. About a third of that we wanted to put into the S&P 500 Index. Another third split between two big shares, we selected Google and Berkshire Hathaway, and then five other shares, which we would use as share picks and the idea being that when we found another share to add to the portfolio we would reduce the holding that we have in the S&P 500 Index, so a quite simple approach here. You put a third of the money in the market, generally. A third of it into two big stocks, and then the other third were share picks.

Slide02

We started off with a third of the portfolio in the Vanguard S&P 500 Index. Last month we swapped out around eight percent of that, it was a 30 percent generally, to buy Barclays shares, and the Barclays shares are the first non-US stock to hold in the portfolio and it’s been a spectacular success. Not because Barclays has done a whole lot, as you can see there, it’s up by one percent in Pound terms, but because the Rand has fallen against the Pound, so the Rand is down from R14.26 to the US Dollar, to R15.79. In Pound terms, it would cost you R20.88 for a single Pound a month ago. It is now R22.87, so a two Rand depreciation there. It’s had an immediate impact on our investment into Barclays PLC.

When you have a look at the portfolio generally, it will give you an understanding of how we’re positioned. We’ve done well with Alphabet that’s grown by 32 percent in US Dollar terms. Apple has been the big disappointment that’s down 23 percent. In fact, Apple we liked it so much we doubled up our bet. We bought it as one of the share picks, where we put a presumed eight percent in each, and then we liked it so much we even bought another one, another eight percent, to take it to a target holding of 16 percent but, as you can see because the share price is down so much, it’s only 11 percent of the portfolio. On the other hand, we’re in good company because Warren Buffett, his Berkshire Hathaway has made only its second technology investment, and that’s into Apple.

Another stock that Berkshire Hathaway does hold is IBM. You can see that’s also a laggard although the good news for us is that we bought into that at a Rand level. That is a lot stronger than where we are today and even with Apple, although it’s down 23 percent in Dollar terms, it’s only one percent in Rand terms. IBM, because the Rand has depreciated, it has in fact been a winning bet for us, so it’s quite incredible the impact that the currency has had.

As you can see though, the star performer in the portfolio is Amazon.com. It’s gone from an initial eight portfolio to 16 percent now, and that is because the share price has risen 112 percent, more than double since we bought into the stock. Amazon, without question, our favourite share and when you do operate from a country where Amazon is getting quite a lot of attraction, which is here in the UK, you can see why the investment community is grabbing onto Amazon.

We ordered something through Amazon Prime last week and it arrived the same day, at our house, at the front door. The guy knocked on the door and said, “Here is your product, Mr Hogg.” Quite extraordinary, (the service) that is being delivered and if you go back and read through the transcript for the Berkshire Hathaway AGM. Warren Buffett referred to Amazon numerous occasions and he actually made the point that when you have got millions, or in this case, tens of millions of satisfied customers, to whom you’re delivering your goods and services instantaneously, in other words services online or your goods very rapidly, in this case, the same day, then you do have an irresistible business model.

He only said something similar years ago, when he referred to Google and that caused a run on Google shares, from the Berkshire faithful. Well, the Amazon share price, a combination of Buffett’s endorsement and the quarterly results that came out that were very pleasing. It’s seen that share gain $100 in the past month, as you can see. The price is just under $700. We bought them at $327 but it’s come from $600 a month ago, so that’s helped the portfolio overall, to show the incredible return annualise the 36 percent. You can get that in a few months but when you’ve been going for 17 months it’s really very pleasing. The most important reason for this has been the Rand. As you can see, the Rand has depreciated since we started the portfolio on the 5th December, from R11.27 to its current R15.79. That’s an annualised drop of 28 percent but the other part that has kicked into the portfolio we’ve managed to add almost another ten percentage points annualised to the return of this portfolio through some very fortunate stock picking.

This table that you’re looking at now will give you an illustration of that. As you can see the Vanguard S&P 500, which is now down to about 19 percent of the portfolio, in Rand terms. That has grown by 40 percent overall but actually, in the last year, it’s done nothing. The S&P 500 has not moved at all. In fact, it hasn’t moved since the 5th December. The purchase price on the 5th December 2014, as you can see, there was $188. It is now still $188.

