In the latest instalment of the Biznews.com Global Share Portfolio Webinar, Alec Hogg takes us through the performance and current position of the long-term portfolio. Hogg breaks down the current position of the investment prospects, split between the likes of Google, Amazon, Berkshire Hathaway and IBM adding time-earned insights to global market’s at the moment as they grapple with the oil price. Hogg puts the big picture into a user-friendly perspective for traders, market-watchers and laymen alike, ending off with an amiable Q&A. – LF
SIMON BROWN: Good day, ladies and gents. It’s Simon Brown here. I’m doing an introduction for Alec Hogg. Before I go any further, let’s just check that you are receiving audio – that you can hear us and see us. If you can pick up the audio and if you’re seeing us on the screen, just raise your hand and go to ‘webinar application’. Brilliant – hands coming up aplenty. Today we’re doing the Biznews Global Share Portfolio. This is the third we have cast from Alec. We really are looking at this as a long-term investment portfolio, running via the Web Trader platform via Standard Bank. Alec will run through a couple of the stocks and then certainly, we have time for questions if you have the questions. Just throw them in the Q & A box. We’ll grab those at the end. Alec, it’s over to you.
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ALEC HOGG: Thanks Simon and it is a long-term portfolio. We have to make that point because I really can’t trade. I can’t tell you, a month ago, to have bought the stocks and then ‘they’re going to be up this month’. You’ll see that our portfolio is back a little, but do recall that we started off in September by putting in some of the investments and of course, the market moved a long way in September. We then had to rebase our portfolio, which we did at the beginning of December. The point of this exercise is to have a look at our portfolio, what has happened in the interim and ‘are we changing our mind on anything’. Would there be any reason for you to worry? Do we need to make some kind of adjustments? Well, let’s just go through the basic idea. We have put 30 percent of the portfolio into the Vanguard S&P500 ETF. There it is – the second row. The code is VOO.
We then put another 15 percent into Google and 15 percent into Berkshire Hathaway. Thereafter, eight percent each, into Amazon.com, IBM, and Novo-Nordisk. If you like, we have 30 percent in the market (in the S&P500 ETF). Then we have another 30 percent in two stocks, which we really believe very strongly in. Berkshire Hathaway is almost a reflection of the way the American market will go. Google is my favourite share in the whole world – not surprisingly – and then, another quarter of the portfolio in Amazon, IBM, and Novo-Nordisk. We still have a little bit of cash left to make further investments. I refer you to this table because it gives you an indication of what happened in the last month. The Rand/Dollar rate is down by two percent, which of course, is to our advantage because we invested on the 3rd of December.
As far as the market investments are concerned, not much changed in the S&P500 Index in Rand terms – virtually unchanged. The Rand has helped to offset a slight decline there in the timing. Google is down. It’s a share that has fallen out of favour. We’re going to get into more detail in a moment. Amazon.com continues to fall but that’s been our laggard in the portfolio. I’m not worried about it at all. Berkshire’s a little bit better in Rand terms. IBM and Novo-Nordisk – neither here, nor there, so that’s the overall look at the portfolio.
Let’s start with the individual amounts. The big story of the moment is oil. You pay your money. You take your chances. You have your bets. Increasingly, what’s happened on the stock market is that the oil price has currently had a negative impact on shares. The reason for that is some of the very big shares that are listed on international markets (remember, we’re focusing our attention on the United States of America – that is where our portfolio is primarily invested), the S&P500 does track what goes on, on the American stock market. You have ExxonMobil and a number of other majors that are part of the indices in the United States. Those share prices have been under enormous amounts of pressure. Not surprisingly, the oil price is down (as we spent quite a bit of time in our last webcast) from $115.00 not even a year ago, to the current price, which is now looking to get closer and closer to $40.00 per barrel. Will that continue into the future? Well, I’m not going to go into details now, except to say that when you have a supply and demand situation that is determined by market forces rather than being determined artificial cartels; at some point in time, it finds its level. I would not be trying to catch this falling knife i.e. the lower oil price.
