Alec Hogg takes us through the performance and current position of the Biznews.com Global Share Portfolio Webinar, which is proving to be highly successful. 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, Alphabet, IBM and Novo Nordisk are performing. The portfolio is up a staggering 49%.
Right, Stuart has pressed the button and we are here for the 10th December edition of the Global Share Portfolio Update. We’re coming to you from Biznews.com’s office at the Johannesburg Stock Exchange. I’m Alec Hogg.
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Stuart: It’s our last one for the year Alec?
I think so and in fact, it’s quite nicely timed because we started this portfolio on the 5th December, a year ago. If you now have a look at the portfolio, after the past year, in our most recent, the end of November, we took a figure for the year. It looks even better. Yes, we can see how much it’s up. Well, we won’t give away the secret just yet but anyway, you can engage with us, please do. Put forward your questions. It is an interactive session. We have some slides that we’ll take you through obviously we want to tell you how the portfolio has done and what the companies in the portfolio have done. Thereafter, to make your own decision, whether or not you would like to follow us into these shares, the whole intention of the Global Share Portfolio is to give South Africans an opportunity to de-risk themselves from the insanity that appears to be going on the economic sphere in this country.
Last night we had the decision by President Jacob Zuma to fire one of the most prestigious members of his cabinet. A man, who in two years has endeared himself to the business community and to the international investment community – everybody knows that Nhlanhla Nene had a very tough job but somehow he managed to steer the ship in a good way. His mistake, it appears, certainly from a career perspective is in attacking a strange decision by the Chairperson of South African Airways, to interject a tiny finance house, in between a long established deal between SAA and Airbus. If you go onto Biznews and read Russell Loubser, former CEO of the JSE and a former director of South African Airways – his take on it, ‘it was really just a way of plundering money’.
Nene said no. He boycotted or stopped that deal from happening and, hey presto, he gets fired and replaced by somebody who probably won’t say no the next time they’re asked to do these things. Cry the beloved country.
Let’s get on to today’s portfolio though and, as you can see our decision a year ago, to take a bet against the Zuma administration effectively, because we took a bet against the share price of South Africa, has worked out pretty well on two fronts. Firstly, the South African Rand has depreciated by 34% in the past year. It’s a scary state of affairs when your value of your currency, you share price, of a country falls by one-third in a year. Can it go further? Of course, it can. On the other hand, what was of great advantage to us was that we invested all of our portfolio into the United States. We found six stocks, as also put a slug of the portfolio into the SNP500 index.
The philosophy really is one-third of the portfolio, roughly 30 percent in the SNP500 index, so you’re buying the market in the United States. As you can see from this graph, it’s done precisely nothing in the past year, so the SNP500 in US Dollar terms is flat. However, in Rand terms it’s up 34 percent. It just shows you the value of finding the right offshore investments.
Alphabet, which is Google, they changed its name in the course of the year. We acquired 56 shares in that company, on the 5th December 2014. That is up by 41 percent, in US Dollar terms, so clearly that’s lifted the portfolio. The real star of the show is you can see there is Amazon.com. The 50 shares that we bought in that company a year ago have doubled in value, and it is very hard not to make money when you’ve got one of your stock picks doing that well. Overlay this with the South African Rand and, as you will see from this chart. The South African Rand is at 15.12, as against 11.27, when we began the portfolio on the 5th December. The return of the portfolio in the past year is 49 percent. That’s staggering. In fact, when we made the investments and we recommended that you follow us into this portfolio our intention was to have a Rand hedge.
Have a way of finding an ability to offset the economic idiocy, which is being followed in certain respects in South Africa, and then being reflected in the share price of the country, which is the South African Rand. If you like, we went short on the Rand but the other intention was to open up the international community, to South African investors. Start showing you that there are shares, many more shares that sit outside of South Africa, than inside the country. There may be 100 investible shares here. Outside of the country, there are something to the order of 20,000 investible shares. Clearly, open up your horizons, exchange control is pretty much a thing of the past, for most individual South Africans. The idea was go offshore and start earning as learn.
We’ve taken the Warren Buffett portfolio, where everything we buy is being held forever. That doesn’t mean we’re not going to make any changes to the portfolio. We certainly, when we find another opportunity, another stock picking opportunity, we’d be quite to sell some of the index tracker, of that SNP500. For the most part, those shares that we have bought have been carefully considered and we do believe that they are the kind of stocks that you should be holding for the long term. Of course, coming to the party today, a year later and looking at Amazon.com you’d be shaking your head and saying, “My goodness, should I be paying $664 a share, when you guys bought in at $327 a share. Well, the reality of this is that if you know the company well, and you make your investment, you should be holding onto it indefinitely.
