🔒 WEBINAR: Amazon, Google, Novo Nordisk outperform

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

Well, it’s Wednesday the 22^nd of July. I’m Alec Hogg and in the studio with me, is Stuart Lowman.
___STEADY_PAYWALL___

Yes Alec, it’s good to be here again for this month’s wrap-up.

We’ve had a very interesting month on the Biznews Global Portfolio because it’s a quarterly month. What the Americans do is they report their financial results every three months, so they give us a better look inside the business and there’ve been some big moves, as a consequence. So far, we’ve had IBM, Apple, and Google producing their financial results (of the companies we have in our portfolio). We’ve also had Microsoft. Thank goodness, we aren’t invested in that one although I suppose for a few moments, you might have thought ‘I wish we weren’t invested in Apple’. We’ll get onto that in a little while, but it is extremely volatile – the movements on the shares nowadays. It’s almost like small caps.

Okay, let’s get into the first of the slides. There it is. That’s the account overview. You will see slight differences in this. This is the screen you’d see when you go into your Standard Bank Webtrader account, so it’s exactly the same screen there. As you can see, the client number (my name – Alec), the date, and then it gives you the situations/positions you’re in. As you can see, this portfolio is up by 21 percent. That is since the beginning of December last year. Annualised, it’s a 29 percent return, so we’re very happy about that in the one sense. In the other sense, some of the shares have really run away from us so if you’re only joining in on the action now, you have to be very cautious about some of those shares – whether you want to be buying them at the current levels. We’ll talk about that in some detail as we go ahead, though.

There’s the overall account overview, as well. As you can see, the one stock in US Dollars that has gone backwards is Berkshire Hathaway. I’m not worried about that one. It’s in the portfolio as a stabiliser, as is the overall market. This is very interesting to look at. Many people buy ETF’s (exchange-traded funds) on the view that exchange traded funds give you the market, and it’s very difficult to outperform the market. Well, in our instance, we’ve been quite fortunate. We put 30 percent of this portfolio into the S&P500 ETF. As you can see: since inception, it’s up in US Dollar terms by just under three percent. We’ve had three unbelievable performances in this portfolio and we’ll talking about them in some detail, but you can see. It’s quite easy. They jump out at you. Amazon.com, Google, and Novo Nordisk. The other three shares have been tracked around – pretty much around – where the overall index is, so we’re not really trying to give you ‘shooting star-type’ performance.

What we’re doing with this portfolio is (a) to make it a Rand hedge and (b) to try to find some stock selections that will do better than the market. Obviously, that’s the intention – overall – to buy shares that will outperform the market, generally. One thing here that does flatter this portfolio…you will see that the screenshot we took this morning from the Webtrader only has the Apple share price as it closed in New York last night, and that was before the big hit came later in the day. We bought at $127.00. It closed in New York at $130 but has now dropped all the way to $121, but we have included that in the overall portfolio.

Just to remind you: you can send through your questions at any time. Stuart is in the studio with me to make sure that we monitor those questions. We also have Meerkat and a Twitter community. More than 21,000 people who are followers on my Twitter stream have the opportunity to join us as well. This new technology is extraordinary. Here, you have television-on-demand and here we are, so it’s good to see you. I hope you enjoy the presentation and I hope you can see the screen. I’m looking at Justin on the other side. He’s making sure that all the technology… Can you see the screen okay? Yes, he has his thumbs up, so all is working the way it should be. Isn’t it wonderful when technology is right?

Let’s get into the overall portfolio now. Vanguard, as I said before, is the S&P500. We have decided to invest our portfolio completely, in the United States. There is a philosophical reason for this. Our belief here at Biznews is that you should be investing in human potential/human initiative. You should be investing in the ability of human beings to take assets and to add value to them – to be able to leverage them. If you’re buying something like gold, into a mining share, or even into an old economy play like a steel manufacturer, you’re taking a chance on those products improving at some point in time. We don’t think that that’s as good a bet as on human potential. The idea here, very much, in line with what Warren Buffett teaches us, is to go for those shares where there is the ability for those who are running it, to leverage upwards by applying good ideas and good management.

