JOHANNESBURG — One week shy of its third anniversary, the Biznews Global Share portfolio has grown from the initial $200,000 to a juicy $331,181. With the Rand having fallen from R11.37 to R13.74 against the US Dollar, the portfolio’s annualised return for SA investors is running at almost 40%. This month we update listeners on the holdings but also take a look at the Bitcoin bonanza. – Stuart Lowman
Well, hello. There I am, Alec Hogg, coming to you from London, a pretty chilly London although I was just showing off with my colleague, Stuart Lowman, who’s our managing editor at BizNews a minute ago, when I turned the computer. Let me show you, here we go. Just have a look at that. That’s what it looks like outside here – the sun is shining in London. However, I don’t really want to tell you too much about what kind of weather we’ve got because it’s 6 degrees. Now, in SA, I remember in Johannesburg we would have 6 degrees maybe a couple of times a year, Stu.
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For sure. That’s very low. I don’t think we get that in Johannesburg unless it’s in the middle of night in winter Alec.
You see the sacrifices that one makes but anyway, I needed to show you just one last thing before we go into our portfolio today. Those of you have been following the portfolio for a while will recall that I’ve been trying for a period of time to get my Amazon delivery delivered to me. Amazon is very good at small stuff but they’re not so good at big stuff but since August – last week, look at what arrived, my new bookcase so just to let you know. There on the top there’s my daughter – hand-off, but there on the top is Alexa, the very famous… oh-oh, she’s coming onto the screen, ‘Alexa stop.’ Just to show you what the famous Alexa is, one of those benefits of Amazon.com, which of course, is the biggest share in our portfolio but enough of that jibber-jabber. Stuart, do you just want to make everybody is able to hear.
Yes, thanks Alec. I’ve already got a comment from Margaret. She says, ‘Cape Town is windy so you don’t have that’. I’ve got a few hands so I think everyone can hear and see you. Just a quick one on questions as those of you who’ve been following us know there’s a little control panel on the right-hand side, with a little questions drop-down menu. If you write questions in there, I’ll pass them onto Alec, as we go through the conversation. It’s very interactive so please, just throw them in as they come to you.
Yes, I think that’s pretty important. That we want to keep this as interactive as possible so, whenever there’s an opportunity to break into the webcast Stuart will do that. We’ve been doing this now for 3 years, with Standard Bank’s Webtrader and we look forward to spending the next hour or so with you. It’s a good idea to get those questions through pretty quickly or early on because we do tend to run out of time towards the end. Sometimes we can’t get around to all of the questions. This time though, I’m going to do something different. Usually every month I will go through each of the stocks and tell you a little bit more about how the stock performed, etc., but I want to try and make it more interesting. The way of making it more interesting, I think, is by giving you a broader overview.
What happened in the past month, there were three things that went on. The one was we’ve had the reporting season so, we’ve had quarterly results from all of the companies now, in the portfolio. I’ll highlight some of those a little later. The second thing is there’s more of the debate between ‘are the tech stocks now or have they overreached?’
As you’ll see, in fact, let’s go onto that. Our portfolio, in the last 3 years, is up 66%, and this is in US Dollars by the way, but if you have a look at the individual performances you’ll see that Amazon has gone from $327 a share, it was $328 a share when we bought it in December 2014, and it’s now sitting at…In fact, it got through $1,200 a share very briefly this week. I know because I’m a shareholder and I know you are too but that’s just an incredible performance. They’re gaining 265%.
Just to let those of you who might only be coming in here for the first time know that this portfolio. One of our stories is that we believe that the SA economy is being very poorly managed. There are indications that things are changing for the better but nothing yet that isn’t already reflected in the weaker Rand (ZAR).Â
So, once we see some dramatic increases in the value of the ZAR then we can reassess that but as far as I’m concerned, for the moment anyway, the ZAR is in a declining trend. So what the idea was in 2014, was to take money offshore, invest offshore and then to put it into global stocks. Now, that doesn’t mean that necessarily you’ll have to get in an aeroplane and fly to London to find a bank account here. That in itself is quite a challenge, I’ll have you know, but it goes through Standard Bank Webtrader, who launched Webtrader in 2014. We then got together with them. You’re able to buy or sell stocks in many stock exchanges around the world and that’s really where this whole portfolio began. I have my own money invested so you are sure that I’m paying attention to everything that’s happening on these stocks, as they go through the month.
So the one big story then of course, was the quarterly results – I’ll talk to that in a little bit. The other big story is this belief, by some that tech stocks are overdone and others who don’t believe that that is true. Thirdly, is the story about bubbles so, those are the three issues that I’m going to touch on today and of course, we’ll take questions. I think we’ll have quite a cool time over the next 60 minutes. Of course, whenever your questions are through Stuart will pick them up, interrupt me as you are ready to do now, no doubt, Stuart, and we’ll play with those as we go along.
Yes, thanks Alec. I’ve got a few questions. The first one on Tesla from Des van As. He says, ‘it’s got huge debt and it’s burning through cash monthly – I struggle to understand why it’s a good holding. There’s other car makers better capitalised and, also entering this market.’
Des, I’m glad you’ve asked that because that gives me the opportunity to go into the second of our big themes, or the big themes at the moment, and that is this argument about tech stocks.
