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 Google, Amazon, Berkshire Hathaway, IBM and Novo Nordisk, are performing. This month he also opens a position in Apple, the most valuable company in the world, valued at $730bn. – Stuart Lowman
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Well, I hope you can hear me loud and clear. Itâs Alec Hogg here, coming to you from the Biznews.com studios at the Johannesburg Stock Exchange. Itâs a pleasure to be with you, as always, for this once a month presentation/webinar â call it what you will â where we have a look at our portfolio and see how itâs done in the past month. The intention is not to start trading the portfolio â anything but. This portfolio is one to be held indefinitely. We have increased the holdings. Weâve added another holding to the portfolio today, but youâll get more of that in just a moment. Right, letâs get into it. If there are any questions by the way, just put them into the back end. Stuart is with me in the studio. Hey, Stuart.
Good afternoon, Alec, and everyone else.
Youâll pick up from your side and youâll get the questions.
Yes. Weâll pick up the questions as you send them, try to interject, and make it a conversation as we go along. It should all be good.
Perfect. The idea then is please drop in those questions. Last month, we had a bit of a problem with the questions. In fact, neither of us could see them until right at the end, but Iâm assured, (by Justin) that heâs put everything together in the right way. I can see a big, empty block here that says âquestions availableâ and whenever you do add them, weâll get straight to them.
Okay, letâs go onto that first slide â account overview. As you can see, I did it last night and it gives a position⌠I suppose the important one is that $211,000. What is interesting about this on the Webtrader is that it has not added back the dividends so in fact, our return is a little bit better than 11.6 percent in USD terms. In USD terms, 11.6 percent in seven monthsâŚmy goodness, I think that you could almost go into portfolio management if you were doing this indefinitely.
Onto the second one. This will give you the overview of the account. There they are – the holdings that we do have. Weâll show you in just a moment that we have actually added Apple Computer to that.
Onto the next one. There it is. Prices at opening vs prices today. This is really, where the major part of this portfolio is. Vanguard⌠Those of you who are joining us for the first time â and I see we have 50 people on the attendance, which is a nice improvement on the last time around â let me just take you through this portfolio.
The intention is to have about one-third in the ETF that is tracking the S&P 500 Index. In other words, weâre buying the market. The Vanguard S&P 500 ETF has a cost of 0.05 percent. That is 1/20 of one percent. I know that here in South Africa, a company like Sygnia has been screaming about how clever they are at 60 basis points. In other words, 12 times what Vanguard charges and Sygnia say theyâre the cheapest in the market? Well, Vanguard is 0.05 percent. We love this one and so does Warren Buffett. In fact, he has advised his wife Astrid that when he goes, her money will be put into Vanguard (not even Berkshire Hathaway). That has performed reasonably well. Itâs sitting at 29 percent of the portfolio today, from the target of 30 percent. The reason is that it has actually underperformed the rest of the portfolio. Similarly, Berkshire Hathaway â talking about Warren Buffett â is you can see that the percentage of the portfolio is down to 13 percent and this quite obvious because your cost was $30,000 and itâs now worth $28,500. Thatâs a big tip for anybody who hasnât bought into this portfolio yet. Thatâs the one to start looking at.
Google: another 15 percent of the portfolio allocated to this one. The structure is 30 percent into the Vanguard Tracker, 15 percent into Berkshire Hathaway, and 15 percent into Google. Why? Because Berkshire Hathaway gives you a good feel of America Inc. and Google gives you the best company in the world. Thatâs the core of the portfolio â 60 percent there. What we do then, is put the rest of the portfolio in eight percent chunks, into five stock picks, of which weâve had three to date. Weâve now added Apple in this period and Iâll tell you more about that later. We still have a little bit of cash, left for the final stock pick. Thatâs the portfolio. Just to repeat: 30 percent in Vanguard, 30 percent between Berkshire Hathaway and Google, and then the final 40 percent into five stock picks. I hope that makes a lot of sense. So far, so good for the strategy.