In the United States, the structure of that economy is such that human potential is unleashed, better than it is anywhere else in the world. Europe has its problems with lots of social issues and social handouts, which doesn’t incentivise people as much as they would be in the United States so we prefer to stick with the US and that is where this portfolio has been invested – fully. We’ve been very fortunate in that regard because the US Dollar has been strong in the past seven months of this portfolio. If you go into the longer term, our view is if the human initiative of an economy is unleashed, then the value or the share price of that country will rise. In the case of the US Dollar, you can see it happening – and happening, very fast – over the past seven months.

The Vanguard, being the S&P500 tracker is proposed to be 30 percent of our portfolio. If you are starting off with us now, please go about it this way. Don’t jump in ‘boots and all’ and replicate this portfolio. Do it over a period of time. We suggest three months so you’d buy your first chunk… Let’s say you have R100k that you want to invest here. You would be putting 30 percent of that R100k into Vanguard (in other words, R30k). Stagger your purchases over three months. Put R10k this month, R10k, next month, and R10k the month thereafter. You don’t ever have to be in a rush when it comes to shares. A lesson I learned, again, the hard way with the investment in Apple as we saw with the changes in that share price over the last couple of days. Vanguard has 28 percent of the portfolio now and in a way, that’s a very good thing. It shows that our portfolio – overall – is beating the market.

Berkshire Hathaway has gone down to 13 percent (due to underperformance) after a target of 15. In other words, when we started we had 15 percent in Berkshire Hathaway. Google, on the other hand, has over-performed. The structure of this portfolio is quite clear: 30 percent in Vanguard and another 30 percent split between Berkshire Hathaway and Google. Then we four stock picks: Novo Nordisk, IBM, Amazon, and Apple being the four stock picks. Into each of those, we put eight percent of the portfolio. It should be pretty simple for you. Again, following the Warren Buffett strategy: put few eggs in one basket, but watch that basket very carefully. The price is in Rand because at the end of the day, we are South African investors. We are taking a bet on the international market because we are of the view that the Rand is a weak currency and is going to remain a weak currency, relative to the US.

The return in Rands, as you can see, is 19 percent on the portfolio in the eight months that we’ve been going. Down at the bottom there: an annualised return of 29 percent. The lights are being shot out by Amazon, which is up 62 percent since inception. Google, which has had a very good run in this last month is up 36 percent since inception, and Novo Nordisk is up 38 percent. Stuart, you have a question.

Yes, I have a question from Eddie. He says, “With the big drop in Apple, would you buy more shares now?”

Absolutely. Eddie, we can jump to what I was planning to talk about in a little while. When we purchased Apple last month, we were quite happy at $127 per share. It went up, subsequent to that. In fact, it got to $130/$131 per share but it’s now fallen, very sharply, to $121. At $121, it is offering better value than the price that we bought at (at $127), so we’ll be putting in a buying order this afternoon for Apple shares. In other words, doubling up our bet there. What it means is that we’ll have 15 percent of the portfolio in Apple, so it actually restructures the portfolio somewhat, with Vanguard holding 30 percent and then 15 percent each in Berkshire Hathaway, Google, and Apple. Then we’d have Novo Nordisk, IBM, and Amazon where we (theoretically) have eight percent in each. It’s going to be a core holding in the portfolio. There are very good reasons for it and I’ll articulate that a little bit later. Thanks Eddie, that’s exactly the point. I’m just a little bit sad that we didn’t wait a month before buying into Apple because we could have got in at considerably lower than the price that we did pay.