This is a nice graph because if you have a look there at the blue line, that’s VOO – that’s the Vanguard S&P500 – and it is tracking the S&P Index, which is the XIC Index there and there’s been a little bit of a divergence between the two. Over time, if you watch where the mouse is going – that’s the way things go – the indices and the Vanguard ETF will track each other almost immediately. We’ve put this graph together to show you the way the market has been bouncing around in the past month. That’s where we made our investment at the time that we spoke to you a month ago, and that’s where we’re sitting right now. S&P500 Index…a little bit off as you can see, from where it was a month ago.
Let’s go onto the next slide and let’s talk about Berkshire Hathaway. An update on Warren Buffett’s company: we’ll be off to Berkshire Hathaway (myself and probably another 150 other South Africans) in the first weekend in May, once again. Remembering that Berkshire is a huge business – the fifth-biggest market cap business in the United States –, it has an exposure to the American economy and clearly, and exposure to oil. That’s the big story. How is Berkshire affected by oil? Well, positively because of the money that’s going to be put into the pockets of consumers. Walmart and Costco are two big companies in which Berkshire has a shareholding. Those two are both trading at record prices. The reason for that is people are sitting back and saying ‘the money that’s going into consumers’ pockets will help retailers in the United States’.
Another influence there was in October; Berkshire acquired the largest retail motor dealership in the United States. It was a big deal for the motor dealership (called Van Tuyl). It wasn’t that big a deal for Berkshire – being such a huge market cap – but it will influence the company positively, so the lower oil price means that people can buy more cars and certainly, cars are cheaper to run. It is a good point as far as motor retailers are concerned. NetJets is another subsidiary of Berkshire Hathaway. That will benefit… If you look at the share price of Comair in South Africa (and that surged in the last little while), there’s a similar story that you can make for NetJets, which is a jet-hiring service where you can actually buy portions of private jets. Clearly, it’s the executive class and they don’t really need to worry that much about the jet fuel, but it can only be a benefit because it will allow NetJets to drop its prices.
BNSF – the big railroad – are benefitting because many of the customers now are starting to stockpile oil, so they’re moving oil around the country. Geico, the biggest online short-term insurance company in America, which is a wholly owned Berkshire subsidiary (a little bit like Outsurance in South Africa). With a reduction in the cost of running a car, the view there is that more people will be able to bump up their insurance etcetera, so that’s on the positive side. The negative side for Berkshire is that they own quite a lot of shares in ExxonMobil, which has fallen but its only fallen back to the level at which Warren Buffett bought into the shares, in 2013. They also have a big stake in Lubrizol. You will remember that that was the David Sokol scandal of a couple of years ago, where he bought shares in Lubrizol. He was lieutenant. Many people tipped him to take over from Buffett in future.
He bought shares in Lubrizol after recommending to Buffett that Buffett actually buy it for Berkshire Hathaway. It was quite an insider-trading scandal. David Sokol departed. Warren Buffett bought Lubrizol. Lubrizol is not a great beneficiary of a lower oil price but isn’t really, making that much of an influence either. Looking at Berkshire overall, the benefits there of oil outweigh the disadvantages. A couple of their points for the company, which have held back its price in the last month, have been Tesco (getting into more and more trouble). I don’t know why people are still burdening Berkshire with this one, but Warren Buffett did buy a big stake in Tesco. He has sold that stake. In fact, he sold it at the first hint of trouble. The other big loser in the Berkshire portfolio (but a tiny part of it) is BYD, which is a Hong Kong based company that makes electric cars and batteries.
It’s been battered. I remember, at one Berkshire Hathaway AGM: Charlie Munger telling the whole audience why BYD was such a fantastic company to buy. I think Charlie would love to take those words back again. Just to close off with Berkshire Hathaway, Buffett said at the last Annual General Meeting in May that he would be quite happy to buy back the shares from the company at 1.2X book. Berkshire currently trades at 1.5X book, so you are getting a margin of safety. If you remember the smart way that one invests: you buy shares or you know there’s a bottom – you know there’s a floor – and the floor here is 1.2X book. If there were to be some chaotic event, you would know that Berkshire Hathaway doesn’t have that much downside. It has a lovely floor under it. There is Warren and there is the share price graph in the last month, of Berkshire.