Of course, this is an offshore portfolio and the Rand is all-important. The Rand has depreciated by eight percent since we launched the portfolio on the 5th of December. We actually launched it in September. We were doing pretty well and then, for technical reasons, we had to start again, which Iâll tell you I was quite irritated about because we were already well in front. What we did do, in the beginning of the portfolio was that we staggered in the investments over three months. If you havenât been participating yet, donât jump in and follow us immediately. Rather stagger your purchases over a three-month period. We started here with an amount of $2m ($200,000) and that has grown to R2.6m at the moment in Rand terms. As you can see, quite a nice improvement there. Weâll get into the details in just a moment, but the Rand has helped us. Thatâs appreciated by nearly R1.00 in the last six months, against the USD so you just sit and without doing anything, youâre going forward.
The best performances: as you can see, amazon.com has been an absolute killer â up 46 percent in Rand terms, in the last six months. Interestingly enough, for the first couple of months we had it, it was going backwards. Then a good set of financial results came through. People reassessed Amazon and the share price has scooted since then. The other one thatâs done terribly well has been Novo Nordisk. Thatâs up by 33 percent in the last six months so those two (Amazon and Novo Nordisk) have distorted the portfolio a bit. Theyâre slightly concerning as well because when the share run ahead to the degree that these two have, itâs hard to say with great confidence that you can replicate the portfolio overall. Thatâs why I say, âIf youâre going to be mirroring usâ, â and itâs a good idea to do that because every month, we can talk it through and tell you whatâs been happening at the various companies. It also, gives you an ability to invest internationally. If you were going to mirror us, I would say right now that you could happily put your 30 percent into Vanguard and Berkshire Hathaway. In fact, youâre buying into Berkshire Hathaway cheaper (not in Rand terms, but in USD terms) than our portfolio bought into it. Google: youâd buy it at the same USD price we purchased it at and IBM is a little bit higher. With that one, you could put your eight percent in comfortably and another eight percent (we have seven percent) in Apple. Weâll tell you in just a moment, why that decision was taken this time around.
Here again, is the performance of the past month. On the 25th of May, the Rand was at R11.94. It has depreciated by nearly two-and-a-half percent in the last month, so if weâd done nothing, we would have gone forward by two-and-a-half percent anyway and that has been reflected in the improvement in the various underlying counters. Vanguard, in fact, was down a little bit but because of the Rand terms, we put on one-point-seven percent. Berkshire was down quite a lot and in fact, it was a loser even in Rand terms, but very fractionally in this period. Google did quite nicely and another good run for Amazon â six percent in the month. Overall, you can look at the cash component, which has improved as well.
Okay, letâs get into this side as well â the dividend receipts. The receipt that did come through in this period was through Vanguard. It pays out quarterly. I paid $1.03 on the 18th December, then 98 cents and another 98 cents this time around. That cash has been added to our cash pile to give us our overall return.
Letâs get into the portfolio itself. Vanguard S&P 500 Index is an interesting business. This Vanguard was started by John Bogle, a man who was the father of index funds/exchange traded funds (as we now love to refer to them).
In essence, he said that very few asset managers beat the market so for most investors, if you replicate the market, you will do better than most asset managers do. This is a philosophy, which has been tried and tested over the years. The important thing here is to get the costs as low as possible because it doesnât help you if you beat the market, and you have to pay two percent in costs because then you will underperform the market by two percent. What Bogleâs done here (and heâs still alive) and his successors at Vanguard, is theyâve gotten their costs down to a fraction of 0.05 percent. How they do that is that they lend out stock to short sellers, so they get fees in by lending out stocks to short sellers.
Stuart, do you have some questions?
Yes. Itâs from Verna. Hi, Alec. I see that you bought eight percent of IBM. What is the reason behind that, as you already own it indirectly, through Berkshire Hathaway?
Verna, the biggest purchase that Warren Buffett made in the last year, was IBM and weâll get to that in a little while, but the indirect ownership is fractional. If you start looking at Berkshire being $117bn portfolio, it has a market cap of $250bn/$270bn (somewhere around there); the ownership that it has in IBM â given what we have â is a very small part overall. Although itâs a big chunk of the portfolio (about ten percent of that $117bn), itâs $10bn so I didnât really look at it from that perspective. What I did though, was ask why Warren Buffett bought this and thereâs a very interesting story that weâll get into in a little more detail when we look into that one. I hope you can just bear with me on it.