Alphabet, on the other hand, has been a good return. It’s gone from a purchase price of $534 to $704. Apple, the other way around, our purchase price there is merely $125 a share, at the moment it’s at $96. Berkshire Hathaway is a little bit below where we bought in, in Dollar terms, $149 to $141 but look at Amazon – from $328 a share to $700. Novo Nordisk another good dividend payer, as is Apple, up from $46 to $53. IBM a little bit lower, and then Barclays, which we bought last month and this shows you how the impact of the Rand in the last month has affected this portfolio. We bought in there at a price of one Pound 74 a share, the share price is one Pound 76, so we’ve regained the costs that were incurred in the transaction but the Rand depreciation, against the Pound has given us an 11 percent gain in that share.

Really, when you have a look at the portfolio overall, our intention was to get to a position where we could, if you like, take a bet against the Rand. We believed the Rand would weaken but on the other hand we would also try and find share selections in the global market, which would give us an uplift on the Rand depreciation, so the Rand down 28 percent, has fulfilled that big bet that we had. The annualised return of the portfolio at 36 percent shows you that our stock selections have also been very pleasing.

Remember, that this is interactive so if you have any questions please just fill in the box there. It’s pretty easy to pose a question. Once you’ve done that Stuart will interrupt me and we’ll refer to your question and answer it immediately, so please go ahead and ask your questions as soon as something comes to mind.

Moving onto the prices at opening until today, this gives you a good understanding of how the portfolio has performed in Rand terms. The Rand/Dollar down 40 percent, incredible, 20 percent a year is what we’re losing on the currency at the moment. The big winner, being Amazon.com, nearly doubling in fact, it’s up 198 percent, which means it’s nearly trebled and the annualised growth there of 140 percent, so in Rand terms it’s been an enormous performer, but even in US Dollar terms a very good return. Alphabet 85 percent in Rand terms. Novo Nordisk, in fact the better way to look at this is having a look at the table you now have on your screen, which shows you very clearly that Amazon, Alphabet, and Novo have been our big winners. Vanguard pretty breaks even, and then Berkshire and IBM under performers in US Dollar terms or underperforming the Rand/Dollar depreciation (over there – you can see them there), and Barclays has only been in the portfolio for a month, so it’s already showing a good contribution but, again that’s all currency related. Apple being the disappointment but we’ve got some fairly good news on that coming up.

Moving onto this month, we do report two more dividends. A good dividend payer, who’s IBM, there was another $1.40 dividend that was paid in May. That’s added another $140 to our cash holdings and then going down, you’ll see Apple also listed its dividend from 52 cents to 57 cent. It’s quite interesting to notice that those companies that declare and pay dividends every quarter, so Apple has gone 52, 52, 52 cents, and in the last quarter although the market didn’t like the results, they paid a 57 cents dividend, which is an uplift on the previous number. Similarly, with IBM a ten cents higher dividend declared in its most recent quarter.

Just getting to the nuts and bolts of the portfolio, Vanguard remember, this is our exchange-traded fund. The reason we went with the Vanguard (VOO), as it’s called, listed on the New York Stock Exchange is because the costs here are very low and you can see identical performance between Vanguard and the S&P 500. When we bought into Vanguard on the 5th December 2014, until today, there’s been no move. In the past 12 months though and we’d like to show you our graphs on the last 12 months. It has tracked the overall index down two-point-seven percent, so if we had put all of our money into Vanguard, in other words, into the market in the United States. Instead of having the 28 percent annualised gain that we have been showing, because of the Rand depreciation, we’d be down to about 26, so it does show you the uplift that is being created by having a more diversified portfolio.

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Berkshire Hathaway, my favourite share, well my favourite company, I can’t say my favourite share but my favourite company, Warren Buffett has been running it for 51 years. The Annual General Meeting, once again, was extremely well attended. The share price at Berkshire Hathaway though it’s done a little bit than the overall market in the past year, which is good news but since we’ve had it in the portfolio, it’s done a little bit worse. This is what we do anticipate from Berkshire that it will outperform the S&P, over an extended period of time. The big news to come out of Berkshire in the past month was the investment in Apple. This wasn’t done by Warren Buffett himself. It was done by one of his portfolio managers. They hadn’t said which of Todd Combs or Ted Weschler has made the investment but a billion Dollars, in the context of $120bn share portfolio that Berkshire has is not that big but a billion Dollars is still a lot of money, in anyone’s terms and it caused quite a lot of excitement. It did in fact lift up the Apple share price by three percent and got analysts making all kinds of assessments. Has Apple gone escrow? Has it become more of a utility company? Why is Berkshire buying it?

