WEBINAR: A fresh purchase – the UK’s Capitec added to global portfolio

This month's update of the BizNews Global Share portfolio is reproduced below – you can watch the recording and read along through the transcript. It is an interactive session which lasts an hour. November was an exciting month for the portfolio. For one thing, it continues to deliver excellent returns (annualised 30% since being started in December 2014). For another, a new stock was added this month, a company called Metrobank which could be described as 'the Capitec of the UK'. As he always does, Alec goes into some detail on each holding, explaining what happened in the past month and why they are being retained in the portfolio which can be replicated through Standard Bank Online Webtrader. – Stuart Lowman.Alec Hogg: Well, I know it's the 24th of November, and we've got a lot to get through today, our usual update on the Global Share Portfolio. Thanks for joining us as always. We've got a few changes, so I'm not going to spend too much time on looking at the existing members of the portfolio but as we like to finish these conversations in half-an-hour, I'm going to be spending more time on the changes that we're making to the portfolio this month..___STEADY_PAYWALL___.As always, Stuart Lowman, our managing editor is with us in Johannesburg. Stuart, you'll be following and looking out for questions..Stuart Lowman: Yes, thanks Alec, always good to be here. Yes, we always try to be interactive and the question box is on the right-hand side control panel, just pop them in there and we'll get to them as soon as possible..So, as the questions come you stop me and we then address the individual bits, so if there's anything in the portfolio or anything in the presentation that is bothering you and that you're not 100% sure with, please stop us and send those questions in and we'll get right to them. Right, well let's get straight to the portfolio itself now and I'll get onto the first page just as soon as I can get this thing to work a little bit more efficiently, my apologies. There we go. That's a little bit better..Right, it shows you that we've got quite a few transactions that we're going to be doing today, and I'd like to take you through….The idea here is that we started it off two-years ago. The decision then was to take a view on South African economic policies, which we believed we were going in the wrong direction. As a consequence of that the impact was going to be a weaker Rand over time and, as a result, it was an incentive to start looking internationally for the opportunities that existed in international markets..Now, this is not something new. Quite a few people have been investing offshore. What our problem was as consumers or as retail investors was that there was no real, easy way of doing this. Standard Bank brought in Webtrader, which completely changes all of that, and up to a million Rand that is invested into Webtrader can be allocated to this portfolio without having to ask any questions or even tax clearances, etcetera. That is part of the whole process of exchange control relaxation in South Africa..This was the idea. You take a million Rand, if you can. We started off with $200,000 a couple of years ago, and then allocate this according to the ratings that we have in our portfolio. We'll get into it in a second but just to let you know in this past month I came across a company called Metrobank here in London, and we've bought some of those into the portfolio, in this quarter. The way we do it is that we do not buy everything… When we find a new stock to invest in, we do not make that investment immediately. We try to take out the impact of the Rand and the impact of share price movements because this is a long-term portfolio..It's done unbelievably well in the last two years but it has been structured on the basis of being a long-term portfolio, so you won't chop and change the holdings at all. We have, however, over the two years, sold one stock out of the portfolio, and that is the insulin producer, Novo Nordisk, which had done terribly well to begin with and the it really hit bad times. They got rid of their Chief Executive, who incidentally had just won an award from the Harvard Business Review, as being the best Chief Executive in the world, so it just shows, watch out for hubris..They also started moving into the United States, where there is a dramatic improvement in the pricing of pharmaceutical products for consumers but, of course, that doesn't work very well for companies who are busy there. All rough, Novo was starting to go on the backfoot. They'd had a fantastic run. They really did poorly in the end couple of quarters. We watched them and we then decided to sell out of them and thank goodness that happened because a month ago, when we sold out of Novo Nordisk. It was only a few days later that they came out with a profit warning and the share price has really tanked, subsequent to that..We're out of Novo Nordisk but we've also done was when we structured the portfolio initially, around a third of the portfolio was put into the Vanguard S&P 500 Index Tracker in the United States. That was to give the portfolio some ballast. It was also to give us an opportunity if we found new stock markets that we'd like to invest in, to reduce that holding and then to reinvest that money into the stock selections that we found..Last month we did exactly that. We sold Novo Nordisk. We took the cash that was there and allocated that to Facebook and Tesla, and I'll tell you a little bit more about that in a moment. This month we are selling half of the Vanguard holding that we had and we're buying into Metrobank. The idea here is to slowly do the purchases, so you don't sell and then buy immediately. You buy over three months, so you'll see what we're looking there is that today we've bought another 55 Facebook shares (that was at last night's closing price). Another 18 Tesla shares, that is the second leg of the purchases that we're doing with those stocks, so next month we'll buy another 55 Facebook and another 18 Tesla shares, and then we've done our deals on that one..Next month we'll buy another 157 Metrobank shares and the following month, in January, the final 157. I hope that's all pretty clear the way that we do this. It takes out of the equation the risk of exchange rate changes and the risk of share price changes as well because remember, these are long-term shareholdings that we're having in these individual stocks..Moving on then to the portfolio itself, and this gives you a breakdown of the portfolio. It's getting more and more complicated all the time because of the number of holdings that we have but we are trying to keep it as simple as possible. If we start off by going to the far-right hand side, where it says 'the target'. There you will see that Alphabet has a target holding of 16% and Apple a target holding of 16% as well. On those two, Alphabet has clearly outperformed this portfolio, and you can see the shareholding of the portfolio is 18% there. Apple has underperformed, and that is a shareholding of 12% of the overall portfolio..We then still have 12% of the portfolio as a target for Vanguard, which is the, if you like, the money that we're keeping in the market but as soon as we find another stock pick, or something that jumps out at us, we can buy into that one as well. We will sell the Index Tracker