Every month I review the Biznews.com Global Share Portfolio in an interactive session that lasts at least half an hour. As a Premium Member, you are entitled to a seat at that live webinar. The next one is at 12:30pm (South African time – 10:30 in London) so good idea to diarise it now. We’ll also send you the registration details ahead of the session. If you miss the live webinar, not to worry because as a Premium subscriber you have access to a recording and transcript like the one for October below. We’ll be launching another monthly webinar updating two new portfolios in the next few weeks – both focused on stocks listed on the Johannesburg Stock Exchange and a single investment option available through a special “bundle” on the Easy Equities platform. But more of that later. The Biznews Global Share portfolio, which you can replicate through Standard Bank Online Webtrader, is constructed around principles taught to us by Warren Buffett, the world’s greatest long-term investor. Each share intended to be held “forever”. It doesn’t always work out that way as you’ll read/hear from this, our most recent monthly webinar, which was held in late October. Facebook and Tesla were added to the mix, while Novo Nordisk was sold off. – Alec HoggÂ
We’re on the October edition of the Global Share Portfolio and timing not great because a little bit later today we’re going to be getting the financial results for the third quarter from two of our big stockholdings, that’s both Apple and Amazon and then later in the week we’ll be getting the quarterly results from Alphabet or the old Google. So there’s quite a lot that’s going to be happening after this seminar, but maybe in a way it’s a good thing because we’re going to do some big changes to the portfolio and those of you who have been following us over the last few months know that I’ve been toying with Facebook.
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You also would know, as I warned last month that we are having second thoughts about the Novo Nordisk shareholding and I’ve been doing a lot of work on Elon Musk and the Tesla deal with the merger with SolarCity and there’s some big opportunity there as well. So those are the big changes that we’ll be getting into in some detail in this broadcast and I guess probably just as well that we only get the portfolio returns or those quarterlies coming out later otherwise we may keep you here for a couple of hours. Anyway on the in, I’m in London as always and in Johannesburg.
Thanks Alec, it’s Stuart this side. Just for the listeners, please send your questions through on the right-hand control panel. We’ll answer them as soon as they come through in between the discussions, so just pop them in there and we’ll handle it on our side.
Yes and Stuart, there’s quite a lot of interesting ground we will be covering this time round, so I think feel free please to stop me even if you think that I’m in my stride in full stride. Let’s just get onto the questions because that’s often where more interesting information comes along from. Okay, let’s kick off with the look or how the portfolio as a whole is looking. You will see there that there are three, well in fact, four big changes. The first one when we go down from the top is to see Berkshire from 202 shares that we owned last month, we have decided today to sell half of that holding. We’re selling 102 shares leaving it as a nice round 100 shares.
The reason for that was, when we began the portfolio, the idea was to have about a third of the portfolio in the index tracker, another third in our two bankers and that was Alphabet and Berkshire and the final third would be through share selections. Well, what has happened is that we’ve taken out of the portfolio from the Vanguard to increase some more of our share selections if you like. We’ve had Amazon which has performed unbelievably well and it’s now become worth 18 percent of the portfolio after starting off with just eight percent and we also added Apple as another banker. So the portfolio’s has a very different feel about it to when we started two years ago. We still have roughly a fifth of the portfolio in the index tracker and that will be lightened when we do our next purchases, well when we find our next stocks that we’d like to include in the portfolio.
Let’s spend a bit of time on this slide because it is quite important if you are replicating the portfolio and remember you can do that. Literally you can actually do it today, open your account or if you don’t have an account with Webtrader, with Standard Bank, it’s very easy to do. You can invest R1mn without asking for exchange control approval, so that’s another thing that you can trigger immediately and do remember that with the Rand having shown some strength recently it is a volatile situation that the country is in and that can blow out very easily just as well as I suppose it could also increase and we do take account of that by advising whenever you do purchases to try and take the exchange rate out of the equation, don’t buy it all immediately. Try and stagger your purchases over three months, but let’s get back to the structure of the portfolio.
Alphabet has been a terrific performer as you can see. We’re talking about US Dollar terms up 52 percent since we bought the shares in December 2014. That has brought it to also roughly about a fifth of the portfolio and the incredible performance by Amazon makes it worth about a fifth of the portfolio as well, so those are our three bankers now. We have the S&P 500, in other words, the index tracker plus Alphabet and Amazon and we’re very happy for reasons that we can articulate later to have those two stocks as our bankers. Berkshire Hathaway, as you’ll see has now come down to six percent of the portfolio. The original target was at 15 percent. The reason for that is that it has become a pedestrian performer. It’s likely also to at best, track the index.