That’s the way we like to invest, we invest for the long-term, and although the intention was that, we would hopefully beat inflation over the past year. This kind of a return, of 49 percent – my goodness, it isn’t to be expected to be repeated every year unfortunately. For those of you, who’ve been with us right from the beginning, pat yourself on the back. Moving onto those prices in Rands and this is where, as South African investors, you really get a good understanding of how the Rand/Dollar exchange rate has lifted anybody who took money offshore a year ago. As you can see there the profit, or rather the depreciation of the Rand has been 34 percent. Each Dollar that you bought a year ago is worth 34 percent more in Rand terms today. Translate that into our portfolio, and we really have three stocks that have done extremely well. Amazon.com has shot the lights up. In Rands, it is up a 172 percent.
Sorry Alec, just on, the performance of the portfolio – Jaco asks. “Is it too late to get in now?”
Not at all, Jaco, I would be a little cautious to just jump on and buy all these shares but what you need to do is to spread your investments over a three-month period. What that does, by buying them over three months, is that you average yourself out and you take the market timing element out of the equation. The problem that you have, if you just jump into the market on any one day is that the stock Market and the currency Market can be moving very dramatically, one way or the other in a single day. By taking it over three months, in other words say you’ve got R100 000.00 that you want to invest. You would take the first R33 000.00 and invest it now. In a month’s time you invest the next R33 000.00 and a month thereafter you invest the third. That way, unless you are terribly unlucky, you’ll miss the spikes between the three and you’ll average out at your purchase price on both the stock prices and on the Rand/Dollar exchange rate, at an average over that period.
No, it’s not too late in fact it’s never too late to invest offshore. Unless we see some dramatic changes, in South Africa on the political front, the Rand is almost in terminal decline. You don’t know where it’s going to go to from here because it’s now broken all the barriers that were resisting further falls, and we really just don’t know where it’s going to go to. Only the good Lord knows where the future is but, at the moment, the way this economy is being managed, and particularly after last night’s news, which saw the Rand, in fact at one stage lose something like 75 cents against the U.S. Dollar. Just on that news. Can you think how much that’s cost the country, and the man who made the decision sits happily in his ivory tower, unaware, presumably of the damage that he is causing to us, anyway it’s not for us to second guess. We’re in the investment game and as far as investing is concerned as long as those kinds of decisions are being made, just stay away.
Neil asks, “What do we buy through?”
Well, there we go. Standard Bank Webtrader – there it is at the bottom of the graph. The reason why we have this portfolio or launched this portfolio a year ago was twofold. First of all, we started seeing some very concerning things happening in the management of the South African economy, here at Biznews, and we felt that it was time to start telling our community that now was an aggressive move offshore, which was the best way to protect your capital. Up until this point, incidentally, I’ve always been philosophically of the view that you should not invest offshore because as a developing country we need all the money we can get. When you get to a stage, when the people who are running that economy are doing such a bad job of it, you don’t follow them like lemmings over a cliff. You have to make your own plans, and that was my rationale there.
Standard Bank Webtrader is a magnificent platform. They give you the ability to invest all over the world and it’s pretty simple. It’s like the normal I think it’s an award Standard Bank online trading system for the South African. It’s a similar way that you can invest offshore. In fact, that first million Rand you don’t even need to ask for Exchange Control approval. That you can just put in immediately. It’s when you go over a million Rand, into these international stocks that you have to start asking for approval. It’s cheap. It’s a, well cheap, it’s a low-cost way of buying international shares. You can buy anyone’s you want and literally you can put your, like you would do with an online trading portfolio. You put in your order at the price that you think is right and you wait. You wait for the seller to come back to you and acquire your stock in that way.
I see we’ve got good attendance and good interaction today, Alec. Vernon asked, “What’s the portfolio value in Dollars, as well as in Rands?”
We started off with $200 000, as our starting point. I’ll just go back a little bit there. There it is, the cost there was $200 960 you can see. The $960 is the difference between the cash value of R12.50 in that portfolio, and the dividends that we’ve received. The total investment has been, let’s call it $200 000.00. Today that investment is worth, as you can see next to it, $226 000.00, so it’s gone up pretty nicely – 13 percent. Fourteen percent, if you add the dividends onto it. From a Rand perspective, at the time that we made the investment, it was two-point-three million Rand. In fact, was a little bit less than that because we added Apple, as you can pick up there on the 22nd July. It was around two million just over two million Rand because at the time we started was 11.27 to the Rand that two-point-two million Rand is today worth three-point-four million Rand, so an improvement there of 49 percent.