Here we go. The Rand/Dollar in the past month: as you can see, there’s been a slight weakening – still further – from R12.21 to R12.35. Since the portfolio began on the 5^th of December, the Rand profit is up nearly ten percent and that also gives you an understanding of the sense that it made back then in December, to actually start this Global Portfolio. Remember, the idea is to invest in stock offshore so that you can get the benefit of the Rand and then, to try to find a way that those stocks you invest in are going to outperform the market, generally. In both of those counts, we’ve been fortunate. The Rand is up by nine-point-six percent. Our portfolio is up by 19 percent so it shows that had we done nothing… had we just left the money in cash, we would already be nearly ten percent better, but we’ve managed to double that by some good fortune. You never say skillful when it comes to investing.

You always have to talk about being lucky, rather than being smart. We’ve been lucky in both the timing and in some of our investments that have gone forward. There you have the Rand profit. Amazon.com underperformed for some months and then shot up after the last quarterly results, and has been rising, really nicely, ahead of the quarterly results we’re expecting soon. That’s done very well. Google is one, which we’ll talk about in some detail.

Alec, I have another question. It’s from Des van As. He says, “Do you wait for the Rand to pull back before investing or do you just go?”

Des, that’s a brilliant question. I don’t. I can’t understand why anyone would try to punt/bet on the Rand. You have banks of analysts sitting there whose only job really, is to try to analyse foreign exchange markets. It’s the biggest market in the world – much bigger than the equity market and the bond market. They have information at their fingertips. They’re at such a huge advantage to me, when it comes to making decisions on the exchange rate. My way of looking at these things is that I have to simplify it so that I can understand it better. If an economy is unleashing human potential… If it has a structure that works towards it, (and surprisingly South Africa has one of those and we’ll dwell on it for a moment) and if the leaders are making sure that is applied (as in the United States), then you have an economy with a share price (currency) that’s going to rise. It can bounce around all over the place, though.

In a South African context, we have an unfortunate situation here where we have a really, good structure. The Constitution is amazing and it gives us the ability to unleash human potential. However, we have politicians who are taking the country down a different road. They’re taking it down a socialist path. They have their own ideas. They’ve been voted into power and they’re perfectly entitled to give the voters what the voters want but as an economist, when you look at this you have to shake your head. Clearly, you extrapolate it to the view that the share price of the country is not going to be strong and as a consequence of that, I just take a long-term bet. I can’t sit here and say to you ‘jump in at the Rand when it gets to R11.50’ or ‘let’s sell some of the shares at R13.00’. Rather take the Rand out of the equation. It’s hard enough to just, find the right shares. Remember, this is a long-term portfolio.

In the latest Annual Report of Berkshire Hathaway, Warren Buffett was talking to his shareholders and he said to them, “If you buy Berkshire Hathaway shares on a five-year view, you should make money”, but if you sell it at any time under five years, he’s not taking responsibility. I’m doing the same thing here. I think that over five years, with this portfolio, you will outperform. If you want to try to trade it in between, I can’t take responsibility for that but I will take responsibility over five years. That’s quite a big statement. If you do the right thing over five years…

Buffett would say ‘ten’, wouldn’t he?

He says ‘five’. Well, he says ‘forever’. He says ‘you buy forever’ but he says that in five years, you should actually start seeing yourself going in front. We’ve been lucky. We’ve been very lucky. We’ve had an incredible start with this portfolio.

Here we go, with those various dividend receipts: cash of $1400 has been added to the portfolio as well. Now, let’s get into the individual constituents.

Here is the overall index (if you like) of the American Stock Market – the S&P500 Index. All that stands for is an organisation, called Standard & Poor’s and they weight the 500 biggest shares on the US market. What you’re doing here is buying the market.

In the past month – not much movement there. It did get to an all-time high, just a couple of days ago, and then came back to end our month up by one-third of a percent. As you can see, the S&P 500 Index, (which is the blue line), will follow that GSPC – the index itself.

That’s the Vanguard Index Tracker. It will follow the index itself and there you have them, pretty much, in the last six months… let’s call it three percent improvement.

Alec, this one’s from Desi. He asks, “Will you hold to the five-year point on the portfolio?”