Getting back to Vanguard, low cost is the major reason why Vanguard is preferred over other exchange traded funds and it really is meant to replicate the index. As you can see in this period, Vanguard paid a dividend, so itâs slightly below the index performance.
In the past month, S&P 500 performance was flat at 0.04 percent, whereas Vanguardâs at 0.05 percent, but thatâs because the dividend was paid. You will see those two lines converging in the next period. Indeed, if you go over six months, you can see thereâs just about, no difference between the two â Vanguard being the blue line and the S&P 500 being the red line. The reason is thereâs just about no difference and just about no costs when it comes to Vanguard. When weâre replicating the S&P 500 Index, which hasnât done great in USD terms in the six months that weâve had the portfolio⌠However, two percent and if you add the Rand onto that, about eight percent Rand depreciation, you have a double-digit growth in half-a-year â not bad going.
Onto the next one: there is my hero or one of them, anyway, Warren E Buffett. Heâs with Mrs Rose Blumkin. I know I tell this story often, but Iâm going to repeat it. At this point, Rose Blumkin was probably 100 or maybe a little bit older than that. She certainly looks like it. She worked until she was 103 years old and literally, when you go and visit Omaha one day and you go to Nebraska Furniture Mart â the company that she started â you will see the size of it such that she used to drive around on little scooter. She did this for many years. Anyway, at 103, she retired and she died, aged 104 and Warren Buffett said, âThatâs no good. We now want a retirement age of 104 because when people leave our company, they tend to go into the box anywayâ and he was very sad to say goodbye to Rose Blumkin. Thatâs obviously quite an old photograph because she died some years ago.
Moving on to Berkshire Hathaway itself, Iâve done a lot of work on this in the past month. The reason was that together with Standard Bank, we did an âInvest like Warren Buffettâ group of seminars. It was a one-hour presentation and very well attended. I wonder if some of you were there as well. It gave me the opportunity to really, get back into Berkshire Hathaway and to look at how the company is structured and what itâs been doing. More than ever now, Iâm excited to be in that stock.
Stuart, do you have another question?
Yes, Alec. This oneâs from Dominique Parker. It says, âItâs my first time, following this webinar and I have a question, which might sound naĂŻve. By replicating the market, are you not putting your portfolio at risk should there be a sudden collapse?â
Yes, of course you are but by replicating the market, you are giving yourself a defensive quality. Itâs really, what weâve tried to do by having roughly one-third into the S&P 500 Index. Dominique, Iâll tell you where my thinking is here. Remember, the period to hold these stocks is forever, so we want to get a nice margin of safety when we buy the stock. We also want to see a superior stock that has outperformed. There are many criteria, which one looks at before buying a share that you put in the portfolio if you know you have to hold it forever and thatâs the way weâre looking at it. As we buy more shares, we will get to a point (we now have four stock picks) where weâll add a fifth in the near future (well, as soon as Iâm comfortable with one to put there) and then if we find another stock pick at that point in time, we would then sell the S&P 500. Weâd sell the index tracker (or half of it) to put that into one of the stocks, etcetera.
Weâre in the market. This is a share portfolio. Of course, itâs vulnerable but when youâre buying the S&P 500, it is far less vulnerable than individual shares are. The S&P 500 can sometimes collapse. In fact, Warren Buffett says in the latest Berkshire Annual Report, âWhen you buy a share, look at it on a five-year basisâ because there have been times in the past where Berkshire (his company), which is the fifth most valuable company in the world, has halved in value. The prices have halved. It isnât that the company has halved in value. The price has halved. The value has stayed pretty much the same but Mr Market has been manic sometimes and has pushed the price too high, and depressed it at other times. As an investor, you need to be patient and you need to buy the shares when the price is actually giving you a good value. Here on Berkshire Hathaway, we really are looking at that at the moment.