Don’t expect it to happen again next year. You say that with a straight face, ‘like 49 percent’ like it happens every day. I don’t know how many portfolios that are available to the public make this kind of a return in a year but we’ve taken the Buffett approach, and we’ve really been, we think, pretty conservative. We’ve taken stock picks in six stocks that we like, in fact the first… Then we’ve put a third of the portfolio into the Index Tracker. As you can see the Index Tracker has done nothing. It’s on zero. It’s thanks to the Rand that the portfolio has appreciated as much as it has. If the Rand had gone the other way, we wouldn’t be looking too clever or, indeed if the Rand had been zero. If there had been no depreciation, the Rand against the US Dollar, then our portfolio would be up 14 percent, which is about right. If you can make a 14 percent, return when long-term share prices rise by between six and seven percent, you’re doing well.
In essence, we’ve beat the market. Well, we were 14 percent up and the market was zero, so that was a very good performance but, on the other hand, because of the Rand it’s spectacular. There we have a look at the costs of the prices that the opening, in other words the prices we paid for these shares, in South African Rands, and the prices in South African Rands today, and clearly Amazon.com, which cost us R3.700 a share, to start with. It is over R10.000 a share today. Not too many shares on the Johannesburg Stock Exchange that have come even close to that kind of a return. We were of the opinion, at the time we bought into Amazon that the company was being undervalued. I’m a great believer in Jeff Bezos, of course, everybody is today, but I’ve been a consistently great believer in him.
The reason, I guess, was because at the time that I started moving into the internet and founded a company myself, which was a Dot.com, a survivor of the Dot.com crash. At the time, Amazon.com was the poster stock for most of us and we watched what Bezos was doing. Indeed on Biznews, we’ve built the business one of his focus areas, which is put the customer at the front and centre of everything you do. We’ve seen our success at Biznews and we believe that if you’ve got a company as big as Amazon and with the history that it’s got, how can you go wrong if you are always putting your customers first? We loved Amazon and we were lucky to get in at a very cheap price. Alphabet, which is Google, is a stock that is the best business model in the world and there it’s gone from R6.000 a share that we bought in at, to just over R11 000.00/share today – 89 percent improvement in Rands.
Then Novo Nordisk owns around somewhere between a third and half of the global insulin market. We know what is happening to people around the world. They’re eating badly, so they’re getting fatter and they’re getting diabetes or more of them are getting diabetes and, as a consequence they need insulin and what Novo Nordisk, which is a Danish company does is it invests heavily into research and development into ensuring that it has the latest products. On the other hand, it also keeps its price increases down, a fabulous company. Berkshire Hathaway, Apple, and IBM are three that if you haven’t bought into the portfolio yet. Congratulations, you can buy them cheaper than we bought them in at, in Dollar terms anyway. In Rand terms, unfortunately that’s not the case. The Rand depreciation means that even though Berkshire Hathaway is down, as is Apple and IBM, from the time we bought in, in Rand terms, we still got in relatively cheap and that’s a nice graph, while we answer the next question, Stu.
Peter Mansfield asks about stop losses. He said, “Considering the aim of holding stocks forever, is the purpose of the portfolio, do you even bother with stop losses?”
Peter, stop losses are for traders. I’m glad you’re joining us here today. It’s nice to have a friend on the webinar. I’m sure there’s lots of friends on the webinar but Peter is a good friend. The whole idea of stop losses is when you’re a trader. This is not a trading portfolio. We want to invest forever. If you find that the share price falls, for instance at Berkshire Hathaway, Apple, or IBM were to fall still further then I would be sorely tempted to sell out some of the Vanguard SNP500, in other words the Index Tracker, and buy some more in those three stocks. Rather than triggering a stop loss, I would rather be buying more of them, if I’ve done my homework, which I’ve done. Quite often, we get asked, “Would you like to buy this share or that one?” I can’t tell you because I haven’t done my homework on them. When you’ve done sufficient homework on a small portfolio, as Warren Buffett says, “Keep all your eggs in one basket but watch that basket carefully,” and that’s what we’re doing.
If Berkshire, heaven forbid, Warren Buffett were to go crook on us or Apple or IBM were to suddenly, become companies that are no longer offering value. In other words, if something like a Tesco were to happen there, we would reassess but that would only be because the directors acted criminally, and we wouldn’t want to invest in those companies in the first place. Isn’t that a lovely graph? It just shows you that Vanguard, which is halfway between the six stocks, three on the left, which have clearly outperformed it, and three on the right, which have underperformed but because of the Rand exchange rate, on the far left, everything is in the green. Dividend receipts as well. IBM is a good payer of dividends. Novo Nordisk is a good payer we’re expecting a nice dividend to come through soon.
It’s usually paid around about this time of the year. Vanguard pays quarterlies, and then Apple has been a dividend payer as well, as well as buying back a lot of its shares.
This one might be for Standard Bank themselves. Craig asks, “What’s the minimum amount you need to invest?”