Definitely. I’ll tell you what we will do, Des. If we find a dripping roast… if we find a share opportunity that is looking as though it can give us a better return than the market generally (and that happens – you find fat pitches come along every now and then), then we will lighten our holding on the Vanguard. In other words, we have a 30 percent holding there in the market. If we find something that is going to beat the index over the period, then I think that you should sell the index or part of the index, and then go and buy that individual share.

Onto the next graph, there’s that picture of Warren Buffett and Rose Blumkin, the lady who was very close to him. The lady who ran Nebraska Furniture Mart – lovely picture, that.

Warren Buffett’s share – Berkshire Hathaway – did a little better in the past month. In fact, it outperformed the D&P500 Index. Unusual, for that one.

In the last six months, as you can see from this graph in fact, it’s down by about four-and-one-third percent, whereas the S&P is up to just under three percent. What this tell us is if you haven’t been invested in Berkshire Hathaway yet, you still have a very good opportunity because you’re buying there for cheaper than we did. Well, cheaper in US Dollar terms, not cheaper in Rand terms.

Here’s Google and this is a stock that I’m going to spend a little bit of time on

You can see from the graph there that Google has had a surge in the last few days. The reason for that was the quarterly results that came out, showed that the new financial director (Ruth Porat) is being applauded by investors for cutting back on Google’s spending. There’s been a perception that Sergey Brin and Larry Page (Larry being the Chief Executive and Sergey being the co-Founder) are a little bit too keen to spend money on their new ideas, and they don’t have as much of the business disciplines, as the investment community would like. Well, in this case, Ruth Porat as the new Chief Financial Officer has managed to keep expenses in the quarter down to 13 percent, dropping from around 30 percent growth in the past. That has impressed the investors to no end and Google’s share price, as you can see, rocketed in the past few days and it’s already one of our best-performing stocks. Remember, this is one of our core holdings. The reason for that is we think it’s one of the best companies in the world with one of the greatest business models. The results that came out showed primarily that the spending was under control. That helped earnings to beat the forecast by about 25 cents per share. The other big bit of news that got people excited was that YouTube, which is a wholly owned subsidiary of Google, reported watching time up 60 percent in the quarter, so it has a big stimulant coming there.

As you can see from this graph, this is a six-month graph, which is a really good one. Google underperforming the NASDAQ Index for most of this period. In fact, it’s only now started to jump through and outperform NASDAQ. If you go back to when we bought in here, there would be some people thinking ‘well, maybe you think it has a great business model, but I could have bought the NASDAQ and done much better’. That was the case up until recently and often with these shares, if you buy the right company and you just sit and wait because you did your homework, you know why you bought into this company for a long-term bet it does eventually give us the returns we want.

Let’s go onto the next stock – Amazon.com. My goodness. This has been a great performer for us. Look at this performance in the last month.

It’s up by another 11 percent against the index and the NASDAQ is up by just one percent. This is in anticipation, no doubt, of another great set of financial results. It’s interesting to see that – not doing a whole lot for most of the month and then starting to move as the analysts do their numbers ahead of the next set of results.

Here you have the Amazon view over the past six months and you can from the previous quarterly results, that’s where Amazon started giving us outperformance. Big volumes down at the bottom. The green shows you the number of shares that were traded and it tracked the NASDAQ. In fact, it was below the index for the first couple of months that we held it. Then, with that excellent set of financial results that came out in February, it shot up and held that level. Then, another set of results. Look at that. Up it goes once more, and there is anticipation from the investment community that when the numbers come out, they are going to be very good again. They have to be because this stock is now up 57 percent in the last six months, so it has quite a lot of performing to do. We’ll be able to talk about that next time around.

Here’s a disappointment if you are somebody who likes to see shares going up indefinitely. It is an opportunity for those who haven’t bought into IBM. Remember, Warren Buffett is the biggest shareholder here. He’ll be picking up the stock; you can be sure as will IBM itself, which has a massive share buyback program. The reason why the stock fell the way that it did in the last few days is that the quarterly results were most disappointing to the street.