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The reality is that Apple is just cheap. It’s really cheap. It’s sitting on masses of cash, in fact $216bn cash on that balance sheet now and it’s only valued Apple at about $600bn, so you’ve got about a third of the valuation is actually in cash, so it tells you a bit quite how underrated or undervalued the stock is, and this was enough to attract Berkshire Hathaway’s attention. Let’s put it into context. The biggest single holding that Berkshire has in a listed company, remember just on the Precision Car Parts investments for $32bn, so that, if you like, the biggest wholly owned subsidiary but of the listed companies the deal that it’s done with 3G, the Brazilian venture capital business, on Craft Heinz is worth, to Berkshire at the moment $25bn. It’s, in its own portfolio, where it doesn’t have a substantial holding over 25 percent that is. The biggest share there is Wells Fargo, which is around ten percent of the Wells Fargo stock held by Berkshire that’s valued at $23bn. Coca-Cola is $18.5bn. IBM is $12bn and Annex (American Express) around $9bn, so in that context the Apple investment is relatively small but on the basis that it is a technology investment it’s quite significant.

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Warren Buffett called Google the perfect business model and now called Alphabet, because it’s a holding company. In fact, Larry Page and Sergey Brin restructured their business to make it look more like the structure of Berkshire Hathaway. Here we have the company performing incredibly well. Again, in the past year, Alphabet has outperformed the NASDAQ by 37 percent, as you can see on your screen there, so it’s a nice place to have our investments.

I’m not sure what’s happening with the questions Stuart but I don’t see any that have been posed yet.

No Alec, there’s no questions. I’m hoping it’s not the chill in the Johannesburg air this side or the wetness in Cape Town.

It’s not affecting technology because we’ve got enough people who are actually on the seminar, to at least be posing questions. I don’t know if you guys want to fiddle around and just see. Maybe the tech isn’t working as well as it should be. Anyway, we are standing by for your questions and I hope at least somebody can try. Maybe you can put a little test on Stuart and just see if the questions are working. I’ve got a suspicion. By this stage, we normally have quite a few questions, so there could be something wrong.

Here’s one for you Alec. Is Alphabet too expensive to buy now, from Ian Hall?

Ian thanks for that. I’m still not seeing the question on my side but that doesn’t matter. It’s important that you see it. No, it’s not too expensive. Ian, what I would do right now, if you’re going to replicate this portfolio is instead of buying it in one fell sweep. By doing that you start taking the risk on the Rand and the risk on timing, so to eliminate the timing risk and to eliminate the Rand risk stagger your purchases over three months. Let’s just say you have a million Rand, which you can put into the Web Trader Portfolio, no questions asked. I’m not sure if you’re really aware of this but up to a million Rand, the South African Government says, “You can take that offshore.” It’s called the ‘discretionary exchange control allowance’. It’s not…

You don’t have to ask any questions of anyone. You don’t even need a tax clearance certificate, so you can put a million Rand into your Web Trader account and if you, for arguments sake, had that amount of money that you decided to invest. I would stagger the purchases, replicate the portfolio as we have it, but stagger the purchases over three months, so the first month, today you can put R333 thousand and then allocate that accordingly. Then in a month’s time similarly, the next third, and in the following months’ time the next third. Ian, we are talking about a dual impact here and not just the share price of Alphabet but also the Rand, and the Rand as we’ve seen in the last month, as volatile as it was, going from R14.26 to R15.79 – it has a far bigger impact sometimes than the shares that you are investing in. Stagger it over three months. Buy the whole portfolio.

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Even though Amazon for instance has nearly trebled in price since we’ve bought it, it doesn’t mean that it’s out of kilter. I’m still a big fan of Amazon and remember this portfolio is based on buying forever, holding forever. The only stocks we would sell is where we see a fundamental change in the underlying value of that company or where we want to add a new, more attractive company into the portfolio. We’ve got a lot of runway still to do there because we can still sell quite a big slug of the Exchange Traded Fund, if we find or as we find more appealing places to put it, into individual stocks, so we would be talking about probably buying another three share picks before we have to look at our portfolio and then start offloading or anything like that, or swapping around. The point being is to stagger your purchases over three months.

Alec, from Ian he says he’s already got the money offshore, so does he still follow the three months process or buy it in one whack because he takes out the Rand issue?