It has underperformed the index in the past two years since we’ve held it and it has no longer… the whole intention of Berkshire together with the index was a very defensive position that we started off with. Remember rule number one as Warren Buffett says, “Don’t lose money”, so we were quite keen to follow our overall umbrella view, which was “Watch out for the Rand”. We felt the Rand was going to get weaker because of poor economic policies being followed by the Zuma administration. You don’t have to be a genius to work out that, that has been an excellent call and if that was your primary call, what you wanted to do was to try and keep the portfolio itself as stable and as defensive as possible because actually the Rand weakness was going to do all the work for you.
That is why we had such a big shareholding in the index tracker and in Berkshire, which between them made a roundabout 50 percent, almost 50 percent of the portfolio when we launched it. Reject somewhat because we are getting more confidence in our bets in the stocks that we are selecting in the US market. We’ve also done a whole lot more work on these things in the last two years as you can imagine and feel that being based in London does give you a better understanding of what’s going on in the global economy rather than when I was in Johannesburg, so all of those things have combined to perhaps give a little bit more confidence to the decision we’re taking today. We’ve sold off half of the Berkshire holding and we’ll retain that in the medium-term.
Apple is doing a lot better if it was an underperformer, quite a bad underperformer for a period of time, but we are quite happy that is a stock that is going to get back to its rightful position. Novo Nordisk, I have been very disappointed with. We’ll get into that in some detail and we’ve sold it out of the portfolio. The fundamentals there have changed quite dramatically. We’ve taken a knock of about 12 percent on the holding, which compare with the way the rest of the portfolio is performing is not an exciting return. On the other hand, fortunately, it was only an eight percent at its maximum holding in the portfolio, so the overall impact of a losing bet has not been that bad.
IBM, we retain there, Barclays Bank, we had the misfortune of buying that just before Brexit. At the time everybody felt Brexit was going to be enhancing the Pound value. As we all know now, that decision in late June has done exactly the opposite. So although Barclays is up in Pound terms, which is heartening, because the banks took an awful hammering in the UK after Brexit, in Rand terms it’s actually down because the Rand has appreciated against the Pound, or perhaps you should put it the other way, the Pound has fallen out of bed against pretty much all currencies post-Brexit, but the big exciting news as well there is that we have added Facebook and Tesla, they’re our next two. We’ve been playing around with the Facebook investment for a while.
You’ll recall that the fundamentals of the business, I have discussed kind of on and off, I love this company, being in the online media field, it is a field that I believe I understand better than most other fields and Facebook is really one of the exponential businesses, almost like Amazon for the long-term. What I’ve been doing there is making a mistake of actually holding back and trying to wait for a pullback in the price before we could make our entry. That of course is alien to the overall portfolio approach, which is try and take out the price issues and the currency issues by staggering your purchases over three months. So we’ve done just that now, we’ve bought one third of the Facebooks that we’re going to be buying and one third of the Tesla’s that we’re going to be buying with the proceeds from the sale of Novo Nordisk and half of Berkshire Hathaway.
So if you’re an aggressive investor and you don’t mind taking a punt on the currency and the current share prices, well I suppose you could go out there and put three times the investment into Facebook that we have done. We think though that as a long-term strategy and certainly this portfolio is a long-term investment portfolio, that you should be trying to take the currency and the prices out of it and just buying the company not the share. So we’ve made an investment into both of those now. Facebook on the… really surrendering to the fact that this is not a share price that seems to be going backwards at any rate of not, also that we do feel that by buying it over three different blocks, we’ll be making an investment or taking out both the Rand and the Facebook share price of the equation, it is a long-term holding.
Tesla, on the other hand is looking particularly appealing at the current share price and there’s particular reasons for that as well. So there’s the overall portfolio. As you can see, it has delivered an excellent return over the period of over 50 percent. In fact we’re sitting at 29 percent annualised, we’ll get into that in a moment as well. In Rand terms, there it is, the 54 percent Rand return over the two years or 22 months if you want to be exact and you can see the individual constituents of the portfolio and how well they have done in terms and this really was the whole intention to make a Rand investment for Rand shareholders rather than putting your money into the Johannesburg Stock Exchange, it was, look at this alternative and we would guide you on a monthly basis as we’re doing right now, updating the portfolio and explaining how it’s going.
Remember the portfolio also is a long-term holding and long-term in our terms is forever unless circumstances change or unless you want to restructure the portfolio because you find something better. In the Rand column there you’ll see really good returns or unbelievable returns really from Amazon and Alphabet, those two have been our big winners by quite some distance. Then a reasonable return from the S&P 500 Index, that was a bet against the Rand in essence as you can see from the previous graph. In Dollar terms the S&P 500 Index is only up by five percent, but when you look back here you’ll see in Rand it’s up by 28 percent since we bought into the portfolio.
