WEBINAR: Google and Amazon surprise

After a bit of a hiccup, we kickstarted our Biznews Global share portfolio again in December, and now we have a few juicy movements to take a look at. Using Standard Bank's Webtrader, Alec analyses how his portfolio has performed thus far. A couple of happy surprises in Amazon and Google, ever-dependable Berkshire Hathaway, and a little bit of a lag from Novo Nordisk. Alec explains, however, why the global obesity pandemic is the reason that he will never drop the Nordisk cash cow. – CH.Good afternoon, ladies and gents, its Simon Brown here and I'll be doing the introduction and I'll be taking some questions for Alec Hogg. We're looking at the Biznews Global Share Portfolio, run through Webtrader..___STEADY_PAYWALL___.Before we go any further, can I just confirm that you are receiving audio and that you can see the screen? If you have a yes to both, just raise your hand and let me go to the webinar application. Brilliant, hands are coming up. I'm going to hand over to Alec. If you have questions, drop them in. If they're pertinent to the point in the presentation, I'll jump in and throw the question to Alec and of course, we have some time for questions afterwards as well and as always, we are recording but with that, Alec the floor is yours..Hey, thanks Simon and it is nice to, as always, be doing this update but particularly nice this time round. Why am I saying this Simon?.It's because we're making money..Amazon.com. Jeff Bezos, a 30 percent jump in that share price, in U.S. Dollars, not in Rand, so our confidence in Amazon.com has paid off and that has made a substantial difference to the portfolio. There it is there, the current position. You can see Amazon is now our best performer. We only have 50 of them. We say 'we only have 50' but if you remember last month it was a dreadful under-performer. A 30 percent improvement in a month is enough to get anybody excited..Overall, the portfolio is now in front. We still have $30.000 in our nominal portfolio. Remember, we started with $200 000.00 here. We still have $30.000 that is available for investment. We haven't found anything yet to put it into. The structure of the portfolio is quite simple. One-third goes in to Vanguard S&P 500, that's the one down at the bottom. Can you see my curser down there? As you can see that has done quite well. .We started the portfolio in December but we had to, for technical reasons begin again a month ago, so in the last month it's done pretty nicely. If you go back to December, it has done extraordinary well, but we'll get into that later. That's the one-third of the portfolio. What that does is it gives you the U.S. Stock Market, tracking through the S&P 500 Vanguard..Then we have, roughly a third in Berkshire Hathaway and Google. Google because I think it's the best company in the world with a faultless business model and Berkshire Hathaway because it is a replica of the S&P 500 in many ways. It gives you an understanding.. Well, Berkshire is so big now, Warren Buffett's company, that it is exposed to the U.S. economy. So if the U.S. economy goes up, Berkshire will perform as well. .As you can see, not a whole lot happened in the last month, with Berkshire Hathaway, in fact, we are making a little loss there, but that is primarily in trading costs. Then we have three stocks that we've invested in, eight percent of the portfolio, and we still have about 15 percent of the portfolio in cash..Those three stocks are Amazon.com, which has now picked up very, very nicely. As I said, 30 percent in the last month, we'll tell you why in a moment. IBM, which is a lovely value play, and then Novo Nordisk, which is a sad situation, to see that one is down five percent in the last month but I will tell you why I wouldn't ever dream of getting rid of Novo Nordisk..Alec, a question coming through around Vanguard, there a bunch of ETF's that track the S&P 500 and the question is asking you and me, asking what my preferred is, but also why Vanguard and why not one of the others? They are all broadly the same..It reminds me of when I went to Gorat's, which is Warren Buffett's steakhouse in Omaha and the waitress, Kathy was her name, came to us and she said, 'what would you like to eat'? We said, "What does Mr Buffett eat?" She told us it was a T-bone with double hashbrown, so of course everybody had the same. It is Warren Buffett's preferred ETF. He would have done his homework on this, you can be sure, and the reason we know it is that it's his preferred ETF. Just before last year's annual general meeting, he was asked what he would do with his wife's Astrid's money if he were to pass to away. Where is it going? He said he would allocate it all to the Vanguard S&P 500. That is the reason why I thought why go and try double-guess the world's greatest investor. That's the one that he likes, so let's go there too..Yes, that's a good point and it is totally expense ratio, chatting before we started recording; 0.05 percent, I don't know how they run a fund at that sort of five points of costs. There are a lot of them and I'm with Alec. If Warren Buffett likes it, heck that's good enough for me and with an expense ratio like that, that's probably why Warren Buffett likes it..It probably is, indeed and I think Simon, that 0.05% – They are doing it all for you for pretty much nothing and costs are so important, when it comes to index trackers. You can get index trackers that charge you a multiple of that and you do see it over time, so if you are going to buy the index and you're going to buy the market then try and get as close to that..Yes, if you have a 1.05 percent cost, you are going to, over 20 years, you will be 20 percent