Yes, I still believe that you should buy it over three months because that takes out the concern of… In investing what you’re trying to do is reduce the risks all the time, and the risk that you have is buying at the wrong time. By staggering it over three months, you take that risk out. You can’t eliminate it completely but you substantially reduce the risk of maybe buying on a day when the share price is at some kind of a peak. We don’t know. Only the good Lord knows the future but we try and invest into reduce the volatility as much as possible, so it’s almost doubly sure that you should be doing it if you’re making the investment in South African Rand, but even if Rand’s aren’t part of the equation, you still need to be cognisant of the fact that share prices themselves can also be fairly volatile.

Slide11

When you look at the Alphabet share price here, on this graph it’s really traded in a very narrow band since early November last year, until May this year, so over the last six months it’s been in a band. Your risk of buying it now, if you do decide to go for a one-off kind of hit, is a lot lower than it would be maybe with other stocks, but I would still recommend you stagger it over three months.

 

Slide12

Let’s move onto our next stock, and this is our, of course, favourite company, favourite share rather than favourite company but it is a fantastic company as well. When you get exposed to the service that Amazon offers, when you listen to the way that Warren Buffett enthuses about Jeff Bezos and I’m busy reading a book in fact, about Bezos at the moment where you get encouraged again to go and have a look at his annual report. He writes all of his letters to shareholders in the same way as Buffett writes his. It is just an incredible business this and one that, well Buffett can’t find any way to beat the business model so who are we to argue with that? It’s also been a wonderful performer for us.

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It did come down quite sharply in January, when we had the sell-off this year, but it’s recovered, and then some. It had a particularly good month for us, jumping by $100 a share. Just to put that in context, we only bought them for $300 a share, or just over $300 a share, so from our purchase price the gain was about 30 percent in the past month and Amazon is, well it’s always got issues to consider. The latest issue that’s been raised there and you can see a little bit of a drop in the share price in the last few days is that the European Union claims its been paying too little tax. They’re looking at a $400m exposure, potentially and this is being motivated by Margrethe Vestager, who is the EU’s Competition Commissioner but Vestager has got quite a few companies, like Amazon, on her radar. She’s been fighting with Apple due to its Irish domicile for quite some time.

She’s also trying to find other companies, like Mac Donald’s that, in her estimation, are paying too little tax. As far as Amazon is concerned, they are registered in Luxemburg. They have a very good tax deal with Luxemburg but it isn’t just used as a shell. There are more than a thousand Amazon employees who work.in Luxemburg. They believe they’ve got a very good case and even so, in the context of a $320bn company, a $400m fine is not really anything to get terribly concerned about. That was the story from Amazon.

There was also a sale by Jeff Bezos – one million shares. He banked $671m as a consequence but no need to get worried there because he still owns 17.5 percent of the company. $671m compared with the billions in value that he’s invested in…I guess he just wanted to find somewhere else to have a little bit of fun. Bezos is very good at that, as you might be aware. He did buy the Washington Post a few years ago, for $250m and I guess if you’ve got it, why not flaunt it?

Slide14

Onto IBM. Here’s a stock that has been a disappointment from a share perspective but is still one where we love the performance of the business. You’ve got to understand the IBM story, which is a company that has been around for more than a century. It’s got relationships with every member of the S&P500 – the top 500 biggest companies in the United States. This opens the door for its salesmen to go and sell new products. Only five years ago, it put together a five-year plan. At that time, it seemed as though the business had become so stable that it was just going to be generating (almost) utility-like – like electricity supply. However, IBM was then hit very hard by the Cloud. It’s still not fully discovered, but that incident is one of the major reasons why Amazon is doing so well. They had a jump on everybody else in Cloud computing – allowing you to dispense with your hardware and put your data into the Cloud.

Slide16

IBM understood this and has adjusted its business accordingly, but not quickly enough for Wall Street. About 30 percent of its business is now in ‘new type’ operations. It’s been a massive job to refocus this oil tanker but it’s moving in the right direction and in Gini Rometty, they have one of the best CEO’s in the world. Warren Buffett has been buying these shares since 2011. He has built up a shareholding around USD12bn and he’s about USD2bn below the price that he paid for them. At the AGM, he was asked if he’s still happy with IBM and he said he certainly was. At these levels, it’s not surprising to see him continuing to buy every time we get a filing from Berkshire Hathaway. It’s still great value.