Now, I’ll refer you – just have a look at this on your screen. If you look at Amazon.com and Alphabet, as two examples there. Both of those, for many years lost money. In fact, Amazon.com has only recently started to allow profits to be shown in its balance sheet. These are exponential companies. These are companies that are going to be growing at a significantly strong rate. Just to give you an example. In the most recent reporting season it was expected that the tech stocks generally would show about 11% growth year-on-year in their sales. They came out with growth of 22% so they doubled what the best analysts on Wall Street were going to do. Just park that on one side.
Those tech stocks are essentially, what we call ‘exponential companies’ and mankind or human beings are not very good at understanding exponentiality. You almost have to take a leap of faith. Do a bit of analysis, understand what exponentiality is, and then bring out your Excel spreadsheet and put in growth of 20 – 25% a year. There are many examples of this but if you go back to Warren Buffett, when he started off his investing. He’s achieved just under 20% a year, since 1965, and it has taken a small, and relatively modest investment to be worth a ridiculous sum – hundreds of millions of Dollars from a couple of thousand Dollars that you could have started with. That’s the reality of what happens in what is called the Eighth Wonder of the World, which is compound interest.
Now, if you’re growing exponentially, like Amazon, like Alphabet, like Tencent, like Facebook, and like Tesla then the impact of this is very difficult to calculate if you’re working in a linear world. So you’ve got to take off your linear hat to start off with, and that is something that investment analysts find incredibly difficult to do, and that is something that value investors find impossible to do. As a consequence of that they miss out and have been missing out on this enormous boom. Amazon, for instance is an example, which is one of the top 5 market cap stocks in the world. Only until recently rated the 18th biggest stock held in share portfolios by US fund managers or money managers, because they didn’t believe exponentiality. They don’t believe the story.
The other thing with Tesla of course, is remember he has no legacy. Just like Amazon has no legacy when it comes to retailing. Amazon went into retailing with a clean slate. It had no stores that it needed to close down. In fact, it’s been opening a few stores now. A few, but it didn’t have the legacy that it needed to share and as a consequence he could do everything differently, everything online, and you see the consequence of it. Tesla has exactly the same situation. It has no internal combustion engine legacy. It has no people on its staff who believe in the internal combustion engine. It has no concrete to shift and believe me, anyone who has worked in a big corporation, I spent 2.5 years at Absa – that concrete layer is incredibly difficult to move along. Most human beings don’t like change and if you’re coming in and you just happen to have the legacy – it’s very difficult to move that along.
So, we look at the big car manufacturers, the existing ones, and we see that their market capitalisation is less than Tesla. Why is that the case? General Motors, which produces a thousand times as many cars as Tesla produces. Why would that be the case? Well the case there is that General Motors is producing internal combustion engines. It’s got an internal combustion engine view and the internal combustion engine is dying. If you like, go back 100 years and think about the companies that at that time who were making buggies. They found really nice, smart wheels. They would varnish the wheels. They would varnish the wood, put in better upholstery but that’s all they could do, when the motor vehicle or the internal combustion engine came along. That’s exactly what Tesla is doing now.
When Elon Musk last month introduced the last big frontier, which was electric cars, they don’t go very far and they don’t go very fast. He brought out the new Tesla Roadster, which is the fastest car ever invented. It goes from zero to 100mph in under 2 seconds. It’s faster than any internal combustion engine has ever been able to do and it can travel for something like 1000 miles on the battery. Those are the realities of what’s happening. To understand the exponentiality and the new world and the Fourth Industrial Revolution all of these things, you have to put on a different set of glasses. I’ve had the privilege of going to the World Economic Forum (WEF) in Davos for the last 14 years. I don’t go there to hobnob with people. I go there to learn. I go there to open my eyes, open my ears, and to listen to the trends of the future. They’re very good at doing that at WEF.
The trends of the future get extrapolated back into what is happening in the world today and where the winners are going. Amazon – think of this company. It’s been around since the mid 1990’s. It is a huge business today. In the last quarter, in the quarter that’s just gone in September, it produced 34% growth in its sales. Now, you go back and have a look at its retail competitors. If they can do that in 3 years they’re happy. In fact, in 4 years, they’ll be very happy. Amazon did it in a quarter, 34%. That’s the incredible story of exponentiality. You rub the sleep out of your eyes and you think, all of a sudden, ‘what have I been missing?’ Why is Amazon doing so well? Well, not only on the retailing side and when you live in a country like the UK, literally, you can order anything you want from Amazon. You put into your browser what it is that you need.
Last night Jeanette, she’s going to be selling some products made in SA, in fact, on a Christmas market and the people who organised the market say she needs a gazebo. My heavens, where do you get a gazebo from? Put it into Amazon.com – gazebo, and up comes many options and it will be delivered on the 30th, we put it in last night. It will be delivered well in front of the period that she needs it by. I don’t know where its coming from. It could be from the other end of the world as far as we know but that’s the Amazon model. You get it quickly, you get it cheaply, and you get what you want. It is an infinite number of products. Now, how can you compare that with a company that’s got bricks and mortar, lots of staff who are trying to serve you in the day? It’s just incomparable.