As you can see, Berkshire is currently trading at $141.00. Your baseline on this one is $117.00. The reason I say that is the Chairman of Berkshire, Warren Buffett, has said that they will buy back shares in the company should the price go to 1.2 times book. In other words, 120 percent of the book value. Without getting too complicated, what happens in the case of a company like this, which Buffett has been running for 50 years is that the book value is highly conservative. Heâs bought companies⌠for example, in the 60âs; he bought a big chunk of American Express. He bought GEICO, which is a wholly owned subsidiary, in the 80âs but he started buying it in the 70âs already. These companies are put in at the purchase price. Today, you can imagine, theyâre worth multiples of that. Indeed, he bought an insurance company (National Indemnity) for $8.5m in 1965.
In the latest Annual Report, the valuation of that is $11bn. Of course, it doesnât reflect that in the book value. He says, âIf the book value comes down to 1.2 or the share price comes down to 120 percent of the book value, weâre buying. Weâre buying Berkshire sharesâ. Currently, the share price is $141.00. At $117.00, you know you got the bottom. No matter what happens, if the whole market falls out of bed, Berkshire, with $60bn in cash, will be buying its own shares when it gets to $117.00 so it does give you that underlying base. An additional interesting point about Berkshire: it is spread across the American economy â very big in the insurance industry. It has a float – in other words, money/premiums that people have paid that are held in abeyance to be paid out at some future. They call it a float in the insurance game â of $84bn. He also has 80 subsidiaries, including the biggest railroad network in the States and then a big portfolio of $117bn, which is concentrated into those five shares, including IBM. It is one of those defensive stocks and at this time, itâs offering excellent value.
Alec, we have another question from Verna. It says, âDo you feel the U.S. market is a safer bet to follow their S&P than the other S&P around the world? Their economy looks the most attractive â itâs growth as opposed to a few years ago, hence your investment.â
Very much so. The United States is the country, which most closely follows the reason why we invest in shares. Just stopping for a minute, you should not be buying dumb commodities. You should not be buying gold, platinum, or something that is literally dumb, to which you canât add any value. You should be buying something where the human incentive/human initiative will add value to the product that is on the table. Thatâs what shares are about. I know many people love commodity shares. They love to buy commodities and they trade the cycles, etcetera. Thatâs fine for them. They understand the cycles. For us lesser beings: when we buy into a company, our intention has to be that (1), that company is in a good part of the economy and (b), the people are running the company would be able to apply the most powerful organ/computer known to man (our brains). In other words, apply their brains to that company to ensure that they generate additional profits.
That is why I look at the country in the world, which is most supportive of this sense, and that is the United States. Iâm very happy to be invested 100 percent in the United States. I know the diversification school will say âput some into Europeâ. I donât like the way Europe is structured. They have social issues there, which they havenât even started to understand. The Chinese market is way overpriced by any criteria and that is because itâs a very immature investor, who has been playing it in the same way as they play the horses in Hong Kong. The South African market: our market has done pretty well because of the Rand hedge qualities but if you want to get the purest form of the purest type of share investment, the United States is the place to go.
Thatâs Berkshire and in the last six months youâll see Berkshire has underperformed, so Dominique, for people like you who havenât been invested in this portfolio yet; to me, this is the one you can jump into â boots and all. Youâre paying $141.00 for the Berkshire B-shares now. You will be buying at nearly eight percent cheaper than we bought in, in USD. Fortunately, the Rand has made us look not as silly, but you will be getting in at a good level and remember, you have that underpin from the company itself at $117.00. Really, the downside is capped. The upside is substantial.
This company has the perfect business model and quite a lot went on in the last month, with Google. Theyâre getting closer now, to traditional media. Thereâve been discussions between Google and some of the big newspaper groups to see if they can work together.
Thereâs been an adversarial relationship up to this point. In fact, itâs interesting to see how Google is moving more closely towards the media industry and working with media. Theyâve launched something, called YouTube Newswire. Theyâve also launched a news lab for journalists to help. The developments in the media space are really, shoring up the major part of Googleâs revenues, which are generated through its advertising on its search function. Those who have heard this before, I apologise. One of the reasons why Google is so widely held by value investors, was that at one of the Berkshire Hathaway Annual General Meetings Warren Buffett was asked about Google and he said he and Bill Gates have spent many a night, discussing where they can find a hole in the Google business model and they canât find one. They say itâs impossible to see where Googleâs going to go off the rails. Like Apple, which weâve bought into, Google has piles of cash. Itâs looking at new areas to disrupt. It and Apple will be fighting over dominance in the music-streaming sector. Thatâs in the news right now. Google also has the ascendancy in driverless cars, which is the next destination of the whole business model. In many ways, when you see what Google are Apple are doing, you look back at Berkshire Hathaway and say, âWhy are we even invested in Berkshire Hathaway when the world is changing so?â Well, the good news there is that Berkshire actually has some very solid businesses, which are just about un-disruptable. Many things are disruptable but in their case, you need a railroad to move goods from A to B. Theyâre a big railroad company. You want to have tomato sauce with your chips and thatâs Heinz, etcetera.