Slide17

Novo Nordisk is one of our sleepers. It’s strong in the diabetes field where it owns somewhere between one-third and one-half, depending on which product you talk about, of the insulin market. Anybody who is diabetic will tell you that there is a massive barrier to entry for new people coming into the selling of insulin and Novo’s advantage is that it is moving more aggressively into the United States with a couple of new products. Of course, that’s the biggest market in the world. It’s a Danish company. It pays good dividends. It performs better than the market does most of the time. It hasn’t done so in the past year and that makes it a nice entry point at the current pricing levels.

Slide18

Apple has been our disappointing performer but every decline in share price is an opportunity for someone else. Since the Berkshire Hathaway investment of $1bn, the share price has lifted as you can see, very clearly, on that graph there. It was down by 30 percent in the past year, at one point. It’s now down 25 percent so it’s still not quite there – an underperformance against the NASDAQ (the benchmark that it performs against). A 30 percent underperformance against NASDAQ in the past year, but a company that has one-third of its market cap in cash money. Then it has the iPhone, which as you know, is ubiquitous. What I like about this company (and it hasn’t really been ticked around the world) is that they invest hugely in Research and Development. The Research and Development, as a percentage of the revenues, has been growing. This tells you there’s something happening at Apple.

Slide19

It’s a very secretive business. It always has been since the days that Steve Jobs believed it was nobody else’s business what his business was (or to tell them what his business was). As a consequence, they’re busy with something they’ve put a lot of money into. It’s not the Apple watch we know, which has been successful but hasn’t really shot the lights out. It could be virtual reality, which is a developing new field but more likely, it’s something to do with driverless cars where Google has been the most public company to make the running. There’s been enough secretive feedback to show that Apple’s also getting big in that field. They’ve been investing heavily. There’s something around the corner from Apple, which is going to excite all of us. You can just feel it and it’s a stock, which, on any kind of valuation, you’ve got to believe that this is the one you should be adding to your portfolio. At these levels, you won’t be sorry.

Slide20

Let’s just close off the portfolio for today. The Rand/Dollar as you can see, has depreciated from R11.27 to R15.79. That’s given us an annualised return… If we’d just taken the $200,000.00 that we’d started with and put it straight into USD (and done nothing else), we would have seen an annualised return of 28 percent. Incredible. As you can see, the Vanguard S&P500 Index – since the beginning of the portfolio in December 2014 – has done nothing and in the past year, its annualised return has been (in USD terms) nothing but because of the Rand’s depreciation, you’ve got a 28 percent uplift there. It’s quite easy to understand this portfolio: Amazon, Alphabet, and Novo Nordisk being the outperformers, Vanguard tracking the Rand generally, and then we have Berkshire Hathaway – a slight underperformer. IBM: a bit disappointing and Apple…even though it’s only down one percent in Rand terms, it’s been the most disappointing but that would also tell you that there’s wonderful value to be had there.

Barclays has only been in the portfolio for one month so that 127 percent annualised is obviously unlikely to be something that we would anticipate in a year although Barclays did get some good news this week. If you recall, one of the reasons we were that keen on the business is that the sale of its South African asset of Absa, which makes up 85 percent of Barclays Africa is going to translate into a release of considerable capital within Barclays PLC and it will also bring into Barclays PLC a big chunk of additional capital. Now, this is all part of the restructuring. Its taken some fairly bold decisions from the new chairman McFarlane and his new Chief Executive Jes Staley to go ahead with this strategy. Barclays however, at its core, is one of the U.K.’s big four retail banks.

Slide21

Between the four of them…Royal Bank of Scotland, Lloyds, HSBC, and Barclays, they have 80 percent of the U.K.’s retail market and that’s a fantastic place to be – very, very low turnover. The churn rate is about 1.5 percent per year so once you start with a retail bank in the U.K., it seems as though you stay with it. That is a wonderful franchise, which is not appreciated in the Barclays share price. It still trades at about 1.3 times book. A more normal level of trading would be double that so there is lots of upside potential for Barclays. They’re cleaning house. We expect that despite some more obstacles, which they still have to overcome, that this one has been sold down too far. If we want to ask for value, the great value bets in this portfolio would be Barclays and Apple. IBM: also good value and of course, the longer-term performers that we’d be very happy to stay with are Amazon, Alphabet, and Novo Nordisk with Berkshire Hathaway and Vanguard being your cores, if you like.