but overall, when you look at this, (at a glance) you can see that the return of this portfolio (over two-years), has been 25%. That compares with the market overall, (over two-years) of 7%, so it comfortably outperformed the market..Primarily, in this past month we've had some quite big changes and it was not surprising because Donald Trump got elected in the Unites States. The impact of Donald's Trump's election overall, has perceived anywhere as a blow to Silicon Valley, so we've had declines in the past month in the share prices of Alphabet, Amazon, and Apple that are in our portfolio..Alphabet down from $18,13 to $7.60, which lost about $3 thousand for us in our portfolio. Amazon was down from $8.38 to $7.80. That lost us also about $3 thousand, and Apple was down from $117.5 to $111, and that took about $2 thousand off the portfolio's value. On the other hand, Trump's election has been seen as very good indeed, for the old industry stocks, and we saw a very sharp move upwards by Berkshire Hathaway, which went from $144 to $158, so that added about $1.5 thousand to the portfolio. IBM, which put on $10 in each share price, adding another $1 thousand to the portfolio..It was also seen or perceived to be a very, good thing for banks and banks around the world have, well they call it a rotation back into the financial sector. The reason for that is that Trump wants banks to start lending again, so they are going to have a look at legislation that was brought in after the great financial crisis, to make banks more highly regulated. Trump believes and his advisors say that that has stopped banks from lending. They want banks to lend again, so they're going to ease off on those regulations on banks..The immediate impact of that was that Barclays bank, which we bought sadly, just before Brexit, on the 29th April. Remember, Brexit was on the 23rd of June. Immediately after Brexit Barclays Bank tanked. Now it has been surging and in fact, Barclays Bank is in front for us finally, after holding onto it for a while. It's a very good idea not to start trading in stocks. Had we done that we would have taken an awful hiding on Barclays Bank. Now it is, in fact 6% the level that we bought it at and despite the decline in the Pound, so it shows you exactly what happens. Barclays, of course you buy in Pounds, but we convert it into US Dollars, if you see that the Dollar value on this table is about $18.5 thousand from around $17.5 thousand..The other bit of good news here was that our staggered purchase philosophy has worked really well with both Facebook and Tesla. Both of those stocks having declined in the past month, so we only bought the first third last month. Then we had Trump elected. We have both share prices falling. We've now been able to buy in more cheaply, or rather to get even better value from those stocks in this past period..There you have the overall look when you convert it into Rand's because remember this is a portfolio that was structured for South African investors and the annualised return of the portfolio is 30%. Largely because in the last month, when you have a look down at the bottom, you can see the Rand has gone from R13.79, pre-Trump election, to R14.23, post-Trump, and that has a lifting effect on the portfolio overall. At the moment we don't really concentrate until we've bought our full allocation on new stock, so Facebook and Tesla is not really worth looking at, at the moment (in the context of their share price movements), but when you look elsewhere there's been in Rand terms, some very hefty appreciations..Of course, the star of the show, Amazon, which is up 200% (in Rand terms). That's the kind of investment that can change your address and certainly has contributed very significantly to the performance of this portfolio. But also, good Rand performances by pretty much everything. Even the market, as a whole, the Vanguard, which is up by 36% in Rand, since we started the portfolio, which was in December 2014..Moving onto the individual performances of the stocks. As you can see, when we started in 2014, the Rand was 11.27. It is now 14.23, so the Rand has depreciated by 26% or annualised 14%. That's had the effect of supporting our original idea, which was to find a Rand hedge, and it certainly has given anybody, I guess who invested rather than traded, in Webtrader (the Standard Bank product) a good return. You would have to have made some pretty sad investments to have lost all of that Rand depreciation. On the other hand, we've been pretty fortunate with Amazon and Alphabet, two of the top performers on the US market, in fact two of the top four on the US market in 2015. They talk about the FANGS, which is Facebook, Amazon, Netflix, and Google. Google is, of course called Alphabet today, and to have two of those FANGS, which were the primary reason why the S&P 500 lifted last year has been pretty fortunate for us in our portfolio..Berkshire Hathaway is now starting to look pretty solid, it's moved up well in the past month. IBM is doing nicely and quite a relief to see Barclays breaking into profit, after losing so much straight after Brexit, and there it is. There's the pictorial reflection as you can see on the far-left hand side, the Rand/Dollar which has helped but by having the huge out performance from both Amazon and, to a lesser extent, Alphabet, even Vanguard outperforming the Rand. That has made a significant to our portfolio's performance..Also, we do take into account dividend receipts. In his past month, there were dividends paid by IBM and Apple, both good, healthy dividends – $1.40 by IBM. It's only $140 but when you add them all up it comes to about $5 thousand that we've added to the portfolio over the past two years through dividends..I wanted to spend more time on our newcomer to the portfolio, and here it is. Stuart, before we go, are there any questions that we need to address?.Not at the moment, it's very quiet on the Q&A front..Okay, so that's really much of the background. Let's get into the specifics, and this is a tip, if you like that I was given by none other than Gerrie Fourie. Gerrie Fourie is the Chief Executive of Capitec. Now, if you had put R1 thousand into Capitec after they had listed on the JSE today that R1 thousand would be worth R65 thousand. They've got something going for them, something very big going for them and, by the way, it took a while for the share price to start lifting, so we're not going back to the initial stages and abusing an artificially low share price. They've had a 52% gain, annualised compound in their share price, since they listed on the JSE. That tells you that they've got a business model that works..I said to Gerrie, (I saw him in the last month) why don't you guys make an investment here, come into the UK and bring your incredible model, which is simple banking, reducing the number of products. Focussing on the retail market, and just making it easy, getting your money through transaction based revenues. What Discovery has brought to the world in something called the shared value model, so if Capitec can save you money, then you're quite happy to give it a share of the money that you're saving. That's what Discovery does with its whole health strategy..He said, "Have you heard of Metrobank?" I hadn't. I had seen them around and having walked past them and thought well maybe it was a spinoff because they've got similar