Moving on to Google vs NASDAQ: as you can see there, NASDAQ has underperformed. Google is up by two percent so again, for newbies like Dominique, you can comfortably put your 15 percent in Google. Youâre paying less than we did.
Onto the next one. Our star performer in the portfolio is Amazon.
It is doing interesting things. In the past month, it was up by just over two percent, outperforming the NASDAQ Index, which is where itâs listed. As you can see though, in the last month itâs had quite a nice run against the NASDAQ â up by two-point-one three. In both of these instances, it was when we had earnings surprises on the upside. In January, Amazon was underperforming the NASDAQ, quite badly. The NASDAQ has now put on eight percent. Amazon has put on 46 percent in USD terms, so itâs been a fabulous performer.
The next set of quarterlies is likely to show us again, that the area where Amazon is dominant, which is web-based services, is one that has caught the attention of investors now. However you want to look at it – Iâm sure youâve heard about the Cloud and web-based services are really showing the Cloud â that is the next big thing and itâs estimated that Amazon has between a three and seven-year advance on all comers. They just got going into the Cloud earlier (or started the Cloud earlier) than anybody else, so they have a massive dominance there. The second-biggest revenue generator of Cloud or web-based services is one-seventh the size of Amazon. Forget about what itâs doing with drones, which is also exciting, on the delivery of its products. Forget about being one of the worldâs biggest retailers. Amazon has huge dominance on the Cloud.
I just love this company and love the way Jeff Bizos thinks. He doesnât worry about the market. He doesnât give the market what it wants. He worries about his customer. Heâs very customer-centric. Amazon remains core in our portfolio. Again, if you were going to buying it for the first time now, I would say phase it in over three months. Buy your one-third today, one-third in a monthâs time, and one-third a month thereafter
IBM. To return to what Verna was asking us about a little bit earlier; it is a company, which Warren Buffettâs been buying a lot of. He particularly likes companies that buy back their own shares. IBM has a five-year program – theyâre about three years into it â of share buy-backs.
When you are busy buying back your shares, the reality is that as a management team, you donât want the share price to go up because if it goes higher, you pay more to get your own shares back. I donât believe that IBM itself (Gini Rometty and her team) are too unhappy, given their massive share buy-back program. Theyâre spending somewhere in the region of $50bn. The share price has not been moving much and neither should you. You will be able to buy IBM at a lower price than we did. This month, it underperformed. Weâve made four percent in USD terms on our portfolio, as against about two percent in the market, generally. Itâs certainly good value. The value investors love this one and the more IBM buys back its shares, the more value itâs going to be giving to shareholders. In the past month, IBMâs done some interesting things. It entered into a strategic partnership with Docker. Thatâs another new thing. Remember, we spoke about the Cloud a moment before. Well, another big thing coming out now, is called âThe Containerâ. Docker is the leader in that and IBM is partnering with it.
Here again, is one of my favourite stocks â Novo Nordisk. It has 50 percent of the worldâs insulin market. We know that people in developed countries are becoming fatter and less healthy. There are more diabetics around today than there were in the past and that number is likely to keep growing.
If you own 50 percent of that market, keep your costs down, and keep innovating as Novo Nordisk, which is a Danish company does, youâre in a good place. The performance during the past month was up and down. We did have quite a nice jump towards the end of the month in Novo Nordisk, but it still underperformed the NASDAQ a little. However, when you take a six-month view, it has been a star performer. Up by 29 percent in USD in the past six months. Itâs a great dividend payer and has launched a R32bn share buy-back program as well. Like IBM, itâs adding value by buying back its own shares.