There you can look at it. I talk about this being ‘Mr. Market at work’. Mr. Market, that manic-depressive who doesn’t have any medication, who buys and sells shares in exaggerated fashion when numbers come out and he interprets them in one way.

Alec, I have another question from Des. He just asks, “Are Google and Amazon still fair value at these levels?”

Yes, Des. That’s a concern. If we’re looking at a five-year view with Google and Amazon both putting on 35 percent in just six months; even over five years, you would be quite comfortable if the market gave you 35 percent in a five-year period so they really have outperformed. My suggestion on those two is just keep your powder dry for the moment, but make your investments in the other parts of the portfolio. An idea of investing in share investing is to find yourself companies where you like the story and you like the investment, so you know that’s a good company. Then you have to be very careful about your entry price. Your entry price must give you a margin of safety. The last thing you do is to chase the stock just after it’s gone up. I would certainly not be selling Google at the moment and I definitely wouldn’t be selling Amazon, but I would not be putting fresh money into it, given the kind of run they’ve both had.

My advice is to rather go for the other constituents of the portfolio that have underperformed at this point, and just hold your powder dry for the pullback. There’s going to be one – you can be sure – at some point in time, as there was here in IBM. IBM is a stock that gives you a great margin of safety right now, particularly after that big decline and is one to which you should be allocating your capital. Always remember, the structure of this portfolio is as follows: we have 30 percent invested in the Index. We have 15 percent in Google, 15 percent in Berkshire, and 15 percent in Apple. In this case, put your 15 percent in Berkshire and Apple. Make those purchases now. Then eight percent each in the other stocks that we hold there (including IBM), so you can take eight percent quite comfortably at these levels, and invest in IBM. I hope that makes sense to you, Des.

That’s the IBM vs S&P500. It still outperformed the S&P over the last six months but the reason why the market was so unhappy about IBM – in fact, the share price dropped from $173.00 to $164.00 – is that it’s the 13^th straight quarter of a sales decline. That’s not news. Everybody was expecting that. What they weren’t expecting though, was that the decline would be as sharp as it was. There was an anticipation that they’d be able to hold the sales slide in the areas that they’ve already earmarked as ‘old economy’ (that’s in software and services). They weren’t able to do that. That fell a little bit more than anticipated. On the other hand, the new areas where there are big investments: Cloud was up 70 percent in revenues and the Data Analytics (something they call Watson) was up by 20 percent – free cash flow stabilising. There are lots of good reasons for buying into IBM. It’s a value stock right now and you are getting a margin of safety so I’d still stick with it.

Here’s one of our favourite shares. Novo Nordisk is a Pharma company. Pharma companies are of great concern because somebody else can come out and find a similar patent. Patent protection is not universal but where Novo Nordisk has the advantage, is this Danish company has 50 percent of the world’s Diabetes market. It’s invested heavily. It reduces/keeps its prices constant. It keeps investing in research and development, and it has half of the market. If you have Diabetes; once you’re diagnosed with the right medicine, it’s going to take quite a lot for you to move to a different medicine. It’s a long process (to get the diagnosis), but once that diagnosis is there, there’s a 50 percent chance that it will be with Novo Nordisk. As long as Novo Nordisk doesn’t get silly and start jacking up the prices too high, you’ll be quite happy to continue to go with the same medication if it works for you. Clearly, this one does.

As you can see, in the past month once again, Novo Nordisk just keeps on trucking. There it is, up nearly three percent in the past month as against the flat market.

It has been a superb performer for us over the past six months, outperforming the S&P500 Index very handily – beating it by nearly 30 percent. Novo Nordisk – one of our stars.

Let’s end off the webcast today with Apple. Apple’s results that came out yesterday were interpreted by the market as ‘disappointing’ and that’s not putting it mildly.

As you can see from the graph, the share price dropping very sharply by about eight percent. An interesting point about this: this week, we had Google going up (in market cap) by $65bn on one day and Apple going down by $65bn on another day. Apple is the most valuable company in the world – worth about $670bn now and Google is the second most valuable company in the world – worth nearly $500bn, so that gap has certainly closed. With Google coming into favour and Apple going out, why were the analysts so disappointed? Listen to this. Here you have Mr. Market at work.