Craig, yes, I think it is for Standard Bank but your minimum, your absolute bare minimum would be something like $25 because each of your trades costs $25. The best way to do this is to have a look at what your cost of trade is and then to multiply, the way I do it anyway, then to have a look at the minimum amount that you should be investing, to make that cost of trade worthwhile. If say it’s, I think it’s $20, so then you’re talking a cost of, wow, because the Dollar has now fallen, unfortunately, R300, so a R300 trade. If you make a trade of R3000.00 then it’s ten percent you’re paying in stock commission – that’s too high. You should really be looking to maybe go at least R10 000.00, as your first investment, and that will bring down the cost of three percent, which is still high but not too bad. If you go to R15 000.00, then you’re getting to more kind of one, one-and-a-half percent levels, which is probably the level that you should be looking at.
I would say to you, what you should rather do is build up a cash pile. Make a trade of at least R15 000.00, when you’re doing that in these global portfolios, or if you’ve got R50 000.00 to invest, then rather select three stocks in the portfolio and invest in those three, than to spread your investments over the whole portfolio for now. It just makes sense but clearly, you’d like to get the same balance that we have in this portfolio in the long term.
James Wells asks, “Why IBM? What’s the business case?”
Right, well James thanks for that. We’ll get into a little more detail in a moment, but I can maybe just quote to you from Warren Buffet. In his most recent report, it’s called the 10Q that they put, in the United States they come out with quarterly results and they have to submit these reports to the Stock Exchange Commission, (SEC), and there everybody can get hold of it. In that report he talks about IBM because he’s now got an investment, or Berkshire Hathaway has got an investment of $12b in IBM, it’s one of the big four. Berkshire has got a portfolio of $110b, incredible numbers. It would, very comfortably would pay for the whole public service in South Africa for maybe a year and a half, given where the Rand has gone to. Just imagine that. All those public servants would be paid for a year-and-a-half, through the Berkshire portfolio, which was started from scratch.
Of that $10bn, $12bn is invested in IBM, and it is one of the big four that make up 50 percent of the portfolio in all. The others, by the way, are American Express, Wells Fargo, and Coca-Cola. He says that, of IBM, they are sitting at a moment at a loss for Berkshire of two-billion Dollars, so how often do you get the opportunity to buy into a share that Warren Buffett has bought two-billion Dollars cheaper? He says that IBM continues to be profitable and generates significant cash flows. We expect that the fair value will recover and, ultimately exceed our costs. They are 15 percent down at the moment, in the investment that Berkshire Hathaway has made. I have done a lot of analysis on IBM, for obvious reasons. It is an important part of our portfolio. You can’t just say because Warren Buffet is investing in it that he is always going to get it right but my sense and I’ve done a lot of work in this.
In fact, I’ve got a new book coming out on Buffett early in the New Year, is that he gets it right most of the time, and his thinking is more important. What is his thinking in this one and his thinking is that IBM has gone from an old business that was really going nowhere, and it has moved into an area where it’s taking the best advantages of being that old business. Remember, IBM serves virtually every one of the ‘Fortune 500 Companies’ in the U.S. In fact, it’s the same thing globally. They’ve got relationships with all these businesses. What they’re doing within there is they’re developing new revenue streams, which are growing at 30 percent a year, and then taking their existing client base, with which they’ve got big relationships, through the hardware, often IBM would be selling these big main frames, which are now going out of favour.
Remember the Think-Pad laptops – they were sold to a Chinese company. IBM still has that relationship, so they can take the companies that they have the relationship with, and show them analytics and how the analytics can be used to help their business. It’s a brilliant company with a fabulous business model, I believe. Moving into the right direction, and dirt-cheap at the moment, so that’s why I like IBM. Should we go onto Vanguard? These are the graphs that we go through every month. Vanguard, as you can see – this is the Index Tracker. It’s like the Satrix 40, but its called Vanguard SNP500. It tracks the 500 biggest shares on the New York Stock Exchange, and it gives, in the past year, it’s been up by 0.6 percent. That’s literally, you can call it flat-lined over that period, but of course, in Rands it is up 34 percent, thank you very much.
We like this one because it’s a bet on the U.S. market and the U.S. market is a bet on the strongest economy in the world and the most flexible economy in the world, which is recovering really well.
A question you get, I think, at every webinar Alec. Elon Musk’s companies – thoughts on Solar City, Tesla.
Solar City is starting to look very interesting, very-very interesting. It’s come back a long way. I’ve been doing some work on it. I love their business model. I know there are sceptics, who say that Solar City is only there because it’s been subsidised by the Federal Government, and that in fact, they accuse Elon Musk of being a genius, in knowing where to get subsidies from. I disagree with that entirely, having read the book by Ashlee Vance. I think that Elon Musk, the greatest shame or the biggest drawback of Elon Musk was that he left South Africa. Had he stayed here, Adrian Gore from Discovery did an analysis once, which said if, Apple… If Steve Jobs had been born a South African and been able to build Apple in South Africa. It would have more than doubled the GDP through his lifetime. There’s a similar situation here, with the way that Elon Musk is going about things.