Before we go into the next, Iâd just like to let you know that weâve also taken seven percent of the portfolio and put it into Apple. Iâve been waiting for Apple for some months. Iâve not been able to see the slide or the pullback in the price that was hoped for. It did come back a little bit from $132, 00 per share, to $129, 00 and we bought in at $129, 00. Apple is the most valuable company in the world. Itâs worth $730bn. Take this for a stat: it has a cash pile of $200bn. That means that Apple can pay for Government spending in South Africa for the next two years. All the money that the State spends in South AfricaâŚApple could take its cash and pay all the public servants, pay for all the infrastructure, and everything else the country spends (we have a spend of about R1trn per year). It has aboutR2.5trn, in cash. It keeps churning it. What I love about Apple is that itâs on a very reasonable valuation.
The price earnings ratio for this year is 14.5. If you compare that with Novo Nordisk at 33 times and Appleâs as good a company. If you look further into the future, youâre buying it a year out (next year) on price earnings of about 13. Very, very reasonable value. Is it likely to keep going? I believe so. Appleâs idea is that at the centre, they keep the cash rolling in but they have operations at the outside, as theyâre just done with the music streaming. Go and read that story on Biznews. Itâs from the Financial Times of London. We have a license to reprint some of their stories. If you go and read that, youâll see the way that Apple operates is that it identifies markets, attacks them with some of its brightest people, and disrupts them entirely. It has plans for driverless cars as well, although Googleâs been making most of the running.
Appleâs been very secretive on this one. If you think driverless cars are science fiction, Volvo recently launched its program to have 100 of the driverless cars driving around in Guttenberg. Next time you visit Sweden, donât become freaked out when you see a car next to you that doesnât have a driver in it, but itâs doing in the traffic what you would be doing. Indeed, in California the driverless cars that Googleâs had on the roads have done 1.7-million kilometres. Theyâve had seven accidents in the years theyâve been doing this â all of them being caused by other drivers hitting into them. Thatâs what Appleâs looking at, as well. Itâs disrupting in areas that we canât even imagine at the moment. It has the cash to be able to do it.
Closing off with our portfolio for today: the Rand has played in our favour (R11.27) when the portfolio began on the 5th of December â R12.21 today. Is it likely to continued depreciating in the longer term? Almost certainly. When you look at the economic policies of this country, they are not aligned with the best in the world. Hopefully, at some point in time, we will change but at the moment, itâs not business-friendly. If itâs not business-friendly, youâre not going to create wealth. If you donât create wealth and others are creating wealth at a faster rate, your currency deteriorates.
Alec, a question from Gail Stevenson. She says, âMy local share portfolio is held in a trust. At the moment, Webtrader only allows portfolios in your personal name. Do you know if there are any plans to change in the future, to allow for portfolios in a legal entity?â
Gail, Iâm sorry. Iâm completely out of this. Webtrader is our sponsor of the Global Investing Section on Biznews. If youâll just drop me an email, Iâll send it on to Stuart and Fatima at Webtrader and they can answer a lot more eloquently than I would be able to.
All right. I know weâve overdone our time by about five minutes. I hope youâre happy to have indulged me. If there are no more questions, we will just finish off then by showing you that in the month, the portfolioâs done really nicely. Weâve had a good run again by amazon.com and a nice improvement there by Google, bringing us up to around nine percent since inception. Youâll see that cash is up by eight percent. You can see that the Rand profit of this portfolio, which is now running at 16 percent overall, has really been pretty handsome. If you havenât invested in the portfolio yet, you could purchase your Vanguards immediately as your Berkshire Hathaways and Googles. Phase in over the next three months. Novo Nordisk. You can buy IBM immediately and Apple, which weâve just bought, but phase in amazon.com over three months. Itâs been a pleasure to be with you. Weâll be back again next month. Weâll let you know beforehand. Stuart, is there one more question?
Yes. Peter Bodell just says, âMany thanks, guysâ. No question.
Itâs a pleasure Peter, and thanks everybody for joining. We will have this transcribed and up on Biznews in the next couple of days. Indeed, it will also be on the Standard Bank website. Until next time, cheerio.