Comparing it here against the S&P500, the blue graph is Berkshire outperforming the S&P500 (nicely done) and he’s been beating it hands down in the last little while – has Mr. Buffett. After some years of underperforming the S&P500, Berkshire Hathaway is now steaming ahead at a much more rapid rate.
Onto our next stock to look at – the other one of our core holdings – is Google, a company that, for some reason has fallen out of favour. I can only believe that this is because of the trading mentality of many people – quarter writers. By the way, if you’d like to find out what’s going on at Google, make a note on the 29th of January. They’re having their fourth quarter conference call. It will be on a Google Hangout, so you can go in there and watch or listen to the development. To me, Google is the greatest company in the world. It’s an investment in ingenuity. It owns its area of search. There are question marks from various people about competition that could come into that area. Being in the media industry, I know that Google has completely transformed the way that people advertise so for me, the benefit that Google has in that respect is not even close to being saturated.
What is exciting about this business is that they actually, just believe in hiring smart people and putting them onto interesting projects. The driverless car – in the past month – got further momentum. You might recall that a year ago in the World Economic Forum in Davos, Erik Brynjolfsson was one of the stars of Davos. He wrote a book, called ‘The Third Machine Age’ and in the ‘Third Machine Age’, it kicks off by saying that his views changed after driving in a driverless car of Google’s. He arrived at the airport in California. He’s from MIT, which is in Boston, right at the other end of the United States. When he arrived there, he was picked up by the Google people. A couple of guys in the front seat of the car, and he and Andy McAfee (his co-author) sat in the back seat of the car. During the whole journey, the two fellows from Google in the front seat, had their arms folded and were looking over the back, talking.
They weren’t driving the car. He said to them ‘what are you doing in the front seat’ and they said ‘can you imagine how people on the highway would freak out if they saw a car driving along with no driver’. That’s the only reason why they make sure that these driverless cars that Google has now been having, and have driven hundreds of thousands of kilometres over the roads in California with only two accidents… Incidentally, in both of those cases, the man in the automatic driving was overruled by the chauffeur and both of them were back-ended into other cars as result of driver error, and not the car’s error. Brynjolfsson then took that information and wrote this book, and the driverless cars are now… In the last month, there’ve been negotiations between Google and General Motors, Ford, Toyota, Daimler-Benz, and VW to produce driverless cars in the year 2020. Think about that and think about what a game-changer that’s going to be for all of us.
The other thing that’s happened in the past month is the launch (by Google) of what they call Google Domains. It’s quite a profitable operation – the sale of domain names – by Godaddy.com. You might have even bought one there, yourself. Well, if you go and have a look at Google Domains, Godaddy.com is in trouble and they’ll be knocking that one out of the market. That’s what Google’s able to do: apply its ingenuity, apply its expertise, and apply its massive cash pile to enter into new areas where it can disrupt, change, and make profit out of it. What about on the downside? Well, the only downside about Google is that the stock continues to underperform, and there you see it. In the past month (Google being the blue line and the NASDAQ Index being the red line), the Google stock underperformed quite poorly. As you can also see, that’s where we started a month ago, and it’s currently down here.
It has come off its bottom, but I think that if you’re a long-term investor (and we encourage you to do that in this portfolio) then this should be something that would make you smile. I love the point that Piet Viljoen makes by saying that ‘if you had a hamburger that became half-priced, most of us would go out for dinner twice a week, rather than once’. In the share market, if the price falls we all get nervous about it. Well, Google has done okay in the past months, but it’s even better value available today. Moving on to the next graph…and by the way, you can send through questions. Simon is waiting. Simon, with your short hair, I don’t think anyone’s going to recognise you when you go on TV next time.