A similar story in the quarterly results that came out, and a company that we know very well, Microsoft – you’ll see it in the portfolio there as well. Microsoft, by the way after Amazon’s results, the share price went up 13% in one day, bang. Microsoft is a company that’s moving aggressively into the cloud space, as is Amazon by the way. What is cloud? Cloud is, if you recall as companies, what we used to do was we would buy computers with hard-drives. When I started my very first publishing business in the 1980s, I was terribly proud of the fact that I had a hard drive of 10 megabytes. An IBM machine with a 10mb hard drive, can you imagine trying to do anything with 10mb today? Those hard drives of course, got better and better and eventually you got to 1 terabyte of hard drive. Now, you don’t need a hard drive anymore because all of that goes into the cloud.
Now, in SA, where we’re still battling a little bit with bandwidth and we don’t quite trust that the bandwidth will always be available. It’s hard to get your head around this as well. In the western world or First World countries the cloud rules. You do not need a hard drive. You don’t need external hard drives. You can buy space very cheaply. I think I get a bill every month from Amazon for $2.98 or something, for almost an infinite amount of space that I can put onto Amazon Web Services. This is what is happening so, think about that as another structure. We have the structural change from the internal combustion engine, which is dying, which is going to be phased out because of climate change and all kinds of other issues, and in the future, we’ll only have electric cars.
Then you think about hard drives and computers and in the future, you don’t need those hard drives because it all goes into the cloud. So, the people who are offering the cloud and Felicity wrote about this on BizNews Premium, I think it was last week, about Amazon, Microsoft and Alphabet – the three winners in the cloud or the three biggest cloud players, who are all in this portfolio. That business didn’t even exist 5 years ago. That’s why, when you look at something like Tesla Motors and you say, ‘why is a company like this trading at the price that it’s trading at,’ and ‘why shouldn’t I be buying General Motors or Volkswagen (heaven help us), or Toyota – some of the other motor vehicle companies?’ Well of course you can but remember what you’re buying into. Some of them are going to survive. Some of them are going to be able to make that shift and some of them won’t.
Thanks, Alec. Just on Tesla from Alan Dee. He says, Steen Jacobs from Saxo Capital, predicts electric vehicle exponential growth over the next 5 years, driven by Chinese production, and obviously, Tesla has reached a deal to build a factory in China to take advantage of this growth. A very interesting point there from Alan.
Yes, thanks Alan. That’s a big point and another big point, a big fallacy that people don’t get is the thought that the Chinese are not keen on expanding or re-focussing their businesses into taking account of climate change. Anything but – in fact, the guy who doesn’t believe in climate change is sitting in the USA right now. The Chinese are completely committed to it. They are re-focussing many of their businesses and they’re going to be by far, the biggest producer of electric vehicles into the future. That you can be sure of. They’re also going hell for leather into the renewable energy field as well. The Chinese are hugely misunderstood because of myths and fake news in the West but they really get this and Elon Musk’s deal with the Chinese in building a factory in Shanghai and the engagement that he’s having with the Chinese authorities should not be underestimated. When you look at that and then you ask yourself, ‘what about General Motors?’ Well, General Motors aren’t even in the starting-stalls, and Tesla is already galloping down, and hitting the home straight. Those are the realities of it. You can disagree with it. You can say, ‘well, I think that there’s better value from General Motors.’
I’m someone who’s lived in a sector, the media sector, where we’ve seen the change already. I remember when I started Moneyweb in 1997, people thought I was absolutely stone bonkers but rationality said to me that surely, if you’ve got a business model that you don’t have distribution costs and you don’t have printing costs, which were about 80% of what it cost you to produce a newspaper. Surely to goodness you can produce better content and your better content will, in the longer term, prevail. That was just very simplistic, slow learning, me. Of course, we had quite a lot of challenges through bandwidth, through Telkom. We had one provider of bandwidth and they squeezed the bandwidth so, they only dripped it out but today you can see that that logic was sound.
Look at newspaper companies. I went to the Tiso Blackstar AGM last week and got the opportunity to ask Andrew Bonamour about The Times newspaper. The Times newspaper lost R1.6bn in the last 10 years. Now, they’re closing it. Many other newspapers around the world are closing. In SA there’s some vanity publishing, in some of the newspapers but generally speaking, it’s an industry that’s in big trouble. On the other hand, the technology driven online publishing industry is not in trouble. That’s the one that’s expanding. If you have a look at the most recent results from the New York Times for instance, you’ll see that the newspaper advertising is down in double figures but their subscription revenue online is up dramatically. That’s the story that we sometimes just don’t get, when you have a radical change. When you have creative destruction – remember Joseph Schumpeter, the great Austrian economist, spoke about creative destruction.
When you have this creative destruction in an economy there’s this huge, big blip. All the rules change, you can’t start looking at investments in the way that you looked at them 5 – 10 years ago. The markets are telling us this as well. Of course, there’s still those who don’t agree with it. I was at a conference with the biggest money manager in the UK, Schroders, and Schroders were like many people. Saying that Tesla is not a share to invest in. It’s the biggest short in the world. In other words, the people who have sold shares that they don’t own. Tesla is the most popular of those stocks because you have money managers who do not believe that the world is changing. They do not believe that the world is changing. They still believe that, when they look at their balance sheets or spreadsheets, they look at today and they underestimate the growth of Tesla and overestimate the growth, for instance, from internal combustion engines and they’ve come to the conclusion that Tesla is horribly overpriced.