down, but you will be more, because you've compounded that 20 percent out of your portfolio..Yes, so that's the reason for it. Okay, so that's our overall portfolio. Let's go through the individuals. We started this portfolio on the 3rd December, those of you who were with us then will remember the Rand was at $11.27. It is now at $11.65. That's against the U.S. Dollar, so you are three percent better, even standing still on the Rand amount that you put in there. Of course, that's not the way that we calculate it because we calculate the portfolio in U.S. Dollars anyway. We said we'll put in $200.000 U.S. as a nominal starting point, but it does give you an indication that we are having some protection there, against the Rand's depreciation. Annualised – that's 12 percent, so it is quite a hefty protection, just for starters and a starting point. .Then it shows you now that all of the stocks, with the exception of Novo Nordisk in Rand terms, are in front. These are very impressive returns for three months but it is not what we are really looking at. If you annualise, for instance, Vanguard that takes you to 20 percent in three months. Google to 24 percent, and Amazon, well there we go – extraordinary. Berkshire Hathaway – even 12 percent. These are good numbers. In Rand terms, better than or double the South African inflation rate but we really are looking at a long term portfolio, so it is most unlikely that, at any point in time, or certainly in the near future, we are going to lightening any of these investments that we made. .It just gives you an indication or a feeling that why we like to invest offshore, not just because you have a wider range of opportunities, but because of we're in a country, South Africa, which has a weak currency..Starting with the big one-third slug, well the 30 percent to be precise slug that we have in the Vanguard S&P 500. As you can see, it very, very closely tracks the index and in the past three months, that is, it's appreciated by about two to 2.1 to 2 percent, if you add in the returns there. Add another Rand, so you're talking about five percent overall and a very nice return it is. .We will keep that slug of the portfolio in the Vanguard Fund because we think that the United States has rebounded very well from the global financial crisis. It is interesting just to digress slightly. When I was in Davos last month, there was quite a lot of discussion on European quantitative easing. The concern that was raised there was, although Europe is only a fraction of what the American's did, why quantitative easing might not work as well in Europe as it has done in America, is because it is really meant as breathing space. .It is almost to give your economy breathing space, while you address the underlying structural issues. Now, in America, there aren't underlying structural issues. It's a highly flexible economy. Labour moves from one area to the other, and that is why it rebound so quickly. In Europe, you have underlying structural issues that the politicians are very loathe to get their hands around. And as a consequence of that, will quantitative easing work in Europe, it's a big question mark, where in America….It's four or five years late..It is interesting. There was a piece this morning that we published, what was going on in France where the French are now trying to do what they can, within the political restrictions and they are going to move from seven to 13 days of the year that Sundays will be open for trading. .How insane is that? Only seven days a year can you have Sundays trading, on average, so the Champs-Élysées stores will now be open all year, every Sunday of the year, but that reminds me of the old South Africa. .I was going to say, this is Durban in 1980..Alternatively, Bloemfontein at around that time. .I remember that on Sundays everything was shut, except the beach..In Durban, in 1980, yes. Well, it's interesting, now if you think they have to fight for that little concession. My goodness, the underlying issues that….Yes, whereas America has already…well that economy has just been working for 100 years..Yes, well even longer, the 'founding fathers' certainly knew what they were doing in 1776, so we like the American economy. They've had their quantitative easing. The economy is back on track. The most recent figures show five percent annualised GDP growth rate, that was in the third quarter of last year. The U.S. is the place to put your money. .Amazon.com, well let's start with this of the individual stocks because it has been a gangbuster. There we go; you can have a look at the portfolio. It moved in the past month. It is almost a month exactly, where it is now up 17 percent and a month ago, it was down about 12, so add that together. It is a 30 percent jump in the past month. It is our best performer in the portfolio, why so?.Well on the 29th January, and if you have a look there, you can pick it up just before the 29th, I think it was the 27th people started thinking, 'could be good stuff coming from Amazon'. The share price shot up after the fourth-quarter figures were released from this company. It is a NASDAQ listed company and that is why we compare it with NASDAQ, which incidentally has been doing a little bit better than the S&P, since our portfolio started anyway. The reason for this is that the numbers that Amazon produced for those three months, at the end of December, were better than everyone anticipated. The fourth quarter sales were up 15 percent, year-on-year, to $29bn. That took, if you had to add the exchange rate, because remember Amazon has a big international…about $10bn of its $29bn in sales comes from outside of the United States. .That would have an impact