colours to the German, I think it is, retailer. Certainly, a Continental retailer, which is a bit downmarket, for those of you have been into Metros in Continental Europe. When I started looking into it, my goodness was this a jewel that has been uncovered here..Metro is an incredibly interesting company. It was started by a gentleman, who did the same thing in the United States with a company there called Commerce Bank. What he did was he created Commerce Bank One, it's called in the US, in the early 1980s, when he was he was a young man in his 20s. He then built this company up, his name is Vernon Hill incidentally. He built this company up by focussing on exactly the stuff that Capitec does in South Africa. He sold it for $8.5bn, after starting with nothing. He got to 400 branches and for all intents and purposes, Mr Vernon Hill decided to retire. Until he saw that the UK offered as good an opportunity as he found in the United States, with Commence Bank One, incidentally which was bought and then absorbed into another company, so it doesn't exist anymore in its original form..He then started with a branch, one branch, at Holborn, in the Centre of London. That was five years ago and subsequent to that their 44th branch was opened in Clapham Junction but what is particularly exciting about this company is that we know, we've seen the Capitec story, from a South African perspective, and if you look at the numbers that Metrobank produces, it is Capitec market two. Sure, there's only 44 branches and Capitec is ten-times that but Metrobank has got a huge amount of runway ahead of it and having lived in the UK now, for 6 months, and had a look at the way the High-Street banks operate, there is much room for improvement..They've got a lot of legacy. The banks here have been hammered by the Regulator for misspelling of products. They've had to pay huge fines. A consequence of that is being that the staff has not seen increases, much less bonuses for quite some time. On top of that staff numbers have been contracted. Only recently did I see a little bit of a glimmer of hope in Barclays, which seemed to be really refocussing on their retail operations. When you walk into Barclays branches, through the new CEO and the new Chairman, you almost get an uplift. When you go elsewhere you meet people who are very unhappy. They are gloomy. They are demotivated. They're only working at that bank because they have too because all these huge fines, you can imagine, has taken money away from the banks' ability to reward its staff, particularly at the retail level. Through the consolidation that we've seen and the contraction of the staff numbers the service to customers has not been good..Along comes Metrobank with a whole new offering. Much better, much keener pricing, just like Capitec in South Africa, and they've just broken into profit for the first time (that was in the quarter) to the end of September, where they showed a small profit of £600 thousand but the growth is Capitec like. This is a company that it's deposits are growing 60% year-on-year. Revenue is up 78% year-on-year. Assets is 66% year-on-year, and they are run along the same lines. They call the branches, not branches like banks do but stores. I'm sure they also find their staff from the retail sector or in that kind of approach, where they are selling products to people who are walking in and not like your traditional banker who, wants you to only address him once you've got up off your knees (I'm joking about that one of course) but I think you get the picture..It is a company that has… The share price has declined through Brexit, which was really a crazy thing to have happened, given the structure of this UK Capitec. As you can see on the chart that's up on the screen now. It dropped significantly on Brexit, which was on the 23rd June, with huge volumes, and since then, has just been going one way. As people, once again that this a business that has got a very unusual business model. A disruptive model, which does work..They've not got 848 thousand customer accounts, up by 68 thousand in the past quarter. Now, when you look at this graph you say to yourself what the heck are we doing buying after there's been such a huge improvement in the share price since listed, it only listed in April this year, but over the past few months, particularly post-Brexit. My thinking on this is that if you have a look at Capitec's share price at a similar stage you would also have been scratching your head and saying 'isn't this stock too expensive' but as you have held onto Capitec over the years. You've seen that any bank that can grow its base at these kind of numbers, justify its rating and then some more..I'm very bullish on Metrobank. We've bought our first third, we're going to put 80% of the portfolio into this stock. We've bought our first third this month. We're going to buy another third next month and the final third will be bought in January. I suggest that when you do your purchases you do it the same way as well. We don't know what's going to happen the next week, let alone the next month, certainly the next two months. You try and take out of the equation as much as possible, try and take out the problem or the issue of timing, so let's have a look. Stuart, any questions yet?.Alec, yes, I've got a question from Jessica. She says she's got £10,000 at the moment and understands this is probably the minimum she should invest, on a cost efficiency perspective. Which stock should be her priority starting point, if she wants to take it from the BN portfolio?.I would say, Jessica that the best way to do it is actually just to follow our, if you can allocate that £10,000 across the whole portfolio, you probably, so you're talking about R180 – R200,000. You've probably got enough there to be able to buy the individual or to replicate the exact portfolio as we have it. I would really suggest that you do that and when you make those decisions and this webinar will be republished on Biznews. You will be able to go on there, have a look and freezeframe, if you like, the portfolio itself and make your allocations accordingly..The whole idea of the monthly update is that we can tell you about the portfolio in a whole and we look at this portfolio holistically. Not as individual stocks. You're not here trying to pick the eyes out of it. We would really recommend that you buy the whole portfolio as it is because this the way that it gives you a balance, so I hope that helps you, Jessica..Looking back at Metro though, I hope you understand the case that we've now made for it and indeed, that it is one that you will be making your little allocation to, in the next few hours to try and replicate or make your portfolio look as close as possible to the one that we talk about every month..The S&P 500 has been an interesting performer in the past month. You can see from the share price there. Remember, we have around 10% of the portfolio in this Index Tracker. The market loved Donald Trump's decision or rather Donald Trump's prognostications about what he wants to do with the economy. That he wants to grow the infrastructure. That he wants to get banks' lending again and wants to make America great. Well, at the moment it's lots of talk but the market is still giving him the benefit of the doubt and as you can see the S&P 500 adjusted upwards slightly in the past month..Alphabet, on the