In fact, one of the asset managers at Schroders was saying, his name is James Sym, and no doubt he has got a lot of money under his management. He says that Tesla is a bubble and it loses $500,000 for every car that it sells. Now, that’s almost like going back a few years to the old Google and saying, Google is a bubble because it loses so many Dollars for every online search that it fulfils, or indeed saying that Amazon is a bubble because it loses so many Dollars for every product that it delivers. That’s not the point. The point is the investment that’s being made into the future and when it comes to understanding the future, Elon Musk is so far ahead of his competitors in the motor sector that it really isn’t a contest.
Thanks, Alec. I think you’ve answered this. Guy Thompson wants to know, ‘is Amazon worth buying at these levels?’
Definitely, in fact, Guy, we’ve got something with EasyEquities and I know the guys from Standard Bank are quite happy that I mention this but EasyEquities have started a portfolio. It’s not the same portfolio as this because it excludes the shares outside of the US but it’s one of those portfolios, it’s called the Exponential Portfolio, and in that portfolio, I’ve got 25% of the holdings in Amazon and it’s only starting now, and I’m putting my own money in. So, Amazon is a phenomenon. It’s an unbelievable company and sometimes you have to experience it to understand it.
When you go to the Berkshire Hathaway AGM and you listen to what Warren Buffett has to say about Jeff Bezos. He says, ‘this man is in a different league,’ and he certainly is. Read the financial statements of Amazon. Read the shareholder’s letter going back to 1997, I think it was, from Amazon and you will see that this man just thinks differently. The Amazon behemoth is now rolling stronger and stronger. I’m delighted to have 18% of this portfolio in it. We only started with 8% so, as Amazon’s share price has grown the portfolio has got bigger and bigger, and as I said, on that EasyEquities portfolio, we’ve got 25% as a starting point so yes, Amazon is worth buying now.
Thanks, Alec. Benjamin wants to know, ‘can I still buy Naspers and Tencent or only Tencent?’
If you have money in SA, ZAR, then Naspers is an excellent purchase. If you have money offshore then Tencent is an excellent purchase. As you can see, Tencent has been a phenomenon. The one we missed, by the way, was Alibaba. I’m a little remiss there. What Alibaba listed on the New York Stock Exchange it went up strongly and then came down, as these things tend to do is they overreact in the early stages. Subsequent to that, it’s performed very well. Not quite as well as Tencent but it has been a fabulous performer, and it would be a very good one to have in your portfolio from a US investment perspective. I missed out on it but I still wouldn’t be worrying about that now and I’ll tell you why. The Chinese market has got, as you know, and depending on who you believe, either 1.2 or 1.6 billion people. The USA has 300 million people. That means that theoretically, the Chinese economy should be four times the size of the American economy. It isn’t so. It’s only half the size of the American economy so, really just put your thinking cap on and say, well unless the Chinese manage their country badly into the future or unless the Chinese people get really lazy, they will overtake the American economy at some point in time, and make up or if they don’t overtake it. They will make up that gap of eight times, roughly, when you take it on a GDP per capita. As a consequence of that you would expect that the stocks, the mega tech stocks in China, would be rated at a premium to the mega tech stocks in the USA, but that isn’t the case. In fact, they’re rated at a discount. That’s why we’ve brought Tencent into this portfolio and, as I say, it’s one of the mistakes that I’ve made with overlooking Alibaba but that’s one that really should come into the portfolio as well.
I don’t think, however, that you should be betting on individual stocks. We never know what the future holds. The time that you start getting confident about a particular stock is the time that it’s going to give you a hiding so, my suggestion is rather to get yourself a good, balanced base, as we’ve got in this portfolio, with our 10 shares here. Divide your investments among a number of shares and then be surprised because the one that you might have been most nervous about. If it’s well balanced, it is sometimes the one that can perform the best…And you can see, that’s exactly what happened here. If you look at Tesla, even though I’ve told you why I like the stock so much, we only put in $10,000 into that stock so, we only started the portfolio, if you recall, with $200,000 and it’s now worth $331.000, but we only put $10,000 of it in, and that was in October last year. That’s a very small percentage. It’s up by 60% so, it’s given us 5% of the portfolio but it’s been a big surprise to us and it’s one of those bets that you can expect to bounce around in the short-term but in the long-term, given the opportunities for a company like this, I don’t believe that it’s going to be 5% for very much longer.
I just wanted to show you this portfolio as well, and that annualised return of 39%. It just shoots all the lights out. I don’t know – it was never the intention to say that we could grow at anything like that. Roughly, the R2m that we put in the portfolio to begin with is now worth R4.5m. That is partly due to the ZAR’s depreciation but also because of the stocks that we invested in performing extremely well. We also managed to get out of some bad ones and replace them with some pretty good ones. As you can see, Tencent has been a great investment for us. It’s only been around since May. Tesla has done terribly well as well, and that’s only been around since October. Facebook too, has been a great performer. I’m talking about those stocks outside of the main holdings. Our most recent holding, Microsoft, has already done 13% in ZAR terms. That 39% annualised return on the portfolio gives you an enormous buffer, if you like, into the future. It also means that we can keep riding our winners without any concerns if a Tesla, as it did recently, it came back from $363.80, I think it was to around $320, where it’s now trading.