because the U.S. Dollar has been weak in that period. If you were to take the exchange rate out of the picture, then the sales would have been up 18 percent, so volume growth is extremely strong. .Operating cash flow is up about 25 percent trailing in the last 12 months. What that meant was we took 2014 as against 2013; operating cash flow is up 25 percent. Things are just going much better in the fourth quarter, after the third quarter results were a little bit questionable and they saw the share price of Amazon falling. This time around, things are going in the right direction. .There's a whole lot, if you go onto the Amazon site, and you look through the investor relations section. You'll see that they detail much of the information there. Amongst the highlights of the period was that in India, they are now already, after just two years, and they are the biggest online store. Although the Chinese have Alibaba, in India they have nothing similar so in two years, Amazon is the biggest there and that is huge potential into the future. .I was chatting with some Americans over the holidays. They order everything, from toilet paper to peanut butter. I thought this was crazy, but when I was looking for razor blades. I use a safety razor. I want the Gillette Blue. I can get them in South Africa. They're about R10.00 a blade. I buy them from Amazon, shipping, tax, postage and everything, at R5.00, so I buy my razor blades from Amazon. Okay, so I wait 12 days..You've given us all a big tip there..I don't know how they do it. Forget the sense behind it. Its pure economics, I can see what I pay at my local store and sure, they're imported but it is almost the sense of what the average American get (they call it prime). You pay $100.00 per year..Yes, all the movies you can eat. .Yes, and everything, shipping free, and the whole shebang, I'm finding more and more that I can just buy stuff on Amazon and it is often cheaper, more convenient, wider range. I'm not yet buying my toothpaste and peanut butter but, razor blades..Who knows? .It's about the warehousing and the logistics and it is probably shipping from…and these blades is made in St. Petersburg, so they are probably shipping from a warehouse somewhere from…not from the U.S. but somewhere in Eastern Europe or Asia..It's an extraordinary story. Jeff Bezos continues to reinvest all the cash flows go back into Amazon.com, and I think you were saying, when we were talking about this off-air, before we started the webcast. That he has a little switch that you can switch on. 'You want profit? Okay, I'll give you profit.'.Yes, because three months ago people were complaining, 'when is Amazon going to make money', etcetera, and it is almost as if he flipped a switch, and said, 'you want profit…done'. Here's some profit. Make the market happy, and carry on..Here we see the share price. A very interesting story. In fact, it was $294.00 a share when we spoke a month ago. It is now $381.00, so thank you Amazon.com. You make us look good. .So does he, Warren Buffett. He's a gentleman who has been around for 84 years. I'll be going off in April to my (I think it will be my 10th or 11th) Annual General Meeting of Berkshire Hathaway in Omaha. I think you should join me because it will be their 50th anniversary. 50 years since Warren Buffett and Charlie Munger took control of what was then a textiles company, Berkshire Hathaway. .Yes..It should be very, very special, but when the American economy does well, Berkshire does well. The share price hasn't really done that great in the past month. In fact, it is interesting when you look back on Berkshire. It seems to have steps around about the time of their Annual General Meeting. We're expecting people, well there's a bit of interest now. It will bump along for a while, and then the AGM comes up in April, a little uptick there. .Then, after around six months it tends to have another uptick but this is a company in which you can really put your money away and you can sleep well at night, because of Warren Buffett..At what price does Warren Buffett buy the shares? They have a floor at which they buy..Twenty percent above. They used to have it at 110 percent of book value. Remember, book value in their instance, is extremely conservative because they don't revalue. Some of their things in Geico, they have at a fractional value of its current value. Geico is the American equivalent of Outsurance, which is the market leader in the United States. I think it's the second biggest underwriter of motor vehicles in the United States and it's all done through the Outsurance route. That would be at a fraction. At one point, they were at 110 percent of nett asset value. They've bumped that up to 120 percent because they said 'no. Even at 120 percent of book value, it's very cheap' relative to what the company is actually worth. You have a floor there as well. I think that's what Simon was alluding to. You have a company that's going to be reflecting the movement in the U.S. economy. We have 15 percent of our portfolio invested there. .The other big slug is in Google. It has the perfect business model, as you can see in the reflection. Again, on the 29th of January, when we had Amazon's results, we had Google's results as well and you can see that the market picked up on that, and pushed the share price higher. At the time, it was looking a little bit sluggish for the quarter. We were down about three-and-a-half percent and because of those results, it's now about three percent, so a six percent move in the share price since those results were released. That's for their fourth quarter results as well. Google was started in 1998. It says in the financial results that came