Starting off with Solar City, which he’s put together with his cousins, Lyndon and Peter Rive, from Pretoria – they are now the biggest installers of solar panels in the Unites States. Where their business model really works is that they have a financing side on basically, a back-to-back loan with a finance house. You install the solar panels. They get paid ‘ thank you very much’ and off they go to do the next installation, but the homeowner repays the financing of those solar panels with the savings that they make from their electricity bills. It’s just an obvious model, isn’t it? If someone came to you tomorrow and said, “I’ll replace all of your lightbulbs” and we had something like this in South Africa “and they will cost you less than the saving that you are going to make in your electricity payment to Eskom”, would you say yes or no?
That’s just extrapolating that theme. The model is being used in many other parts of the world now. The Japanese have actually picked up the model and are doing it there. Even the Chinese went over to analyse Solar City. I like Solar City as a result. It’s a great business model. It’s got fine minds in there and the share price has come back a long way. It was over-hiked but we’re getting to a point now where it’s starting to offer value. Tesla is a longer-term prospect – still very hyped. Lots of people love Elon Musk (for good reason) and there’s a lot of the Musk premium in that share price still, at the moment. I guess for the moment, you’re going to battle to find a margin of safety there. In SpaceX… I don’t know. Can you buy SpaceX shares? Are they listed?
I’m not sure. I don’t think so.
Anyway, it’s not one that I know well enough to be able to pass any comment. I don’t even know if they’re listed so clearly, it’s outside of my area of expertise. Of the three, Solar City would be the most appealing, anyway.
Neil asks, “What happens when the Fed decides to start increasing rates?”
It’s a very good question, Neil. I wrote a book years ago, called ‘Shares: A buyer’s guide’. I spent quite a lot of time analysing the Dow Theory. Richard Russell, who was the global expert on the Dow Theory passed away in fact, in the past month. The Dow Theory newsletter though, he’d been writing for something like 50 years. How does the Dow Theory work? It was put together by a guy called Charles Dow who started the Wall Street Journal. That’s why you get the Dow Jones industrial average. It was in fact, Mr Dow and Mr Jones who started the Wall Street Journal. They started this average and it still survives till today. He died tragically, very young, did Charles Dow but before he passed on; apart from the Wall Street Journal he also put this theory together. He said that because people are involved, markets move in very clear trends.
You get [I think] five trends that occur in any cycle and in the final trend, you have a blow-off as we saw in South Africa 1987 and 1969 (a bit before my time). I certainly saw. I was right up close in 1987. We had another one in 1997/1998 and another one in 2007 – all the 7’s. We’ve got a stock market in South Africa, which is at level that’s pretty high at the moment. We had a piece on Biznews this week to show that the price-to-earnings level of the Johannesburg Stock Exchange is very high. Why is that? Since 2007 and 2008 when we had the crash – the bankruptcy of Lehman Brothers – the Federal Reserve in the United States was sitting with a big problem. Does it repeat the mistake that they did in the 1930’s and suck money out of the system, and go into a depression?
Well thankfully, they decided not to do that mainly because the man who made those decisions – Ben Bernanke – had done his thesis on the 1930 depression, so he knew what not to do. He didn’t really know what to do, but he knew that you didn’t suck money out of the system so they went the other way around and they pumped money into the system. As a consequence of this, it pushed up prices all over the world. Imagine: you have a tide that some superhuman from outer space comes in and just pumps money into our sea for a period of time. It would lift the whole sea and clearly, those people who benefit from a rising tide, (which is commodity prices and stock markets) would enjoy the upswing. That was what happened when quantitative easing was introduced by the Federal Reserve. Now it’s stopped.
They’re not creating any more money and in fact, they’re starting to suck money out of the system. Warren Buffett is there on your screen on the left-hand side. That’s one of these old pictures of him with one of his favourite people, Rose Blumkin who died at 104. You can see behind her. She used to sell a lot of carpets, did Rose Blumkin, until the age of 103. As Warren Buffett says, “When the tide recedes, you get to see who’s been swimming without trunks.” Now, around the world we’re already seeing this. In Argentina, the socialists have been kicked out of power, almost with a massive swing in the voters there because socialism works when you can spend other people’s money. When you have to work for a living, it’s not so easy anymore. The only way to spend other people’s money is to have willing taxpayers or willing lenders around the world.