Alec, while you’re on Barclays, Alan D wants to know your view on Brexit.

Alan, I haven’t done enough research into it yet. I’m doing a lot of analysis now. The bit that I know is that it’s rather bizarre from an economic perspective, that it’s even being considered. All of the information suggests that the U.K. (economically) would be poorly served by leaving the European Union but we’re living in strange times. If we look at the way the political world around the world is transforming, the political governance does need a shakeup. It’s not just in South Africa where the voters are unhappy at the way that the system is structured where you vote for a guy once every five years, and as long as you believe his lies aren’t bigger than the next one’s lies, you vote for him again and just give him absolute power, which is a really strange way for democracy to work.

There’s been a big kickback… I would like to believe that common sense will prevail in the U.K. but on the other hand, the possibility is the swing towards the unusual…towards the eccentrics in the political arena says that a Brexit is not out of the question. If it were to happen, it would affect the U.K. economy. It would affect the U.K. currency. The Pound would definitely come under pressure. It would affect asset prices like housing prices. An estimate I saw the other day, says that they would fall by 18 percent. I don’t know how they get so specific with these things but it would definitely have an impact on U.K. housing which, on the other hand, has been expanding so rapidly over the last few years, that the locals are uncomfortable with the fact that the young people are finding it impossible to actually get into the housing market – to own new homes.

There are many different variables but generally, from an economic perspective it isn’t a good thing. It could be perceived as a good thing from a security perspective but from an economic perspective, definitely not.

On the Rand, I think I can answer this for you Alec but they want to know your view on where it might go.

Our view on the Rand is consistent. The exchange rate of a country is like the share price of a country. The share price of a company is determined by the capital allocation of those running a company. Similarly, the share price of a country is determined by the capital allocation of those running the country. When you look at it in those terms – in pure economic terms – you have to conclude that the capital allocation by those running South Africa, has been poor and is unlikely to change much. The socialist-type policies where Social Grants are now built into the system and are a very big part of the system, does not make for wealth creation. We’ve seen this many times around the world in the past where socialist ideas, although incredibly well intended, just don’t work. Human beings need an incentive. It would be far better to allocate the capital more sensibly, to where the country has advantages.

If you are confused, think of it as a company. If a company is an IBM, IBM could easily have sat back and just kept pouring money into the areas of its business, which were getting eroded by technological developments and changes. Instead of doing that, it stopped and it started allocating capital into new areas such as artificial intelligence (the Watson supercomputer) and into the Cloud itself, which was the biggest threat to IBM. It saw this and then started investing in Cloud capacity and consequently, IBM is positioning itself well for the future. South Africa’s advantages – the two most obvious ones – are being terribly neglected. The one being tourism where political imperatives are continuously affecting the tourism industry. We had the insanity by Minister Gigaba on the visa regulations. If you were sitting in a country somewhere else in the world, of course you’d like to come to South Africa. It’s a beautiful place.

However, if you have to go through too many hoops, you might decide to rather go to Croatia, Australia, Vietnam, or any of the other more than 150 available destinations. The latest move by the Minister of Sport to summarily decide to disallow any international events by the major sports bodies that could host those global events is extremely short-sighted, and extremely costly. Tourism is not an area where the capital is being sensibly allocated. The other one is on fracking. We had a piece this morning on Biznews showing how Britain is going to start (once again) fracking for the first time in the last five years. What happened five years ago? One of the frackers hit a fault and there were earth tremors. Consequently, there was… I don’t want to call it ‘panic’ but this is a very stable society in the U.K. and people were unhappy about it. There was a big investigation and a moratorium on fracking.

That is now being lifted by a company called Third Energy, which is going to be fracking a well in Yorkshire. Why is this relevant? The U.K. has got shale gas roughly 1/15th the size of South Africa. It’s got an economy 8.5 times the size of South Africa so if you look at it from that perspective, the incentive for South Africa to utilise its shale gas reserves is 120 times higher than the incentive for the British to do it. The British are just champing at the bit to get ahead with it. Their shale gas will take care of their requirements for the next nine years. South Africa’s would take care of its requirements for energy (not just gas but also everything else) for hundreds of years. Yet, the treacle of bureaucracy stops it. If you were a capital allocator, you’d be throwing money at the exploitation of the shale gas to try and bring back to account and of course, give you the economic impact.