other hand, being a Silicon Valley stock, did not adjust upwards. In fact, it went down quite sharply and there were a couple of reasons for this. If you see the whipsawing in the share price there, towards the end, where it was above 800. It came down below about 760 and then went back towards 800 again. That is all 'Mr Market' at work. The Alphabet share price improved when the third quarter results were released. It showed net income up 27%, better than was anticipated by the traders. It pushed… It was up incidentally, primarily driven there by Google. Remember, Google as the biggest holding in Alphabet. The revenue is around $5bn for the quarter, versus $4bn for the same quarter a year before..The company exceeded all expectations. The market was looking for about $8.60 as an estimate for its earnings and Alphabet came out at around $9.00. Much of the uptick there was also, as before, given to the very impressive, Ruth Porat. Ruth is an ex Morgan Stanley Investment Banker, who took over as the financial director of Google in May 2015, and has been able to claw back on quite a few of the costs that this tick focused company – the cost seemed to be running away with it a little. The decline though, in the share price, was immediately after the US election when all tick stocks took a knock but, as you can see, it's stabilised somewhat since then..The other big issues that have been weighing on Alphabet, as well as Facebook in this past few weeks rather is the whole fake news story. It's perceived that the Trump Administration is going to want these companies to be monitoring the newsfeeds that they allow people to access a lot more closely in the future, to take misleading news out of it. To police it more, and that's going to be more costs. On the other hand, Alphabet has also through its Google operation, boxing a little bit with the European Union Anti-Trust Regulation, so as these things surface again there's a few concerns amongst the investors. We've got to look past all of that and this is a fantastic business..It's got the ideal business model. It generates or controls 95% of mobile search and about 78% of search functions on desktops and laptops and it just has the best product and it keeps investing in this product. As a consequence of that the revenues grow directly from a direct proportion, so Alphabet has had its ups and downs and I think somebody, like Jessica, who hasn't invested in the portfolio yet will be very comfortable to be able to get into this stock at a level, which is quite a discount on where it was just a month or so ago..Our favourite share, for pretty obvious reasons. When you show 200% depreciation (in Rand terms) over two years is Amazon but also, when you understand the business model of Amazon there is really is nothing that is like it around the world. There's no reason that I can see why would you start selling Amazon shares, given that the company has a highly disruptive model, which is just taking hold all the time. It's mushrooming. It's like if you've got a really good product, and it is a lot cheaper than what everybody else is offering and a lot more convenient and it gives you greater choice, well why wouldn't you go with it? If you live in a geography, like we do in the UK, where you are exposed to the benefits of Amazon you could order something and literally have it in your home tomorrow, and indeed, if you are one of the 70 million people who have signed up for Amazon Prime, which is a lovely subscription model-type income that comes into the Amazon fold. Well, if you're in one of them then you don't even pay for delivery..Amazon is also winning because its Web… Amazon Web Services it's called, its investment in cloud computing, was so far ahead of the game, that it's making massive margins there and has a huge stake of that sector, so there's no reason whatsoever to reconsider Amazon share as a core holding of our portfolio. As you can see, if you've been smart or lucky and bought in earlier, in the last couple of weeks after the Trump election, and the view that this was going to affect, or 'Mr Market's' view that this was going to affect all the tick stocks, where you could have got it quite a bit cheaper than the share price that it's at, at the moment..Just on Amazon, Alec. Mark asks considering it's done so well, aren't the best gains behind us? Is it not too late to invest in Amazon or is it going to be a long-term winner?.Mark, our investment in Amazon was done on the strength of its business model and, if anything, I would look at Amazon's business model as getting stronger and stronger, so it's a long-term winner. I would urge you, if you have any doubts, go and read the transcript of the Berkshire Hathaway AGM last year, with this man who is on your screen now, Warren Buffett, and what he had to say about the 'Amazonisation of the world.' He mentioned Amazon maybe five or six times. Buffett doesn't invest in companies where he can't see the long-term or the 5 to 10-year horizon on their profits. That's just the way he is. He's a highly conservative investor but the way that he was talking about Amazon. It reinforces to me that their business model is something that is not just here to stay but it continues to expand, so definitely not. Amazon is still a stock that you can be accumulating very, very confidentially..Just on the back of that, Alec, what other trackers would you consider, for example the FTSE, which might benefit from political changes in the US?.Again, to go back to Warren Buffett's advice on these issues. The big picture is so hard to call. The big trends are impossible in fact, on a day-to-day basis if you try and play the market by finding or making a bet on something. You are almost, certainly going to have more losers than winners. If you're lucky, maybe a few more winners than losers, but that's not investing. That's speculating. Rather go and have your bet on a horse in the Durban July or have a bet on a soccer match. Here we're talking about investing. We're talking about taking a view on the company..It's like buying a business. When you invest into these companies, into these shares, you're buying the business – not all of it but a very small slice of it of course, but you buy a business not for what you can make in the next 10 minutes but what you might make in the next 10 years. That's why, in 10 years' time, so much can have changed. We have to look at the underlying portfolio of companies that are within a particular holding company. How's the company structured? How is it run? How is it governed? Are these honest people? Are they smart? Are they making the right kind of decisions that you would expect if they were managers working for you? That's really where it all comes down to..Berkshire Hathaway is a very good example of this. If you have a look at the share price in detail here, you'll see that it was bouncing around the mid 1.20's in the beginning of this year. If you were taking a trading-type approach at that stage because we paid much more to buy our Berkshire Hathaway stake, you would be saying 'oh, surely we should be switching into something better and finding a better opportunity.' Well, as you can see the share price is now almost $160 a share, and the big increase came with a 5% lift in the stock immediately after Trump was elected..Now Buffett has been arguing, as you are probably very, well aware for Hilary Clinton as