The ZAR’s performance is very important to this portfolio. This is where we started off on the 4th December. You can see right on the left-hand side, it was R11.47, and it’s now bounced around. At one point in time, in January 2016, you could imagine that this portfolio was looking pretty sharp because the ZAR was so weak. The ZAR has improved of late in the last few days, in fact, but it is generally a currency that I would be very concerned about given the underlying economy and the GDP per capita that is continuing to fall in SA. Of course, all bets could change in December and I’m feeling pretty confident now that Cyril Ramaphosa will win because rationality always does prevail but even so, it’s a high risk to start betting on the ZAR at any time, and particularly now with the ANC elective conference just around the corner.
Individual performance that will help you and it shows you that the ZAR, since we started off at R11.27 is where it began, and it has depreciated by 22%. So, if you had just taken your money and put it into the USA 3 years ago, left your ZAR, converted it into USD, today you would be 22% up. Of course, that wouldn’t be anything like the returns that we have with this portfolio, and you can see underneath it why that is the case. The ZAR in fact, has only performed better than Microsoft and Metro Bank, and both of those were bought fairly recently. All the other stock picks have worked in our favour. There’s a profit since purchase, as you can see, the wonderful performance of Amazon. It’s lovely to have one of those in the portfolio. It puts the whole portfolio ahead and then we have Alphabet not far behind it. There’s the much in the line Tesla, which has done very well for us. Apple as well, has been a great performer.
I want to talk a little bit about this before we go into any questions on Bitcoin. You might have read this morning my piece on BizNews Premium about Bitcoin. There’s always questions about Bitcoin, Stuart so, to almost hedge you off before you chat about that. I just wanted to throw these up. Here’s what happened to Bitcoin in the last year and here’s what happened to the NASDAQ bubble. Is Bitcoin a bubble? Let’s just dwell a little bit on NASDAQ. As you can see, NASDAQ is the tech stock, tech heavy index – the NASDAQ Composite Index, and I took out here from 1992 to 2002. It started only in 1991, and as you’ll see from 1971 all the way to 1995, so it took 24 years for NASDAQ to get to its first one-thousand. I hope you can see that on the graph there.
Then it took another 4 years to touch at two-thousand, in early 1998. Then it took another year to get to three-thousand, and within months, this happened by the way, in November 1998. Within months it just went up straight, in a straight line. A little bit like SA’s debt to GDP ratio under Jacob Zuma. Just one-way traffic right through there, and it peaked at five-thousand. Now, I mentioned this in my story this morning that I had an associate who I got to know around about in this area here, and he was a very successful trader. When he saw this happening and then indeed in this part here, in late 1998, he went short. He went shorter than NASDAQ and eventually he was forced to sell out round about this level, at round about 4,000 – 4,500, and it still went higher. So, those are the problems with bubbles. Never, ever try to time a bubble or to call a bubble as a rational investor. You never know. What you do know is that the bubble will burst but you don’t know when or how, and if you look at what’s happened at Bitcoin there is no question in my mind that this is another bubble. You don’t go from $1,000 to nearly $10,000 in one year, up 10 times, without it being a bubble.
Other indications of this is that every man and his dog now seem to be playing Bitcoin. There are, fundamentally, good reasons why Bitcoin would be worth owning but in this, and at this price, you’re worried about Tesla and you have a look at this on Bitcoin. I just want to give you one last point about this. The greatest economist in the world, in the last Century, was a man called John Maynard Keynes, and Keynes is worth, he came to a speculation at quite a late age. He was in his mid-30s round about 1910/1912 so, he was in his mid-40s, 10 years later, where he saw this disaster happening in Germany. If you recall after World War I, the allied forces put massive reparations onto the Germans, who had lost the First World War, and as a consequence of that they laid the ground rule for what came later with Adolf Hitler but the new government that was elected there was called the Weimar Government. The Weimar Government didn’t really know what we know today about the printing of money and it wasn’t a problem for them. When they had to pay all these reparations they just printed more money. A little bit like Governor Gono did in Zimbabwe, he also believed that no country has ever gone bust by printing money. Well, he certainly hadn’t pulled out his history books.
Anyway, the Weimar Republic was printing money like it was going out of fashion. John Maynard came and looked at this and said, this is insane. It’s going to burst. The Deutsche Mark is going to be worthless and he bet against it, he went short of it. He was right, of course, but his timing was wrong. He didn’t know how long the bubble was going to last and he was wiped out. The most famous economist of the 20th Century got wiped out for being right but having his timing wrong and that’s what happens in bubbles. You cannot predict them. If he couldn’t predict the end of it then us lesser mortals have got pretty much no chance, and it’s similar with Bitcoin. Is Bitcoin or the bubble going to burst today, tomorrow, next week, next year, or in two-year’s time? Who knows? Is it going to burst at $10,000, $20,000, or $50,000? Who knows? All I can tell you though is that when it bursts everyone gets hurt and I can assure you it’s going to end in tears but whose tears and when are the tears going to happen? Heaven only knows, and the future will tell us that. But if you like speculating and you’ve got money to lose or to burn, and you like this kind of thing well, have a go. Why not, if that’s the kind of person you are? I work too hard for my money. I don’t believe in gambling and speculation and, as a consequence of that, it’s just too rich for me. I think that’s the way to look at it.