Berkshire has been a little disappointing, underperformed the market, Apple was the one that we still believe we might have timed our purchases a little unfortunately, but we still believe in this one and indeed the Apple share price at one point in the past year was sitting at $90 a share when we were looking rather sad or the portfolio was taking quite a battering from its impact, but it’s now at $117 a share and after the quarterlies are released perhaps that’ll go higher still. IBM, long-term bet, Barclays, you know the story there. We really like the turnaround story, but Brexit has hurt it and there’s the two newbies, Facebook and Tesla which will end up with at nine percent and six percent respectively of the portfolio, so they’re both, at this point anyway part of our share selection or share picking, but we’re quite excited about the potential of both of those.
Annualised return of this portfolio since we started it was 29 percent and you can see the impact that the Rand has had, against the Pound the Rand has strengthened to just under 17 against 21 when we bought the Barclays shares and against the US Dollar, the Rand has been going the direction we anticipated. Here are the individual stock performances as well, which provides the latest figures and the annualised, the Rand profit since inception and the annualised profit. Again, only Barclays is one that we are concerned about in Rand terms, everything else is up and there’s a graphical representation of it and you can see there that Amazon and Alphabet, we had two bets there. Interestingly enough if you talk to private equity people they will tell you that of a portfolio of ten, if you can have one winner, you are doing exceptionally well because it will offset a number of losers.
Well in our case we’ve had one unbelievable winner in Amazon and one very big one in Alphabet, so those are the two that have ensured that this portfolio has outperformed quite considerably. The dividend receipts are not something that we paid too much attention to, but this is something that I’m sure you’re quite interested to know about, why Facebook? Well, there’s Mark Zuckerberg, it is an exponential stock, it’s an exponential company, anybody who has seen the growth of Facebook over the past ten years or followed it in that way as clearly as I have will know that you are here in a whole new world of communication, of engagement. The media industry is, on the one hand it loves Facebook because Facebook sends it quite a lot of traffic. On the other hand it hates Facebook because Facebook is becoming a substantial distribution channel in its own right.
We think that the Facebook effect is going to continue and we think that it’s just going to go stronger and stronger and I wanted to put this, or I have put this graph here so you can see the performance of Facebook in the past year. We should of course have been buying it in February this year when it was under $100 a share. That wasn’t a decision that we took there, the results that came out in February, as you can see, that big jump there from the mid-nineties to over $110 a share showed that Facebook was on track even if the rest of the market was at that stage or most people were a little bit disappointed. The technical analysts are going to love the fact that on the 50-day moving average Facebook has remained above that now for the last six months and it continues to bounce above that level. It’s had a quite a sharp uptick in the last few days.
This is in anticipation, I have no doubt, of good quarterlies again from the company, but as you can see had you bought Facebook at any time in the last year, unless you were really mistiming your purchase, you would be pretty satisfied. We can expect that Facebook, after that sharp increase in the last few days, it will probably come back to earth again or certainly lose a few Dollars in the share price, but who knows when the quarterlies come out maybe it goes the other way. Either way we’ve started making our investment, we have taken one third of the cash that we’re going to allocate to Facebook.
Indeed we are allocating $22 000 of the portfolio to this stock. We raised $14 283 from the Novo Nordisk sale and by selling half of the Berkshires $14 670 together with $4 000 that we had in cash, gave us a cash pile of $33 000 and that’s been allocated two thirds Facebook, one third Tesla, so $22 000 to Facebook, $11 000 to Tesla and it’s been spread over three months, so $7333, this month for Facebook and $3666 for Tesla. You can see, I hope that makes it pretty clear how we are handling these two, moving onto Tesla because –
Dell Felton asks Facebook’s on a PE of 63, I know you probably mentioned this before but is it not too expensive?
The problem with PE ratios with exponential companies is, it is impossible to assess them on that basis and maybe just very briefly an exponential company is a company that grows its revenues and its business at a rate that is in excess or far in excess of the economy. It is something that is, it is a company that is multiplying or enjoying the multiplier effect. There could be many reasons for this, but as the world is changing, as we’re going from the old economy, if you like into this new information age, as we go from the third to the fourth Industrial Revolution and I hope I’m not throwing around too much jargon, but just to understand this in a very basic manner, the Industrial Revolution began through steam.
Then the second Industrial Revolution, you might remember steam that was in the 1830’s, the second Industrial Revolution came through the discovery of electricity which was about 80 years after that. The third Industrial Revolution was through the discovery of computerisation and the fourth Industrial Revolution is the one we’re going through now which is the discovery of big data and being networked, technology taking an ever bigger place in our life and it’s actually interesting to have a look at this picture that we’ve got on the screen there because this is a product of the fourth Industrial Revolution. That car, that Tesla is not motor vehicle; it is a computer that happens to have a chassis around it and a motor in it and a motor vehicle or a mode of transport around it.