being a better president than Donald Trump. In fact, if you go and listen to that same podcast or recording of the Berkshire Hathaway AGM, or go and read through the transcripts (it's all on Biznews), you will hear that he was asked by somebody 'what happens if Donald Trump gets elected as president?' His view on that is the same thing that I would say is an answer to Mark. That is 'if you invest for the long-term you'll outlive Donald Trump's presidency. You'll outlive the impact of Brexit. You'll probably outlive, even if Boris Johnson were to become Prime Minister in the UK.' I don't know if you can outlive the impact of a Jacob Zuma in South Africa because that's really a structural change to the economy here and we've seen the impact of that on the South African Rand..In developed economies, it is very difficult to call the big trends and it's also a much smarter idea to invest where people can operate within their circle of competence and just looking at that movement on Berkshire Hathaway, as we're talking about. That lift, after the election of Trump, was on the basis of the rotation of investors into financials because, as mentioned earlier, they believe banks are going to start lending again. Berkshire has got a $100bn portfolio, and it's concentrated in five socks. Three of those stocks are banks, Wells Fargo, Bank of America, and American Express (a financial service company). Three of their big five, so clearly the portfolio is lifted by the fact that shares, in financial services, are doing better..Secondly, higher interest rates will help Berkshire Hathaway, which is sitting on $68bn in cash. Why do we talk higher interest rates? Well we do know that the US Fed has telegraphed that it's going to raise interest rates at the December meeting, so that's the first thing. But secondly, as Donald Trump starts spending more money, almost like the Reaganomics type of approach, the immediate result of that is that you need higher rates because as inflation starts picking up again, you need interest rates to reflect that. That's the second point..The other ballpoint is that his view is infrastructure needs to… The new president is going to be betting on infrastructure in the United States, and Berkshire Hathaway is extremely well positioned to take advantage of an infrastructure boom there. Not least with BNSF, which is the biggest railroad company in the US, which Berkshire owns. Of course, Mid-American is one of the biggest power producers. They're the biggest in renewable energy power producing but they're one of the biggest producers, and they will also benefit from a lift. So, Berkshire Hathaway after doing really badly in the beginning of this year (its share price), and then lifting up, and bouncing around a little. It came out with its third quarter profit numbers, which were pleasing and, as a consequence of that, and the other factors that I've just mentioned – there you see the lift in the share price..This, by the way, is one of our anchors. It's almost like you have a S&P 500 Index to reflect the market overall. Berkshire is a bit like that, to reflect the US economy, so it's a bet on the US economy. Stuart…?.Alec, going back to Amazon. Jamie just wants to know how do you place a value on it, given the sporadic nature of its profits and free cashflow? .It's one of those things that when you do your intrinsic value calculation on Amazon, most of the time, what I do with South African stocks' intrinsic value. I will take a 5-year time horizon, so just very quickly how intrinsic value works. You need to put a valuation on a company before you buy it. The way you would do that is you would take the cash, because a company is only worth the cash that it can generate. The cash between today and judgement day, as Buffett puts it..Well, you don't know when judgement day is going to be but really, if you want to be conservative, for most developed market stocks, and I would use US and UK stocks like this – you take a 10-year horizon. Then you work out what you think the company is going to… You take its current cashflows, (free cashflows) because that's the money that it could reinvest in the business or distribute by dividends. You take its free cashflows and you then accumulate them over the next 10-years. You add that back to the current cash pile and that gives you a figure – divide that by the number of shares. I hope that helps a little bit..What I do in South Africa is I will only work to five-years because it's a far, more volatile market and I want better value in a volatile environment. Internationally, you put the potential growth. Now, when you start putting the kind of growth rates that we're seeing on Google, on Facebook, on Amazon that intrinsic value, because of the compounded effect. It starts going off the charts and it's very hard to believe the numbers because they're so high. I just want to… When I put that into my calculations that I see a price north of $800 for Amazon, if I'm putting in a 50% annualised growth, on this company over the next 10-years and I've got a very, comfortably north of $800 valuation of it..That's where we start and battle when it comes to the exponential growth or exponential companies like those that I've just mentioned. Facebook is another one as well. Facebook's numbers, for instance. Their revenues were up 56% but their profits were trebled in the past quarter. Now, when you put that into your spreadsheet, into your exponential calculations, you start getting terribly confused because the numbers just look ridiculously high but that's what happens with exponential companies. If you had gone back, for instance with Naspers, which is a South African company that most people know, and look at the appreciation and shake their heads..Well, had you done the numbers for Naspers, based on the 30% to 50% of gross that has been coming out of its biggest shareholding, which is in Tencent in China. You would have looked and said 'but that's far too high – it cannot get to that level.' We, as human beings, cannot get our heads around exponentiality. It's just part of our makeup. We're hardwired to see things in a linear basis. Once we start embracing what exponentiality is. What these kinds of appreciations can actually do, like a Capitec. Think of Capitec over 20-years, growing at its profits by 50% compound, or PSG. If you went back 10-years ago and looked at the share price you would have said 'that's ridiculously expensive.'