through, that the continued strength in core advertising is there. It would have made more money, had the U.S. Dollar not been weaker (because it reports in U.S. Dollars). .In its case, in fact, it gets more of its revenues now from outside of America than from inside of America. Amazon has a spread of about 18 or 19 to 10. In Google's respect, it gets a quarterly revenue of 18-billion. Fifty-six percent (ten billion) of that comes from outside, so it's interesting. Both Google and Amazon get ten billion per quarter, from outside of America, in sales..Staggering numbers..Extraordinary. When you put it into Rand terms, it's R100bn. The paid advertising (or paid clicks, as they call it) on their business model was up by 14 percent. Cost per click is down by eight percent. What that means is that they're getting higher volumes at lower costs and that gives you very, very happy customers. We pulled this out of the Google quarterly analysis and again, it gives you some very interesting analyses there. I like to look at these. If you go back to the fourth quarter of 2012, you can see how the revenues are going up and up – a very nice, steady improvement. Another thing there is the U.S. First International, which is pretty steady. It has improved slightly in the last two years: 54 percent international to 56 percent now, so it is moving in the right direction. If you have a global business, America of course, is very big but the rest of the world is even bigger. I'm very happy with Amazon, very happy with Google, and those results helped Google's share price coming from around $496.00 per share to $549.00..Things are going in the right direction. There's another little insight for you. The United Kingdom is an area in which Google split out as well because they have a pretty big business in the U.K..Onto our Big Blue Big Value. A value play: I see that IBM is getting more supporters almost by the day. We did have Gini Rometty, the Chief Executive of IBM in South Africa last week. She got a bunch of people together and gave a big show at the Sandton Convention Centre. Unfortunately, I couldn't make it. I was in Cape Town, on my way back here, but it's a company, which is not just big in South Africa. It's big all over the world. .You can see that its performance continues to lag a little. In the last three months, it under-performed the S&P 500, but this is not something to be concerned about. It is a business that is a value play and IBM is generating a lot of cash. They're focused into the future. They've made the right bets on the Cloud and this is a company, which allows you to sleep very well at night, too. It's been around a long time and their Watson (new artificial intelligence) innovation is going in the right direction as well. Do you like this one, Simon?.I do and the person who likes it a lot too, is Nick Norman from Atlantis Asset Management. He's much smarter than I'll ever be and I got into an argument with him about it. I'll be honest. He booked me and he knew what he was talking about. At this point, we look at IBM and we think about the 1970's. You mentioned Watson. We know them from Big Blue who beat Kasparov for the Czech's game and the Double Jeopardy TV show..They beat both of the Double Jeopardy superstar champions and formed a team. I think Watson was up against Big Blue, and Watson actually, whipped them both..I remember when Big Blue beat Kasparov. I'm a chess fan and a Kasparov fan and for me, it was heartbreaking. As a stock, what do they do? They're moving into the Cloud. They're a little bit late, but never underestimate them. They're a giant company. They're turning slowly because of their size but they have the core infrastructure of what the Internet and the computing world is..The rating is very, very attractive. Value investors are now investing in IBM. Warren Buffett has been upping his stake there as well. When you see the value players going for a stock that has the technology assets and global reach that IBM has, this is one with which, again, you can sleep well at night. .Novo Nordisk. I don't know what is going on here because this stock has 50 percent of the world's insulin market. Think of that. The world is getting fatter. We're eating worse. Not everybody is following Tim Noakes' diet. In fact, very few people are following his diet, relatively speaking, so the incidence of diabetes is growing. If you get diabetes, it's quite a process to get right cocktail for yourself. You go to you physician and over a period; he will try to find the right cocktail. When you eventually get it, you don't want to go through that again. The chances are half that you're going to have a Novo Nordisk product. There's also the new product that they're putting into the American market, which doesn't have FDA approval yet but it's likely to come. This is a cash cow that focuses on ten percent growth. Not 20, 50, or 100 percent growth per year. They're a Danish business that's saying 'let's look long-term. Let's grow in double digits – maybe 10, 12, or 15. Let's not rip the backside out of it. Just keep the investing going. Keep a nice momentum so we don't attract too many competitors. What a wonderful business model. Every now and then, they deliver a whole lot of cash to shareholders in special dividends..They're giant special dividends, too..Why not have this as a core holding in your portfolio? Well, it's the only one so far, in three months, that hasn't done well for us. It hasn't actually made us a profit but that of course, means you can get in cheaper at this point. That's Novo Nordisk, so that's really, our portfolio and I guess, the end of our slideshow..A couple of questions are coming through, Alec, asking around