SIMON BROWN: I should be so lucky.
ALEC HOGG: Good stuff but anyway, if you have any specific questions, please tap them through and we’ll get to them immediately.
Onto the next stock, which is Amazon.com, this is a company, which again, I’m a big fan of because I’m investing in the ingenuity. It’s quite closely related to the industry that I understand – being the media industry. Jeff Bezos is one of the great entrepreneurs of the world and in the past month again, there’ve been some interesting developments here. They’ve hired Woody Allen and they’ve hired him on the success of Amazon producing its first movie, which won two Golden Globes – a movie, called Transparent. The idea now is to get Woody Allen to start making a half-hour series, all of this to go onto their prime instant video channel so they’re moving into the video field with their own content. The media industry is fascinating because of all these different developments – all kinds of non-media players coming in. This is an attack by Amazon, on Netflix.
They weren’t terribly successful when they brought out their telephones, but this seems to be a lot closer to home for Amazon. I’m quite optimistic that the Prime Internet Video Service is going to be more successful than some of their other ventures were. What I like about this is that Bezos keeps trying. He has a fantastic base. Amazon is a USD90bn company when you start looking at those kinds of turnovers, but he doesn’t make any profit. This is making some of the short-term investors rather irritated because they say that they’d like to see dividends. They’d like to see profits coming through, please. Bezos says ‘I’m having too much fun, investing’.
What is good news here though, even though it continues to be out of favour (and we can see that in the next graph), which shows you the share price there underperforming once again, in the past month. That’s Amazon against the NASDAQ – quite a significant underperformance. One bit of good news came out this week was when City Group reassessed its view on Amazon.com which, as you can see is currently trading around the $293.00 level and said that their target price has been raised from $325.00 per share to $354.00 per share. That’s an uplift of about 25 percent from where we’re currently at. They’re reassessing the longer-term view of Amazon.com and it’s one of those that I have no doubt… In time, we’re going to be extremely well rewarded. You want to buy shares when they’re cheap. You don’t want to buy shares when they’re expensive. Even though Amazon’s down seven-and-one-third in the past month, it’s just becoming more and more attractive. Think of that old ‘two hamburgers for one’ story.
Shall we move on to the next constituent of our portfolio? Big blue – big value.
Ginny Rometty, the Chief Executive of IBM has been quite outspoken in the past months. Ginny was a recent visitor to South Africa, interestingly enough, to come and have a look at the Third World. She brought her entire executive team to Johannesburg (not to Cape Town). Most companies go to Cape Town. She brought them over a Super Bowl weekend to show them what was going on in this country and gave them some views of where they might be applying their minds, into the future. Clearly, she’s someone who’s innovative, who thinks a lot differently, and it reminds me of what IBM’s currently doing – a little bit of Bill Gates at Microsoft, some years ago. Gates didn’t like the look of the Internet and all of a sudden, he was transformed. One doesn’t know what caused it but he then swung the super-tanker of Microsoft to focus on the Internet, believing that the Internet was the future.
That transformation has of course, played very well for Microsoft, thereafter. What Ginny has been doing is refocusing IBM onto the Cloud. Now Cloud Computing is the next best thing in the computing space. You think ‘well, IBM makes a lot of mainframes, so they’d be putting the mainframes into companies. If companies are no longer going to be buying mainframes (in other words, putting their documentation and information into the Cloud) then surely, IBM would be vulnerable. In fact, it’s quite the opposite. IBM has invested $1bn in producing (and this came out in the last months) a new model, called the Z13. It’s the most sophisticated computer ever built and it is the perfect computer for the Cloud so it’s a big bet on the Cloud being the place where computing is moving towards. Cloud revenue at IBM was up 50 percent in the nine months to the end of October and Ginny and her team are focusing on this one.
ome investors are still not buying it, even though it was the very first tech stock that Warren Buffett bought into – IBM – and he has a big stake there. The investors that don’t like IBM believe that it’s too reliant on buy-backs and dividends to keep the share price going, and they continue to downgrade it as you can see – in the past months, down by five percent. To me, that makes it just a little more attractive. Indeed, for those who didn’t get in the first time around, the decline in the Rand wouldn’t be a problem for you if you want to follow me into this stock. It’s offering great value and the kind of stock we’re looking for in this portfolio…it’s would potentially do terribly well.