.Now, the point is how much longer can Amazon continue to grow at its current growth rates? My bet is at least 10-years, and if that's the way I feel, I can put those numbers into my calculation of intrinsic value and come out, at the end with an intrinsic value for Amazon, which is far north of where the current share price is. Of course, it needs to continue to grow like that and when it starts going ex-growth, which is what you saw with Apple. That's a very good example..If you look at the way that Apple was growing when the iPhones were surging ahead. The calculations that people had for its exponential growth, set the share price to far higher than the current levels. What happened then was that, as it started going ex-growth, as it became clear that you're not going to sell more iPhones than there are people on the planet or indeed you're only going to sell a percentage of the people on the planet, then the exponential growth rates of Apple started becoming less of a factor. To me, what the big thing for Apple is, it's just generating cash. Just what it's got now. It's throwing off enormous amounts of cash. It's got lots of cash on the balance sheet and when you start adding all of this together, also the growth that you're seeing for Apple, in its services business..Now, just think of this for a minute. If you take the installed base of Apple iPhones. In their September quarter, they had sold 45 million. They've got a billion products or devices, in the marketplace. Now, those billion, as an Apple fan for 30 years, I know that if I have one piece of Apple equipment I'd love to have another piece of Apple equipment because they talk to each other. Then, if I'm going to buy an app, I usually go to the Apple Store to buy the app from it because I know that it works on my Apple computer, and so on and so forth. That was the genius of Steve Jobs..He created this ecosystem of Apple products, which makes Apple fans, like myself, go back to the Apple Store to buy Apple products rather than to maybe get the alternative that a company like Google is producing. The way I see Apple and why its showing excellent value for me, is that it's throwing off a lot of cash and it has got a wonderfully strong balance sheet..The other benefit, and you can see from the share price, it's fallen since the US election. I'm not so sure that that was the right reading by 'Mr Market.' Trump has said he's going to make it easy for US companies to bring their cash back home. Up to this point, a company like Apple, which has got literally, hundreds of billions of Dollars sitting outside of the country. It hasn't been able to bring that money back into the US because of the taxes it would have to pay, when it repatriates that cash. Once 'Mr Market' realises that Trump is real in what he's saying about these things and if he abolishes that Repatriation Tax, it will give Apple an opportunity to consolidate all of its cash holdings, in the United States, and perhaps accelerate its investments into new fields, where it believes it can have an advantage as well. The Apple car, as an example, or a driverless car..This is a company that has got an ecosystem of a billion devices. It's highly innovative. It continues to offer the installed base, new ways of spending money with it and it keeps bringing out new products, like the iPhone 7, so the real fans can continue upgrading but it's real value, I would argue is the installed based, the ecosystem that already exists and that is what Steve Jobs built over those years. That's what he understood and that also gives you the reason why we wouldn't dream of selling Apple shares at the moment..Onto IBM, which is another one of our holdings here. IBM is a company that is nice to see that its share price has now finally broken up above that moving average line. The technical analyst will tell you that's a good thing. It's a company that is now starting to perform quite well for our portfolio but for a long time it was our value bet. Again, when you use it intrinsic value, the best way to invest is to work out a valuation for a share (so that's your intrinsic value). Then put in your margin of safety, so I like to work at 15%, at least, below that. Let's just say with IBM we worked out its intrinsic value was $200 a share. We use a margin of safety of 15% there. That would bring it down to $170 a share, which means you can buy the stock up to $170 comfortably..Well, as it happens, IBM's intrinsic value in our opinion, or in my opinion anyway, is comfortably north of $200 a share and we're in good company here because it has been the biggest purchase that Warren Buffett has been making in the past few years. Every year he's been continuing to add to his IBM shareholding, to the extent that it is now one of those 'big-five' shares that he holds in his portfolio. Remember I mentioned Wells Fargo, American Express, Bank of America – IBM and Coca-Cola are the other two. We don't have Coca-Cola, it was just a little bit out of our range and a bit too expensive, relative to intrinsic value but IBM is one that we have been adding to the portfolio and you came too. Stuart…?.There's a question from Andrew, he asks would you look at Chinese companies' like Baidu or Alibaba?.I would definitely and I think the whole idea of the global portfolio is to look right around the world. My problem is I don't know them well enough. Both Baidu and Alibaba and, of course, Tencent – sorry, those two, plus Tencent have been fantastic performers. I just don't understand them and I think the most important thing, when you are investing is, first of all, work within your circle of competence..I'm very comfortable with the stocks that we hold in the portfolio. I understand the companies. I understand the revenue generators and I've got a pretty good feel on the culture, on what's likely to impact them and I can also see when the flags are being waved. I really don't know when it comes to the Chinese companies. It's just such a complicated geopolitical system there. From time-to-time you have attacks on Chinese entrepreneurship. On the other hand, at the moment, it appears as though Chinese entrepreneurs are being celebrated in China, hence you've got Tony Ma from Tencent and Jack Ma from Alibaba being celebrated as great entrepreneurs, which of course they are. If the presidency were to take a different approach or pushed into a different approach or if some big business guy were unmasked as a corrupt individual and is part of the whole corruption policy..My problem in investing in autocracies or countries that are run by people who have clear, political motives where the public has no say. In China, you don't have a vote. In China, you don't have a free media. That means that what is the information we're getting out of China? Is it accurate? Can we trust it? If it is then it will be the only authoritarian regime on earth, in history, which has actually not used 'so-called' official statistics to give you a picture that they want to give you. I'm just not close enough to it, Andrew, so I do apologise. At this point in time, probably stick with what you know..Investing is also a lot about governance, it's all about transparency, it's also about working within your circle of competence. All of those things for me, right now are, when I have a look at US and UK stocks, I feel very comfortable with them, and South African shares as well. Although, I suppose the argument there is what about Naspers because they're invested in China and Tencent. We've got to believe if the investment in Tencent is that big. It's bigger than the whole Naspers market cap, from time to time, then they know what they're doing there and they'll be following that really closely. Let them rather do the bets, rather than trying to go in yourself, where you might be caught short..Okay, onto our third but last stock here, and this is Barclays. I'm very excited to see that Barclays has finally started lifting up its head. It was one of those investments that we didn't time very well. In fact, we bought it in April then the share price looked like it was going to go up nicely. In fact, it had a good, little run and then it came down with a bump after Brexit. The reason for that was we paid Pounds and the Pound took a hiding and the UK banks were sold off very sharply after Brexit, on concerns that leaving the European