The failure or the absence of that says the guys running the show do not allocate capital efficiently, despite sitting on some sizeable assets. Consequently, the share price (or the exchange rate) is unlikely to perform the way it should and because of that, we would rather not be invested in that exchange rate.

Two questions quickly before you close off. 1. Do you use technical indicators to buy? 2. Does Vanguard pay dividends?

Well, we’ll start with the second one first. Yes, Vanguard does pay a dividend. I’m just going to go back to where Vanguard is on here. Every quarter, you’ll see that there’s a decline in the share price at a period in time, and that’s usually due to the dividend payment. For some reason, we didn’t have our dividends table on here. It pays a dividend four times a year. It’s not very big, but it is a small contribution. On the other aspect. Stuart, that technical analysis story… I have applied my mind to technical analysis. In fact, I found a book from an old friend. Gene Moon who taught me about technical analysis in the days before computers. I’m really aging myself now. We used to have a thing called Trend Line and every month or every couple of weeks, Trend Line would print out on graph paper, the share price graphs of the stocks on the JSE.

By using the technical tools, you could then come to some pretty good conclusions on which way the shares were likely to move in the short term. My problem with technical analysis is that it can become… One becomes a little obsessive with it. The world doesn’t work according to these cycles every time. A far better way to invest is to buy a Dollar for less than a Dollar – to buy a Dollar bill for less than a Dollar. Try and get a Dollar bill for 80 cents rather than saying ‘well, that could be worth $1.50 at the moment. The tech says it’s going to $1.70’. Technical…we’ve had Black Swan events. We have all kinds of other events that come along that can throw you out very badly on technical analysis. When you get too invested in it as the primary tool, it can burn you and I’ve seen this happen in my career – many times – to people who had impeccable reputations for a period, only to be caught out at a hurdle.

There’s nothing wrong with looking at technical analyses or looking at long-term share price graphs to give you a sense of whether that share price is excessively priced at the moment – if Mr Market has gotten terribly excited or terribly depressed. I would not base a decision on buying or selling a share, on technical analyses – certainly not technical analyses alone. You buy a share after you do your research, after you establish the intrinsic value, and you see that that share is trading at a discount of 20 percent or more (if you’re lucky) to the intrinsic value, which is the case for instance, with IBM and Apple right now. On the other hand, when you see that the share is above its intrinsic value or trading above its intrinsic value: as much as you like the company, it’s not the time to buy it. You wait until everything’s in your favour. That’s what I like to judge the purchasing of stock on, and not on where the share price has gone.

Some people have done pretty well with technical analyses and I don’t want to have a flood of them showing me how clever they’ve been. It’s just the way that I like to recommend that one invests for the long term and remember, that’s the other thing. Technical analyses will give you all kinds of signals on buying and selling shares. That brings in new costs to the equation and for investors in the long-term; the one thing you’ve got to try and get out of the system is costs. If you buy today at a good price and you hold that share forever or until the management of that company disappoints you through acting fraudulently as they did with Warren Buffett with Tesco, or if you find that a better opportunity comes along that you’d like to switch into, that’s the time to sell your shares. Generally, when you buy a stock, the underlying company should be so attractive to you and the price that you’re buying in at so appealing, that you would hold it forever.

I think that’s it from our side, Alec.

Wonderful, Stuart. Thank you and thanks to everybody for joining us today. It’s been a lot of fun. It’s been something that we’ve tried again (unusually different). We’ve got our friend Stuart Schady here from Standard Bank, sitting in the Standard Bank Building and then you have Stuart and Justin in the Biznews offices in Johannesburg and of course, I’m in the Biznews office in London. It just shows the miracles of modern technology. We’ll be back again in a month’s time with another update. Just to leave you with the portfolio generally though, it has been an extraordinary month for us. There’s the dividend receipts. My goodness. My apologies. I went through this a little bit quickly but if you have a look… One of the questions was on the dividend receipts. There, you’ll see Vanguard, since we started, has actually declared six dividends.

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That’s in the last 17 months and those dividends are round about $1.00 each time. Apple is a good dividend payer as well. I’ll just leave you with the overall figure that the portfolio – annualised – is now up 36 percent. That’s in the last 17 months. Long may it continue… I look forward to being in your company again sometime next month.

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