To close off the last of the five, is Novo-Nordisk, the market-leader in insulin – owning 50 percent of the market in the world. Novo-Nordisk has had Saxenda, if you know much about the business of making fat people thin then you would realise that it is a boom market, particularly in the rich north. Saxenda, an anti-obesity drug, has been approved in the United States. There’s not too much understanding yet about the clarity on it. Novo-Nordisk has not disclosed what they’re going to be charging for this drug and some analysts are saying that at a cost $25.00/day (to be treated) it’s too high. Well, I don’t know. When you’re rich, $25.00/day (if that is indeed the price point that they’re going to come in at), they say that you can never be too thin or too rich. When you’re thin and rich, it’s easy enough to pay the $25.00, I guess.
Novo-Nordisk has a target of growing at ten percent per annum. We showed you a long-term graph in the last discussion of our portfolio. It’s one of those stocks that just keeps going and when they get to the place where they’re sitting on a whole pile of cash, they pay out cash dividends. They’re not currently in that situation and one of the big bull points is if it happens (and it’s the kind of company that tends to follow through on its promises), they have a daily insular innovation – a brand, called Tresiba, which is available elsewhere in the world. It was turned down by the American FDA last year, but they’re going back there try to see if they can get this one through again. If that approval comes through, it will be interpreted very positively. What I like about Novo-Nordisk as well, is that it is indeed, a triple bottom-line company, one of the first in the world, which focuses on those triple bottom (financial, environmental, and social responsibility).
I’ll be off to Davos tonight indeed, and paying a lot of attention this year at the World Economic Forum, to those issues – the issues of triple bottom line, which is increasingly becoming important for companies. Novo-Nordisk has an advantage in that regard.
So, that’s the portfolio, Simon.
SIMON BROWN: Alec, we have questions. Folks, if you have more questions, pop them in the Q&A box. The first one is from Ernest and it’s a great one. He says ‘Berkshire Hathaway’. He has it booked for long-term. What about leadership going forward? Charlie Munger, Warren Buffett: between them, they must be 170 years old, or something like that.
ALEC HOGG: 174.
SIMON BROWN: 174. Next set of leadership? They can’t carry on forever.
ALEC HOGG: Yes, Warren is 84. Charlie’s 90. He’s asked this question at every Berkshire Hathaway AGM and I’ve been going for the last ten years. He keeps explaining, as you and I would, ‘well, I have a mind full. I have an envelope in my drawer. If I were to pass away, the Board would get the envelope and they would open it and know who the successor is’. I like what Charlie Munger said two years ago. ‘Warren Buffett is the most rational of beings’, said Charlie. ‘Why would he not pay attention (in the same way) to his succession, as he has to everything else in his life?’ To have built his business to the degree that he has – that’s his life’s work. Why would he risk allowing it to fall over just because he dies? He spent a lot of time on this. He thinks about it a lot. One of the good examples that he did was that he built in two portfolio managers from a cast of thousands as you can imagine.
You wanted to work for Buffett, not necessarily in Omaha, but that’s where they ended up. These two portfolio managers have both beaten him in their performance in the portfolio and he’s been progressively giving them more and more money. He has the same thing going on in the company itself. Succession: some short-term views would be ‘well, when Warren goes, Berkshire Hathaway will be sold off. It will have an asset-strip’. This is no Phillip Frame. This is no Byzantine webmaster at the middle of a complicated operation. This is a man whose greatest contribution to Berkshire is the allocation of capital and he has selected those who can allocate capital when he’s gone.