It was very easy when there was all this money being pumped in the system, for socialists or people with crazy economic policies to not just survive, but to thrive. However, as the tide has gone out, so have their fortunes. A similar thing happened in Venezuela, which was a very poor economic model. Chavez has been going there for the last 16 years. Chavez’ successor has been kicked out of power with a massive swing of almost two-thirds majority for the previous opposition, many of whom had been in jail. The tide is going out and as the tide goes out, those who have been swimming without trunks get exposed, both politically and from an investment perspective. Companies are also coming under the cosh. We saw Anglo American the day before yesterday, announcing that it’s going to cut its workforce from 135,000 people to 50,000 people.
It’s going to cut the size of the business in half by either closing or getting rid of its assets. That’s an incredible reflection of a company that overdid itself when the tide was coming in and now has to readjust to survive. Quantitative easing will affect the bad companies a great deal. Whether it’s going to affect the companies in our portfolio, I doubt because we’ve actually bought them on the basis that they will be able to thrive in any economic conditions.
Alec, there’s a few administrative questions, which I’ll pass on to Standard Bank but there’s one here from Shane who says, “Should I move my money from the S&P into IBM?”
That’s a good question. I would say I wouldn’t move all of it, but I would certainly move part of it. If you don’t have anything else invested…if all you’ve got is in the S&P500 Index, then I would certainly be looking to make investments into the three stocks that are at the moment, very appealing to us. They’re giving you a huge margin of safety and also, trading well below fair value. That’s Apple, IBM, and Berkshire Hathaway. Yes, I would perhaps structure your portfolio in a way, depending on how much money you’ve got. Remember, use that R15 000.00 minimum investment as a starting point. You don’t want to overpay in your commissions, but I would certainly be doing that. Don’t keep all your money. There’s no need to keep all of your money in the S&P500 Index if you have a good understanding of individual shares that are offering great value, and giving you a big margin of safety. Those three are certainly in that category.
Just to show you: there’s Berkshire Hathaway. It’s done pretty much nothing in the past year. That’s the S&P500 (the red index). We know that that was point-six percent. There’s Berkshire, down 12 percent. Would you be buying S&P today or would you be buying Berkshire Hathaway? I think there’s your answer – very easy. You’re getting Warren Buffett at a 12 percent discount to a year ago. Alphabet (Google) has been a great performer, but it’s a great business model. Would I be worried about Google’s future at the moment? No. There hasn’t been a whole lot happening in the past few weeks on Google. However, one bit of good news for them is one of their competitors in the search field – Yahoo! – is really on the rocks now. Yahoo wanted to sell or unbundle its stake in Asia.
The share price is dwarfed by the holding that it has in Alibaba. It then came to the conclusion (or shareholders did) that you’d have to pay too much tax, so now Yahoo! Is stuck. It’s reversed that decision, which is not very good for Yahoo! Shareholders. They just don’t know where the future is going to go. Of course, that’s not bad for Alphabet (Google) because there’s one of your competitors. It’s also moving aggressively into self-driving cars, which could be the next, big thing. It’s very likely. It’s expanding around the world through the Loon system. Google wins when more people are on the Internet and one of the ways they’re doing this is by putting balloons up in space. Not the balloons that you’d have at a party, but very high quality balloons, which can then put Internet into areas that it never was before, including in Africa.
It’s up 43 percent – sure. It can come back Of course it can but this is the stock that you want to hold for keeps.
Amazon, similarly. Amazon’s still doing fantastic things. In the past few weeks, the big change there… In fact yesterday, they announced their new drone. What Amazon’s going to be doing – again, refining its business model – is it wants to take the product that you order from it, and deliver it to you to your home, through a drone or without having to use expensive human beings to do it. As the reality of Amazon’s power in the retail market becomes more and more apparent and as people understand the exponential benefits that it can give you, it continues to grow. You can see in the past quarter since the beginning of September, it’s a stock that has continued to do well. It’s now starting to make a bit of money and it’s had a huge bet on the Cloud.
Now, if you ever hear about the Cloud, know that Amazon Web Services is by far the dominant player in that place. Lots of others including IBM, are trying to get more involved in that area but Amazon’s just way ahead of the game.
Let’s move on to Big Blue. Talking about IBM, I’ve given you some insights there. Here, you are buying at 15 percent cheaper than Warren Buffett bought in at. Could you ever have a better opportunity? Probably not. Talking about Buffett and Berkshire by the way: in the past quarter, Bill Gates (the richest man on earth) invested more money into Berkshire Hathaway. He’s worth ± $80bn. $10.5bn of that is in Berkshire Hathaway shares and of Gates’ portfolio he’s got 15 other shares, which between them, have about $7bn. Then he’s got Berkshire at $10.5bn and he’s got Microsoft, which of course he started, at $16.5bn. Talk about having a few eggs in your basket, but watching them carefully. If it’s good enough for Bill Gates, surely it’s good enough for you and I.