I saw a lot of people being hurt in the NASDAQ bubble. I saw just as many people being hurt in 1987, in fact, more people in 1987 in SA, and then of course in 2008, we had the commodities bubble in SA as well, and we’ve got another bubble going on and that’s in debt, where you’ve got negative interest rates on long bonds. How the heck can that possibly be justified? But you’ve got the professionals who’ve been sucked into it. They’ve been told that they have to put money into bonds and as a consequence, you’ve got a bubble that’s developed there as well. I just wanted to spend a little bit of time on that. The real lesson from bubbles is know that they’re a bubble, first of all, and secondly, just try and ignore when you have the newly rich investors, newly rich on paper, but don’t be ugly to them. The best way is to say, ‘look, it’s too rich for my blood – maybe you should take half your money off the table,’ etc., if you feel brave because when the bubbles continue, as happened with that acquaintance of mine. It would have went from R4,000 to R5,000 I can assure you. At that point he was feeling very glad that he got out at R4,000 or had been forced out, but he felt terribly sick a year later when it was down at half of the level that it was at. That’s a little story about bubbles.
Have we got questions, Stuart? Okay, I’m not going to worry too much about that. Stuart might have had a few bandwidth problems but let’s continue in our normal way. Let me just make sure that you can still hear me. Can you just raise your hands, please? Thank you very much, that’s great. Okay, the hands are raised and you can hear me. It seems like the problem we’ve got is with Stuart, and not with me. Okay, let’s go through the portfolio. As soon as Stuart comes back online he will pick up those questions so don’t worry about it. Put the questions through and we’ll just go through the rest of the portfolio.
Here’s the Vanguard S&P 500 Index. What I’ve done this month is gone back to our purchase date, the 4th December 2014, and here you can see. It’s been a bumpy ride for the whole of 2015, and then for part of 2016, and since then it’s just been one-way traffic. You’ll see, primarily a lot of that happened from around October 2016, and you’ll recall that Donald Trump was elected on the 8th November 2016 so, the Trump trade is still in place. The S&P 500 Index is a weighted index of all the shares that are listed on the NY Stock Exchange, or the top 500 shares on the NY Stock Exchange so it gives you an indication of how that Index has performed and it doesn’t really shoot any lights out but this has been a lovely performance. In the last year you’ll see it’s gone from about $1.95 to where it is at the moment, to $2.35 so, a nice return, a good and solid return that you’re having there.
Some of the better returns that we’ve seen in the portfolio have, of course, been through the stock selections. Here’s Alphabet and again, it took a little while from December or January right through to June – for 7 months it was doing nothing. This is often the case in investing that you can make an investment and you need to have patience. Thereafter, one of the reasons there is they got a new financial director who just adjusted their spending into a way that was more Wall Street friendly and as you’ve seen, the share price of Alphabet has gone over $1,000.
Here’s the all-time star, the hero, Jeff Bezos, and that share that we bought in, in the mid $300s, as you can see, it actually cracked $1,200 in the past week and I don’t think it will stop there, not by any means.
Berkshire Hathaway – even it has had a good run lately, benefitting from the Trump trade so, if you see from October, the whole stock market has gone up but again, if you were to use a scale and put that next to some of the big movers, like Amazon and Alphabet (Google), you’ll see that percentage wise it hasn’t performed anything like as well.
Apple, this has been a great winner for us. Apple’s results that came out in the last quarter and you can see that bump up from October to November. The results were exceptional. They were way ahead of target.
Let’s just pick up on the questions because I guess that’s the more interesting thing. I see there’s 38 questions there so, let’s try and work through them as quickly as we can.
Perfect, there’s a question on IBM, Alec. One of the users still has IBM in his portfolio and he’s not sure whether he should sell?
I’m not following IBM anymore so please do. Unless you’re going to be looking after it yourself. The whole idea of this portfolio is that you have usually got a day job, or most people have got day jobs, and it’s my job to keep an eye on these stocks. I’m not following IBM anymore. Warren Buffett has sold out of the stock and for him, after many years and a huge holding that he had, if he decided to get out of it – that was good enough for me. It had disappointed. It had not been a good performer for us so that was why we’re out of it but unless you’re prepared to follow it yourself, just know that I’m not going to be.
Thanks, Alec. Gerrard Cooke just says, ‘he’s got R1m to invest – how should he spread it in Webtrader?’
I would say that if you’re looking to invest it offshore you can spread it amongst these shares, Gerrard, no problem. That’s really the whole intention. If you’ve got the R1m, and you want to invest offshore, my suggestion would be to allocate it according to the proportions that we’ve got in this portfolio and that will, at the very least, you’ve got somebody looking after or looking into the shares for you and somebody who’ll report back on them every month, and that’s what this webinar is about.
Thanks, Alec a comment from Len, his son-in-law has just opened an account at Metro and he says, it’s great service. He’s very happy.
Thank you.
William Murray, he doesn’t say what. He just says, ‘please comment on Tesla and Facebook.’ I know you’ve done a lot of Tesla commentary. I’m not sure for Facebook.