Union was going to affect them most..It's another reflection of the way that you should invest. If you look and the basic reason for buying Barclays PLC is there's a change in management. They've got a High-Street franchise in the UK, as much as I love Metrobank and I do believe that Metrobank will be another Capitec in this market. Only 1% of Brits change their bank accounts every year, 1%. Now, that's plenty for Metrobank to feed off but when you're a Barclays, even if you were a bad bank, and they're aren't in the High-Street. As I mentioned earlier, they really are getting their act together, but even if you were a bad bank you still would be taking a long time before your High-Street franchise would be affected..The irony of this is that the uptick in the share price over the past month has been on Donald Trump's election and on Barclays' insistence in retaining its investment banking function and its American operations. There was a time that many investors discounted the investment banking and US operations out of Barclays, and certainly we did when we bought it because we bought it at about 0.6 times book value. What you're saying there is that if you liquidated the company today you'd get 40% more than the current share price, just by liquidating it. It had got to the stage, when we bought in, in April, where Barclays was just frighteningly cheap. Now, it's starting to come back into favour for reasons that we could never have interpreted or forecast. That's what you do when you buy cheap – you buy good value operations..Barclays' real story though is, it offered excellent value, if they could fix it. Staley, their new Chief Executive, and McFarlane, the new Chairman, are taking a bit longer than the market thought they would but they are making the right decisions, clearly. When you walk around Barclays Banks here, in the High-Street here, in the UK you will see a rejuvenated approach. Now, I don't know if that's a short-term thing but it certainly is a big contrast to what you see at most other High-Street banks..Secondly, they've had a lovely fillip from what's going on in the United States. The decision to sell out of Absa is one that was criticised at the time but it does appear, from a long-term perspective that it is going to be far better for Barclays to have those Rand's converted into Pounds in the UK, which they can then deploy here. Than to continue in a very, turbulent environment, so they're making the company a lot smaller, a lot easier to manage, and they are enjoying the benefits thereof..We're coming to the end of our presentation for today. Facebook, as I say, we don't spend too much time analysing the stocks that we are busy adding to our portfolio. If course we spoke a lot about Facebook last month but this is a stock that we've been watching for a long time and very happy to have made their decision, finally to invest in Facebook and it's really good to be able to buy in now, at just over $120. Of course, we bought in significantly higher than that last month but that's fine. That's why you stagger your purchases into shares. They came out with their quarterly results on the 2nd November and that was well ahead of market's expectations. As I mentioned earlier, the net income there went from $900m to $2.4bn, so not quite three times. That's $900m in the same quarter, a year before on revenues, which were up 56%, so what is that telling you? It tells you that as the revenues grow, you've got this crocodile affect that the margins just grow as well. You have fixed costs at Facebook and they had the wonderful exponential model where scale is everything..They've reached, would you believe, 1.79 billion active users. Now, there are seven billion people on the planet, and lots of those are little, young people and lots of those are very old. But pretty much, well a huge percentage of those in between have got a Facebook account – incredible. That's up 16% year-on-year, incidentally, (the number of active users). They have a big share of mobile advertising and they're doubling down on video. The big story for Facebook, going ahead, is that they are wanting to attack the $70bn a year in television advertising and they believe that they can get a big chunk of that..Remember, Facebook's net incomes are still running at only about $10bn a year, and that's from their existing advertising but if they can attack that $70bn in US advertising revenue and pull a bit of that across. They could easily double their revenues and Facebook, being a fixed cost with scale adding to the bottom-line, is just in a magnificent position, so we're very happy to be holding that one in the portfolio..Then Tesla it was a big month….I've got a bit of a feedback, so my question might not come through properly. He asks why did you buy FB now instead of earlier, Facebook that is?.Facebook, well we've been looking at Facebook for a while and it was always expensive. It always seemed relative to the valuation that I could see in it. In other words, in the growth that I was anticipating from Facebook, it always looked like you were going to overlay. To be frank, I was waiting for a pullback in the share price. Missed out in January this year, as you can see from the graph, which we've got back up on the screen. It came back really nicely in January, as far as purchases were concerned. You could have got for under $100 but it then didn't last very long. Early February it bounced up again after good quarterly results, and since then it has been continuing to rise..Part of the reason for Facebook was also that, and we say this with the portfolio, when we find one of the shares, in the portfolio that no longer appeals, we will look for alternatives that we've been examining and keeping our eye on. When we took the decision to sell Novo Nordisk, it was an ideal opportunity to go into two stocks that we felt were offering value and Facebook is one of those, so that was the reason. I'm sorry I didn't buy it earlier but, I guess rather late than never. Certainly, that party is going to be going on for a long time, a bit like Amazon I think..Then our final stock in the portfolio is Tesla. Now, we've got a small stake here. We are buying these very slowly and the reason why we're accumulating them now, rather than having done so before, is because the valuation of the share is starting to look very attractive. The opportunity arose to buy these shares, at these levels, because of the deal that Tesla has done with SolarCity. You have to understand the background to see why did Tesla do this deal..Tesla, it might surprise you, although it was referred to as a merger with SolarCity, it really was anything but. Tesla is by far the senior partner. If you take the evaluation of Tesla and SolarCity – Tesla was 93.5% and SolarCity was 6.5% of the combined lot. Yet, Wall Street was very upset about this. They still are affecting Tesla or hurting Tesla as a consequence. There was a report in fact, put out this week by Morgan Stanley. To say that there's absolutely no value to this deal. Well that's their opinion..If you understand that Elon Musk and his brother, Kimbal, who are both involved in the whole Tesla SpaceX operation, grew up as kids with the Rive brothers, Lyndon and Peter, who run SolarCity. If you realise that they holiday together. They actually go out on social occasions together. They are the closest of friends, these South Africans