There’s Novo Nordisk. It continues to have a pleasing performance against the S&P500 Index, outperforming it in the past year by nearly 24 percent. It had a good past month and this is one that you just put in your bottom drawer and forget about because it’s being extremely well managed. It’s a company that continues to deliver through thick and thin.
Apple, a business that I believe is offering massive value at the moment. Maybe because it’s so big, analysts find it difficult to understand Apple. This week, it won a court case against Samsung, which has been going on for a long time. Samsung was sued by Apple because of some of the licensing agreements/patents that were taken out in 2012. Apple believed that Samsung had been copying it. Samsung said it wasn’t so and in fact, that Apple had been copying it. Well, Apple won that and Samsung paid them $548m. Lots of Rands, but I guess in Dollar terms it will just add a little bit more to the cash pile that Apple already has.
There’s the final graph that we have, which gives you the prices at opening and the prices today in Rands. As you can see, our portfolio has been helped a great deal by the view that we took on the Rand that the Rand would weaken in the past year. Not in anyone’s wildest dreams would we have anticipated a 34 percent depreciation but then, not in anyone’s wildest dreams would we have anticipated some of the dumb decisions that have been done in the past year by those who influence the share price of this country (or the exchange rate). If you have a look then at the six shares that we own and the Index Tracker – nicely divided. Good performances are Amazon, Alphabet, and Novo Nordisk. Those three have been extremely pleasing in Rand terms.
Even the S&P500 Tracker (the Vanguard VOO) is 34 percent up. Incidentally, the cost of that Tracker is five BIPS (basis points). One-twentieth of one percent. That’s how efficiently they run it and how big it is. Down the bottom, even though Berkshire, Apple, and IBM have underperformed in U.S. Dollar terms, in Rand terms they’re showing us a healthy profit.
Just two final questions, Alec. Peter asks if you’ve investigated Alibaba.
I’ve watched Jack Ma in action in Davos. In fact, he’s been there the last two years. I’ll hopefully be watching him again very closely this year. He is an exceptional entrepreneur. The Chinese delegation though tell me that Tony Ma (the man who runs Tencent) is as good, if not slightly better. Jack Ma is the showman. Alibaba is a good company but of the two… I have a very good friend who in fact, was a financial journalist with us here in South Africa – John [Mulcahy? 15:40]. We’re going back to ancient history, but that was at the Rand Daily Mail that we worked together all those years ago. He then went off to the South China Morning Post, went into stockbroking, and was head of research for a big Hong Kong stockbroker. He’s been involved in that area for 25 years and his assessment is that Tencent is a better company than Alibaba.
I haven’t done the analysis on either of them to the degree that I’d have any confidence in making an investment recommendation and, apart from all of that, you do have an easy way into Tencent through Naspers here in South Africa. What I can tell you is that for the last two to three years, I’ve been a Naspers bull and one of the investment gurus here in South Africa whom I respect extremely highly (Sy Jacobs from 36ONE)… On a recent roadshow that I was involved in, I asked him what would be his one share that he would be buying at the moment and he said, “Naspers”. If you have the option between Alibaba or Tencent; based on what John [Mulcahy? 16:49] has said to me and based on what Sy has said to me, I would certainly be leaning towards Tencent but I’d also want to be doing my own homework on it.
A final question from Shane. He talks about his Xmas bonus, which is what Matthew Lester’s recent article is on. He says, “Should I wait until January, considering the Rand is weakening as is?”
I made a mistake a couple of months ago. Somebody asked a similar question and I said, “No. I’m sure the Rand’s blown out now. Just wait a little while before you go in.” My view at that time was that the underperformers in the portfolio can buy any time, but the outperformers… Maybe it would be better. You could save a bit on the Rand. I’ve changed that. I made a big mistake there. I should have shut up and just said, “We’re not Rand fundi’s.” None of us can predict what Jacob Zuma’s going to do tomorrow. He might decide to [who knows] declare war on Zimbabwe. Anything can happen. If you are prepared to fire Nhlanhla Nene and replace such a key position with a guy who (with greatest respect)… There must be 1000 others in the ANC who could do the job better than this fellow.
If you’re prepared to do that then you’ve got to start wondering what the thought processes are going to be employed that will have an impact on our currency/share price. Anything can happen and in South Africa, it tends to do so. The view would be ‘try and take out the currency risk in the same way as you would take out the market timing risk – by investing over three months’. If your Christmas bonus – hopefully you’re very well-paid and you get R45 000.00 for argument’s sake – then you’d invest R15 000.00 in the cheapest of the three shares as we see them at the moment, which would be IBM now, R15 000.00 in Berkshire Hathaway in a month’s time, and R15 000.00 in Apple in the month thereafter.