Well, Facebook also came out with financial results in the past quarter that were better than expected. In this new world what you have to try and do and please, it is a new world. The internet is an invention that has changed mankind and changed reality as we knew it. It’s brought in exponentiality. Companies can now buy and sell products through the ether. It really is a new world. I know we’ve heard it time and time again, 1929 they said it was a new era. In 1987 they said it was a new era. In 2008 they said it was a new era. Those were all to explain away dislocations in valuations. To me, this is a new era because the internet really does change everything so that’s the premise I come from but remember, I invested heavily in the internet from a personal and from a professional perspective, right back in 1997 so that’s where it starts.
In this era, in the new technology era, where different processes come to play. The Fourth Industrial Revolution, as they call it at WEF, you’ve got to look for the gorillas because the gorillas win in this game. You will be surprised to hear that of all online advertising in the USA, two-thirds go to just two companies, Facebook and Google. Now, that’s extraordinary when you consider that there are many players. In fact, you could be an online internet player tomorrow, if you want to start a website to compete with them but two-thirds of the advertising goes to those two companies, and Facebook is one of them. It’s a gorilla. The social network vehicle that Facebook has put together is the gorilla in that space. Social network is, for better or worse, becoming ever increasing in our lives and you’ve got to have a slice of that action. It generates between 35% – 38% profit margins. It has a new world kind of approach, with relatively few people. It’s trying to do a lot of good and it has a social license because you don’t have to go onto Facebook. It doesn’t cost you anything but if you don’t want to join that network you don’t have to. It is the one to join. There is an alternative in China and of course, we do being very focussed on the western side, we do sometimes forget that there are other alternatives around but as things are going right now, Facebook is still growing and there’s nothing that I can see on the horizon just yet that is existentially problematic for it so, Facebook is in our portfolio.
Thanks, Alec. A follow-up comment on Metro Bank. Harry says, ‘it hasn’t moved like your other holdings – what are your thoughts on selling Metro and adding proceeds to Tencent or one of the others in the portfolio?’
Metro is an interesting one. Metro is a different play. I bought Metro because it’s almost like Capitec in SA. We’ve had the advantage in SA of watching the way that Capitec’s continued growth, year-on-year, the way that it adds customers all the time – the way that it expands its balance sheet at exponential rates is translating and has translated into a share price that today, everybody looks back and says, ‘of course, I always knew Capitec was going to be a big hero.’ The thing is, Metro Bank is going through the early stages of Capitec. It’s growing at 60% a year. It’s expanding rapidly. It’s in a market where it is chewing up the competitors. I’ve actually just moved my account across from HSBC, our business account, to Metro Bank and I’ve been absolutely delighted with the way that this business operates.
There it is on the screen – I met the founder, Vernon Hill, and he’s done this before. He did it in the USA. He started a company in the USA called Commerce Bank. From one branch, when he was 26-year-old. He had built it up into 500 branches, sold it for billions of Dollars, and then he retired, as he said, ‘for exactly one week.’ After that week he said, ‘someone told him that America is a competitive area – the UK, on the other hand, has got a ‘5-bank cartel,’ an opportunity that knocked only once and he didn’t need to wait for it. So Metro Bank is in the early stages of formation. It’s around 7-year’s old. I don’t know when the market is going to pick up on this one. I have no idea when the Capitec effect is going to start coming through here.
The reason why Metro Bank’s share price has not reflected the growth is because the British investors or the big investors, it’s a much smaller pool of capital than in the USA. They are mindful that at this rate of growth you need to keep adding capital so, Metro Bank will be coming back and having successive rights issues to raise more capital, or that’s the theory. Of course, there are other ways of raising capital. There are preference shares and other kinds of things but up to this point what Metro Bank has done is it’s issued more shares through rights issues. When I spoke to Vernon Hill about this he said, ‘you’ve been in London too long – you don’t actually know how this thing works.’ I said to him that was my understanding that the share price was not being supported by institutions or they weren’t buying into the story because they were going to be fighting against themselves because they’ll have a rights issue if they buy their shares now and they push the share price up they’ll only be able to buy the shares at a more expensive level in the future. He said, ‘no,’ he doesn’t buy that story, and I’m with him but we’re going through that hiatus right now where you’ve got a little bit of a boxing match, if you like, between the investment community and the bank itself. The underlying business though is spectacular and that’s the one that I like to be in – spectacular, exponential businesses, and this is one.
Thanks, Alec. Steve says, ‘Berkshire Hathaway has underperformed Amazon by a factor of 10, over the same period – is it time to disinvest and buy elsewhere?’
Berkshire, yes, you might have noticed if you’d been with us for a long time that we have halved the holding in Berkshire. Is it time to disinvest? Well, when we find something like this, like Tencent Holdings, and Alibaba is looking around the corner, then that is the time that we will take money out of, and I’m going to show you the portfolio again, there it is, out of Vanguard and Berkshire, and reallocate that into a stock pick that we like even more. So, it’s a very valid point. My problem with this is, the one thing I would have been happier to invest in Alibaba than Berkshire? Of course, because the performance is so much better but Berkshire has done okay. It’s generated a return for us, in ZAR at 48% in 3 years and Berkshire and Vanguard, i.e. the index as a whole. They are there almost like a parking spot for your ZARs until such time as a better opportunity comes along and I can assure you, I’m looking and I keep looking.