SIMON BROWN: That’s what conglomerates are about, Alec – the allocation of capital. Brian Joffe comes to mind – locally. A couple of folks are asking similar types of questions. ‘I can’t afford to buy all of them. If I have to go and get one of them, which would be the one’. Some folks are saying ‘would it be fair, just to start with the Vanguard’.
ALEC HOGG: Absolutely. I would certainly recommend… In fact, on Twitter the other day, somebody asked me what my share is for 2015 and I said ‘the Satrix 40’. If you have to buy one share or one equity, it would be Vanguard. As much as I love Google and as much as I love Berkshire Hathaway, they could have poor years. Anything could happen. We don’t know what the future holds. When you are in the market – in the major ETF, which reflects the market – that’s the one to go for, so Vanguard’s the one.
SIMON BROWN: A couple of questions coming around the exchange rate. Ed puts it quite succinctly. He says ‘what is your long-term view on the Rand/Dollar’. I don’t know if you’re prepared to put your head on the table, but the question (broadly) is that ‘over the longer-term (let’s talk decades), we would surely expect to see Rand weakness and therefore, that’s always going to give a bit of a kicker to that portfolio’.
ALEC HOGG: I think that if you have a look at any young democracy through history, it has growing pains. The United States even had growing pains, but they’ve refined their economic processes now, to one where they’re a flexible economy. If things go wrong, they bounce back quickly. Longer term: they grow much more rapidly because they have smart governance. They have democracy where everybody understands what democracy’s about. They speak about things. They have arguments over stuff like WikiLeaks. They’re at a different level of consciousness. South Africa is a young democracy. We have many expensive lessons that we are learning and will learn in future. Because of that, the Rand will be weaker against the U.S. Dollar, in time. It’s rational. It’s logical. In addition, point-three percent of global GDP is generated in South Africa.
America is 75 times the size of the South African economy. Why would you go for a little cork in the ocean when you have the whole world to choose from? Longer term: no question in my mind that the Rand, relative to say, the U.S. Dollar (because that’s where our portfolio is concentrated), will be weaker. That’s why we have our investments there.
SIMON BROWN: A question around ‘what about beyond America, sort of European, etcetera’. In a sense, Google, Amazon, and IBM are global companies, rather than American. They might be domiciled in America, but the really are global.
ALEC HOGG: They are global companies, but they’re American-managed and if you have a look at European management (with the best will in the world), the Americans are in a different league. To them, management is a science. They have the best business schools. They have the best graduates from those business schools and they are able to apply the science of business so much better than any other (broadly speaking) companies from other geographies. Novo-Nordisk of course, is Danish so there are exceptions. You can’t just say ‘well, it’s an American company so it’s better’. Many European and even South African companies would compete with any American company, but these are global operations in every sense of the word.
SIMON BROWN: When I think about it, all big companies these days, to some degree…but I like your point about American management. I’m not seeing any more questions coming up and we’re bumping for the half-hour mark. Ladies and gents, we’ll leave it there. Alec, you’re off to Davos this evening.
ALEC HOGG: Tonight, yes and we have our presentations.
SIMON BROWN: They week after next, I suppose.
ALEC HOGG: It’s just around the corner. We get back on the Monday.
SIMON BROWN: Tuesday, Wednesday, and Thursday…
ALEC HOGG: Tuesday, Wednesday, and Thursday.
SIMON BROWN: Durban, Cape Town, and Johannesburg. I’ll be at the Johannesburg one. We will have another webcast coming up through February. I’m not sure of a date. We will fix that up when Alec is back from his travels. Travel safe, have fund, and we’ll chat next month.
ALEC HOGG: Thanks Simon and I’m looking forward to seeing the Standard Bank clients at the post-Davos, face-to-face… What would you call them now? Seminars, rather than a webinar but there’s value to both of them and I thoroughly enjoy that. I go there, listen, make my notes, and try to compress it on the plane home so that by the time we get to those presentations, there’s some sense that comes out of it.
SIMON BROWN: Folks, there are still some seats open. If you log onto Online Share Trading, you’ll see under the courses as I said, Tuesday, Wednesday, and Thursday the week after next.