who have left Pretoria and are living in Silicon Valley. They're clearly highly intelligent and highly entrepreneurial. In fact, they made it into the Pretoria News as teenagers, when these guys went off and bought or got themselves setup to have a video arcade, but because none of them were over 18 they weren't able to sign the lease on the premises that they secured, and their parents weren't prepared, at that stage, to sign the leases either. The newspaper got hold of the story and was talking about these young entrepreneurs – well, if only we could have invested in them at that point..The deal or the business rationale of the merger between Tesla and SolarCity is that they are both having to bet very heavily on batteries. Now, Tesla has got the Gigafactory, which is building batteries in the middle of the desert and SolarCity, which is the biggest installer of solar power in the United States, needs to have a storage system because solar power – can you imagine the value that it's going to have when you've got a cheap battery system that you can actually run your, though the day, you use the solar, and it builds up, so that you don't have to go onto the grid and use coal or, heaven help us, nuclear or any of the other grids sold power sources..What we're seeing in renewables is the costs are continuing to decline. There have been subsidies that the government have given to renewable companies, and SolarCity was a threat, from a political perspective, because of course, Donald Trump doesn't believe that there's any such thing as Global Warming, so from his perspective and those who support him, they seem quite happy to continue to push out coal, into the atmosphere. How misguided that is – they will hopefully discover one day but the reality is… There's been enough support of getting to get Moore's Law going in renewable energy for an operation like SolarCity and now, Tesla, which has absorbed it to really benefit from the retail or the rolling out of solar power to the American public..It was a fantastic deal. When you have a look at it from Elon Musk's perspective, he gets his cousins to work with him. He can overcome, as the biggest shareholder in SolarCity… He can help SolarCity to overcome a lot of those problems that you have when you start manufacturing. SolarCity is only now starting to manufacture. They can get together and do their batteries in a combined effort. There are many-many reasons why it makes sense, but for Wall Street. They were looking, presumably at the short-term benefits, they couldn't see the sense of all of this and, as a consequence, the share price has been under some pressure..We're very happy. If you've ever looked at or seen a Tesla car and you'll understand when Musk says he built a computer with a vehicle around it. He's got a huge advantage in the whole electric vehicle or certainly, a luxury electric vehicle sector, which will grow and grow into the future. Tesla is extremely well positioned. They're continuing to, now beat estimates from the market, so this was the time to make the investment. We've done so. We think it's still a very good time to be adding to the portfolio and we bought more of those shares, in the past month..Here's the portfolio, just to close off with that you can see how we are structured. Around 10% is sitting the S&P 500 Index. As we did in this past month, when we find a suitable investment to go into, we sell from the S&P 500, which was always meant to be a little bit of a place to leave money (almost like a bank on the side), so that we could then dip into that when we found a suitable investment. We have, through Metrobank but we've sold sufficient to buy Metrobank shares that will take us to 80%..You'll see from the whole outline of the portfolio, right in the beginning, was to try and have your share picks at 80% of the portfolio. Now, of course with Amazon doing as well as it has, it's gone to 16% of the portfolio. We did put more into Alphabet and into Apple, to give them a bigger weighting, because we also think they are fabulous long-term holdings but we will be taking Facebook and Metro up to 18% each, and we will be taking Tesla up to 4%, and maybe bumping a little bit more, if the value still exists in that stock..Overall, the portfolio, which started at just over R2m when we began it in December 2014 is now worth nearly R3.4m, so it shows that overall philosophy of diversifying out of Rand investments was one that has worked out to the advantage of everybody who's followed this portfolio. As mentioned, we were running an annualised return last month at 29%. That's not picked up to 30%, primarily because the Rand has weakened from R13.79 to R14.23, against the Dollar, and from around R16.50 to R17.60, against the Pound, so the Rand still has a very significant impact on what happens to this portfolio, on an ongoing basis..I know we've been a little longer than our usual period but the thinking was to try and take you through the rationale for the investments that we've made, so that if you are following the portfolio, and particularly the new ones, you also have the confidence to be able to follow us, Stuart, shall we finish off with a question or two?.Thanks Alec. There's a question on dividends – how important are dividend yields when you assess stocks for the portfolio?.We don't look at dividend yields at all. The reason for that is that if you do need to generate income, from your portfolio, there are lots of other ways of doing it, rather than through dividends. What we would suggest is what Warren Buffett recommends to the shareholders in Berkshire Hathaway. He says if you are going to live off or if you have a portfolio and say that you think if you're 60 years old and you think a good time is that you're going to live until you're 90. Well, you are pretty safe in selling… That will give you 30 years, so if you take your portfolio, let's just say it's 100. You divide that by the 30 years. You're quite happy then to be selling off 3% of your portfolio or of your shareholding per year, if you need to generate income in that way..There are many ways of generating income from a portfolio. You can sell, as he says to his Berkshire shareholders, sell 3% of the shares that you hold in the company because Berkshire, of course, never pays dividends and the feeling that he has, and it's a belief that many other companies have as well, both Amazon and Alphabet falling into this category, and so does Facebook and Tesla. Is that the company itself will do far better by reinvesting the cash into the business than you would do, by taking the cash and putting it into an alternative investment. In other words, into the bank, but if you need the liquidity then sell some of the shares..That's it from my side. Thanks, Alec..Thank you, Stuart. Thanks, everybody for joining us today. It's been quite a lengthy update (they're not usually this long) but I'm sure that you appreciate that it had to be this time, given all the ground that we had to cover. We're very grateful that we have a portfolio that has performed so well, but remember the intention here is the long-term holding. The intention always has been, whatever we put into the portfolio, the average holding period is forever. Novo Nordisk kind of caught us out a little bit there, but for the rest of them you buy and hold. Until next time, cheerio.

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