Sometimes these share prices run away from you, and sometimes you’re not quite sure about the investment opportunity. We did look at Lloyds Bank, you might remember some time ago and we were quite keen on that one and fortunately, we didn’t pursue it. We went rather with Metro Bank, which has also underperformed but I’m much happier to be in Metro than in Lloyds right now. But both Berkshire and Vanguard are sitting there as, if you like, almost like our cash we will turn it into cash when a more appealing opportunity comes along. There’s lots of them, you just have to be comfortable that it’s a kind of stock you can put in your portfolio and hold for the next 5 years.
Thanks, Alec. Maureen asked, ‘I’m not sure if you’ve got any insight on MimeCast?’
No, sorry. Not a company I know at all.
Just two pieces of commentary. Andrew says, ‘can we blame Telkom and short them?’ I suppose no because I’m not with Telkom, and I know you’re not with Telkom so, it’s not their fault we fell off.
No, mine would be Virgin Media, who’ve got this unbelievable 250mb fibre into our home but I guess, Virgin Media – I don’t know what happened there, I apologise. Don’t short Telkom, and certainly not on what happened today.
There’s just another one. Apparently, Bitcoin has just broken through $10,000, according to Shane.
I hope you’ve got lots of them Shane, and I hope you can take your profit one day but please, don’t take it on my ‘say so’ because the problem about bubbles, and I’m just going back there again. Look at that, it’s gone up ten times, in fact 20 times in this year. It was at $500. Well, good luck to those who’ve made their money. It’s like when I was a young man I used to go to the horseraces every weekend because the student loan and my rental repayment was higher than my salary that I was earning, my after tax salary. As a consequence, I had to somehow make ends meet and the way that I did that was I’d go to the races and place bets on horses that really looked like, after a lot of studying, they would make a good return. One day, I remember it so well, I made a mistake and put the wrong numbers in and it was a 50:1 shot, and it was a win bet as well. The 50:1 shot won the one leg and a 20:1 shot won the next leg, and I had never seen so much money in my life. I think the people who’ve invested in Bitcoin must be feeling a little bit like that day but it didn’t fool me into thinking that it was something that I knew much about. It was really just dumb luck.
I’ve got another question from Gerrard. He just wants to know have you used Standard Bank’s Shyft app, and your thoughts?
It’s amazing. It’s a fantastic app. I don’t need it because I live in the UK but for a South African it definitely is a wonderful way of moving money around and really Standard Bank is doing some pretty good stuff and that is one of the very good innovations that you can get from the bank. Well, Stuart, I see you’re saying that because we’re coming to the end of our time. Maybe we can give it another 3 to 4 minutes. I see there’s still lots of questions coming through. Let’s try and answer a couple more before we log off for today.
Thanks, Alec. A question from Steven, he says, ‘are there any shares in the portfolio that you wouldn’t buy now due to the growth they’ve already experienced since the inception of the portfolio?’
Steven, that’s a very good question and it’s one that you should always consider when you look at the portfolio every month. In all honesty? No, there’s no stock here that I would not be happy to acquire in the proportions that we’ve got in the portfolio at this level. If you said to me, ‘would you go and put 100% of your investment today in Tesla, given all the wind that’s gone on from the front, and given the way that the market has been heavily short of Tesla?’ I’d have to say, to put 100% into Tesla right now, is not a very smart move but to have 5%, absolutely because it’s one of those things that is just going to surprise you. Certainly, every other stock in the portfolio. Amazon, I’m very happy at 18%, it’s the best company in the world and it’s the company that I think in 5 years’ time, if you close down the stock markets today I would put a very significant bet on Amazon being worth more in 5 years’ time then it is worth today, a lot more. In fact, growing by a rate, which is faster than any of the other stocks in this portfolio.
Google is another company. It’s a gorilla in its field. Remember, Google is giving you the information for free. It’s using your data and it’s taking that data and applying it in very smart ways but you aren’t paying anything for an amazing service that Gmail and Search gives you. Apple, the Apple X – I suppose Apple has got to be the more vulnerable of them but it has been moving quite aggressively into new fields. It’s got a lot of cash, the last I looked it had $250bn in cash. It pays lots of tax. It’s the biggest tax payer in the world. They pay $35bn in tax, over the last 3 years. Would I be happy? Absolutely.
Tencent Holding, the same thing. We have 10% in Tencent, the numbers add up quite nicely but remember, Tencent has got 900 million Chinese who use Tencent as their operating system on their phone. Facebook we’ve discussed as well. Vanguard is really 8% in the index overall. You can’t find a better place to park your money.
Microsoft, I love because of the way that Office 365 is transforming. The whole business model has changed. Metro Bank, we spoke about a moment ago. Berkshire, again, a nice parking place, and Tesla is a bet on the future. It’s not excessive, it’s only 5% of the portfolio so, no, I’m happy with all of them.
Thanks, Alec. We’ve managed to get through all the questions so I think it’s unfortunately time to say ‘bye.’
Indeed, it is, and thank you for being with us. Our apologies for the break in transmission. Do know that we will have the portfolio webinar transcribed and up on BizNews Premium for your leisure to go back to at some time in the future. From my side here, in London, where the sun is shining, even though if it is only 6 degrees. It is always a pleasure to be with you and thank you for joining us today.