rebalancing. Starting at 15 percent, Amazon goes crazy. Would you sell some down or would you let that rebalancing happen naturally, over the life of a portfolio? We must stress that this is a long-term portfolio. This is not, by any stretch, a trending portfolio..I think we must take a cue there from Warren Buffett. What he's done (and he's had some of his holdings for 40 years, like American Express), is that he's bought them and then, as the cash flows have come in, he hasn't allocated more and they've risen..So you're putting into Novo, which is currently underweight, rather than Amazon, which is probably overweight..That's what he would be doing. If we had extra cash to play with, we would do that. I'm still sitting on the 15 percent of cash because I think we could probably, in the next few months, find another couple of good investment opportunities and I don't want to get into a situation where we have to sell something to buy a new one. Every member of this portfolio has been carefully considered for its long-term attributes. They say you should look at a unit trust on a minimum of one year, probably invest in it for three years and if you're really smart, take a ten-year view. The best holding period for stock is forever, because they will go up and they will go through their cycles. I don't want to do that, if possible. I like the way the portfolio is structured, with 30 percent in the S&P 500 so you're getting 500 stocks there anyway. In those two, Berkshire and Google bringing up another 30 percent and the final 40 percent, which it will be eventually, will be individual stock players that you really have to think about before putting them in. Unless something dramatic happens, you wouldn't want to ever, sell them down. Let's just let them run..It's partly on to the next question, which is about dividends. I'm with you. That's broadly, what I do. I probably picked it up from Warren Buffett. I don't sell down stocks. I just put my new capital via dividends or money I'm putting into the portfolio, into the laggers..Remember, we're not exactly getting dividends from most of the shares in the portfolio. Amazon has no dividends. Google don't pay a dividend. Berkshire-Hathaway doesn't pay a dividend. We really, are letting them ride. When Novo Nordisk's dividends come through, we should be….Mark Camper has just tweeted something written Anna Edna on Bloomberg. Novo Nordisk won approval of a weight-loss injection, into a list of pharmaceutical options for Americans attempting to shrink their waistlines..So they've won the approval. That's news to me. Thank you. Thanks for that..I don't know where he got it from, but it's sourced from Bloomberg. It says that they just won that approval..Well, that's good because if you recall last month, they had been turned down by the FDA and there was concern because it had been thought that the approval would just come through as a natural progression. They were turned down. They then reassessed everything, went back with an appeal, and now – good news. Thanks Mark, for that good news. Novo Nordisk: for me, just buy some more. If it is something that you haven't brought into the portfolio yet, it's giving you the opportunity..If I'm running the numbers right, we have space for two more stocks..We do. We have about 15 percent – $30,000.00 and the idea was to have seven-and-a-half (between seven and eight percent) for each of those stock picks. We have 30 percent in the S&P 500, two big stocks that make up another 30 percent (Berkshire and Google), and the balance of the portfolio would be in individual stock picks. So far, we have the three of them (Novo Nordisk, Amazon, and IBM) and we are looking to maybe get a couple more..Folks, I'm not seeing any more questions coming through. If you have any, quickly pop them in the Q&A box. We've been nudging our time, but we're happy to overrun by a few minutes. You're off to Berkshire again this year. Will you go to the Value Conference ahead of the Berkshire AGM perhaps? Maybe that's where you'll find one of your extra stocks..That's exactly what I was thinking. That's when Novo Nordisk came up last year. Simon, it's become a week worth doing. Slowly, but surely the satellites to Berkshire-Hathaway conference have improved in quality and now, there's a selection of things happening in Omaha ahead of the AGM, which is usually the first Saturday in May unless it clashes with Mother's Day. There are all of these opportunities. This year, there are some very good conferences. Last year, it was the Value Investors Conference; a two-day event at which I learned a lot. This year, there's one even before that. I'll probably go a week early. I'll probably go through a whole bunch of the conferences and maybe see if I can cover them. These are not Davos-type conferences or even the Mining Indaba-type. These are relatively small groups where you have top-class presenters and those presenters then give a presentation to everybody. I could take those presentations and then feed them back into our community. That's the strategy so far. We just have just dot the I's and cross the T's, but that's likely to be the case in April..Ladies and gents, I'm not seeing any more questions. We'll park it there. We will be back next month, which will be March. I don't have a date. I will get a date, which will be communicated and everything will be rolling out. Let me be safe and say that the video will be online at sunrise tomorrow morning. I'll get it to them but there are always logistics. Thank you very much to everyone attending. Alec, always a pleasure. Thank you for your time.

WEBINAR: Google and Amazon surprise

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