It would be nice if you could put five into each but the problem is that because of the cost of trading (and it is in U.S. Dollars because you’re buying U.S. Dollar shares), it’s going to cost you. $20.00 is nothing. It’s very cheap in an international scale, but when you put back into Rands you’ve got to be aware of that. My feelings on these things: don’t try and second-guess the Rand. Don’t try and second-guess share prices of particularly those stocks that are now offering great value. You should be in a position to smooth out your investment and once you’ve got them, put them away and try to forget about them. Try not to trade them because the biggest cost to any investor is trading in and out of shares.
If you want to go and trade, have fun. Put money outside in a trading portfolio. We all want to have our fun in some way. Do it there. There’s nothing wrong with that but when you’re talking about an investment and certainly, Buffett-type portfolios that we have here with our Global Share Portfolio from Biznews, then the best thing to do here is to try, make your investment, put them away, don’t even watch the share prices, come back to the webinar every month, and I’ll give you an update. It’s my job to see how things have been developing in that period.
Alec, I see we are running over time, but we have a final question from Maureen. She asks, “Would you sell Anglo shares now?”
Would I have owned Anglo shares in the first place? That’s probably a better question. Philosophically Maureen, when you are buying shares in a company listed on a stock market, your investment has to be because you believe that the people there will leverage your investment/allocate your capital in a way that will give you a better return than you’d get from the bank, at a lower risk. That’s really where you’re starting. The problem with resources shares – and I know there are many in South Africa who have done spreadsheets from here to eternity, who will say I don’t know what I’m talking about – is that to me, the problem with resources shares you eliminate that huge issue. You eliminate the ability of the human ingenuity to leverage your investment through allocating capital smartly and to give you a good return on investment.
That’s what you’re doing when you’re investing in shares. You’re investing in human ingenuity. The reason for that is that the movement in the commodity prices far outweighs any brilliance of the managers. That’s why I would never buy Sasol shares – ever – because the movement in Rand/oil price massively outweighs anything that the best Sasol managers could achieve or in fact, destroy at that company. It also makes you wonder why they have to pay these guys so much money if in fact, they really are bit players in the company’s fortunes. Would I own Anglo American shares? No, because that’s my philosophy. If you’ve got them, there must have been a reason why you bought them in the first place.
If you bought them because you believed that they were offering good value then surely, the fact that they have depreciated so much means they must be offering even better value today. That would be the rational way of approaching it. The other way to look at it is every single investment that you own…you must look at alternatives to that investment at the point in time, at the price that Mr Market is putting them on. If Anglo American is heavily depressed because Mr Market has become very concerned about them and at some point in time Anglo American will return to fair value (whatever that might be or, those resources, and whatever geniuses can work that out), then maybe stay with it.
If you’re going to invest in shares, the first place to start is to remember that you’re actually investing in human ingenuity and not in some dumb, inanimate object. Otherwise, just go and put all your money in gold.
Alec, a nice one for the happy holidays coming up. John wants to know. Your new book: what’s it called and when is it coming out?
John, tomorrow it goes to the printers. You might recall that I did a very short book on Biznews. It’s available on Biznews. It’s called, ‘How Warren Buffet invests on the Johannesburg Stock Exchange” or ‘Invest on the JSE like Warren Buffett’. Jonathan Ball publishers convinced me to take that and to expand it from around 10,000 words to 30,000 words so it gives you an idea of the size of it now. It goes to the printers tomorrow. I’m very happy with it. It’s called, ‘Invest like Warren Buffett: Global Edition’ and it will be retailing at R140.00. I’m delighted at that because it means they’ve got a pretty big print order. The price of books often depends on how big the print order is. Of course, the size of the book as well but if you have a large print order, you can make it better value. It will be retailing at R140.00 in the New Year.
I’m not sure when we’ll get our first copies. We will be putting an eBook onto Biznews. I will be doing an audiobook and we will be pricing it in line with the printed copy. I know that with books, a lot of people like to read eBooks, but many more are still happy to have that piece of paper in their hands. I look forward to you being one of the first purchasers of it.
I think that’s it from this side, Alec.
Stuart, thank you and thanks for indulging us. I see most people stuck with us. Only a couple of people dropped off. I think we’ve taken off your lunchtime. We’ve got to go and get ourselves a salad or something now to fill the hunger pangs. Have a wonderful Festive Season. If you celebrate the birth of Christ and Christianity, just remember that all religions are just about doing unto others as you would have them do unto you. If we can do that, we’ll all be in a better place. I look forward to being back with you towards the end of January. We will give you an update on that and we look forward to serving you again as we have done in the past year – even better in 2016 – here from Biznews.
Yes, thanks Alec. A great 2015. Hopefully, 2016 as good if not better. Have a good holiday, everyone.
Great in a way. If you happen to be holding Rands… Well, who knows? Stranger things have happened. Cheers everybody.