IPhone sales were up 35 percent year-on-year. In China, the revenues doubled. In China, the iPhone sales were up 87 percent. These are unbelievable numbers. However, the analysts were expecting that the iPhone sales would have been up slightly more than that. The analysts had marked in a figure of 48.8-million. The company came out with 47.5-million, so because it didn’t reach the level that analysts had calculated, they decided to punish the stock and this is an opportunity for us to get in at a better level. That’s the reason why we will be buying. We’ll be taking the last cash that we have (nearly $18,000) and we will be investing that in Apple Stock tonight, taking Apple to 15 percent of the portfolio. This is an unbelievable company. The house that Steve Jobs built continues to do better and better. It’s sitting on $200bn in cash.

It’s allocating that cash to operations like Apple Music at the margin, where it identifies disruptable opportunities/disruptable industries and funds them, but it’s doing it the right way. It’s creating little exponential growth companies on the margins throughout the organisation and then, still having the iPhone itself. IPad sales were down 18 percent – largely anticipated, but to offset that in the future, Apple is working on a new iPad with a larger screen, which it believes will be sold into corporates who can then replace their laptops with these new iPads. Apple Mac sales were up by eight percent and the Apple watches… They haven’t split out the numbers, but Bloomberg’s figures suggest it’s round about two million that have been sold already (again, below what some analysts were expecting. They were expecting around three million).

All around, the Apple story is an incredibly good one if you look at it from a longer term, but you do have expectations that are created by investment analysts and in this case, the expectations were not met. Consequently, the share was punished and there’s the six-month graph.

We only got into Apple last month. Maybe if we’d been smarter, we’d have waited for a little bit longer but this is a five-year bet so I’m not too worried about that one.

Finally, just to close off and show you how the portfolio has done over this period, Vanguard is now 28 percent of the portfolio. The price hasn’t moved much. Berkshire Hathaway is down in US Dollars. Of course, it’s done very well in South African Rands. Google has gone nicely, from $534 to $662. Novo Nordisk. There’s a winner. $46 to $58. IBM – $162.50 to $162.60. Amazon – $327 to $484 and Apple – $127 to $121.

It jumps out at you. You can comfortably go in and buy the market i.e. the S&P500 Index. You can do your purchases of Berkshire Hathaway at this level. We think its good value. You can certainly buy into IBM at the current level and similarly, into Apple. We’ll be putting 15 percent of the portfolio into Apple as well.

Stuart, it looks as though the questions have dried up.

It’s all clear this side, Alec.

Well, thank you for joining us. We look forward to being back in your company again round about the same time next month, in August. It will be the second-last Wednesday of the month. It gives us enough time to get a feel for how the portfolio has been performing and hopefully, if you’re not joining us on this portfolio you can also watch on Meerkat.

We’ll see how it’s gone from the outside when we go out there.

That’s on an Apple iPhone5. That was another thing, by the way, that the CEO Tim Cook was saying. He said 73 percent of Apple phone users have not yet upgraded to iPhone6. Given the high praise that the iPhone6 has had, he reckons that there’s a big captive market there. So when your contract expires with Vodacom (or in my case, MTN), I’ll go onto an iPhone6. I’m a guaranteed purchaser, aren’t I?

Normally, the iPhone users upgrade regardless of when a contract expires so maybe they’ve finally learned that they need to wait. We’ll see them in the next quarterlies.

I have no doubt. Certainly, the Chinese don’t worry about that (as mentioned, they were up by 87 percent iPhone sales there). Thanks for being with us and we look forward to being back in your company again. Thanks for the comments as well. I see a couple of people have said ‘thank you for the presentation’. It has been our pleasure. It’s always easier when things are going well. Who knows? Only the Good Lord knows what the next month is going to bring, but you can be sure we’ll be here trying to make sense of it all.