Elon Musk when he built this never looked at what other people were doing. He decided that he wanted to take a computer and make that into a car. A consequence of this is that when they have an upgrade to some part of this vehicle, they will download it overnight as you would do with a computer programme. That’s the way a Tesla works, so it is revolutionary in its break with the past and move into the future. Naspers is a very good example of the exponential effect in a South African context. If you’d been buying Naspers on a PE for any time in the last ten years you’d be kicking yourself today. Naspers is not a PE stock; it is a company that got really lucky 15 years ago when it bought into Tencent, which was a small Hong Kong. I think lucky is only part of it. It was a part of a strategy that Antonie Roux and of course the great Koos Bekker followed in that period.
They believed the internet was going to explode. They believe the best place at that point, this is around the year 2000 to take your bets were in the emerging markets so they had what was called a mud on the wall or throwing mud at the wall strategy and they bought many companies in the emerging market that were in the internet space. They didn’t have 100 percent success rate by any means. In fact, just before the purchase of Tencent they bought into the biggest internet service provider in China and took an R80mn write-off when that went bankrupt, but Tencent was the one that brought home the bacon. It’s now worth more than R1tn to the Naspers portfolio. They invested $34mn worth 800, or the numbers are just out of the ballpark anyway what, I think it’s worth $80bn now.
It’s been described by people in Silicon Valley as the greatest private equity investment ever and if you’d said, “Well, let’s buy Naspers on a PE or let’s buy Tencent on its latest profits” you would’ve been losing money in the last 20 years, so when you get to this point where there is a transformation in the industry, in the structure of the economy. The fourth industrial age is here. It’s not like when the internet boom came in the year 2000 where they were overoptimistic assessments of what might happen to the companies that were being listed there.
Well, I suppose if you bought Amazon you would be quite happy with your investment today, but this is a shift throughout and if you can pick those companies that are going to benefit increasingly through the various benefits that come who were first to market and who have big market shares, those are the companies that you should be invested in and those are the companies that you shouldn’t look at the PE ratios. I hope that helps.
On that note Kev Johnson asks who do you think the next Alphabet or Facebook is that they should look out for.
Well, definitely Amazon is the one that the whole world has stopped and looked at. I’ve no doubt that we… actually quite interesting on that, some investors believe that you should be offloading your win so that you can have more bets. I believe completely differently to that and the Amazon investment, even today I would be happy to buy those shares given the structure of the business and the way it’s going and definitely not be taking any profits. In fact, that’s the genius to a degree of Koos Bekker. He bought into Tencent, it’s returned unbelievable benefits to Naspers and yet despite huge pressure from investment analysts to have said “Well it’s overpriced” or at this point or that point Koos Bekker has stuck with it and I think that’s really all you need to do is to find your winners and then make your bet because you can see that those companies are doing things differently.
I love for instance, Discovery. I think it’s an incredible business. We can’t buy it because it’s listed in South Africa. It would be a bit silly to take Rands and put that into a South African company, but Discovery has also got something very different. It’s at the early stages of the shared value concept in business and many of the successful businesses in the future; I believe are going to be those who follow a shared value approach. How that works is that you make a profit by making sure that those who you serve get a tangible benefit as well from using your services. Now with Discovery, they are encouraging you to become healthier so that you can cut the price of your insurance on medical costs and life insurance.
Therefore, if you follow Discovery’s suggestions through its Vitality programme, where it promotes a get fitter, get healthier, do little things that will make you less of a risk, it benefits because it has to pay out less in claims and you benefit because it passes on the discount to you. Now there are many companies that are like that, the idea is to try and find the shared value pioneer in a particular industry and those are the winners of the future. So when you ask who’s the next Google/Alphabet or the next Facebook or the next Amazon, just look at companies like those who are giving you a service and making profit because you’re getting something that benefits you.
Think of Google, how much you would have to pay for library fees for instance, to be ridiculous if you didn’t have the Google service or Facebook, what it would cost you to send letters to people rather than what you can do now by just talking to them on your page or indeed on Amazon, what you would pay in additional costs to a retailer rather than getting it delivered to your home and unfortunately, in South Africa it’s hard to get your head around this but when you are in a country like the UK literally you shop on Amazon. If you need a new heater as we did this week, we went onto Amazon and had a wide selection, in fact we did it yesterday, and it’ll be delivered today.
That’s what the benefit of it is and that’s why if you want to find out more about Amazon, obviously there’s conference calls etcetera, but Warren Buffett has dedicated quit a lot of his annual general meeting, the Berkshire AGM this year to the Amazon effect. So to find something else that’s got that kind of effect, we’d think in both Facebook and Tesla we’re onto something here. We believe that Tesla is again, a shared value option. The reason for Tesla, just to get back to the purchase here is not just because Elon Musk is a boy from Pretoria, but primarily if you have a look at that share price graph in front of you, Tesla is now after being a bit of a rocket in the share price stakes for some time, it’s been pedestrian over the last few months, which does give us a useful buying opportunity and the reason for that is that Tesla is in the process of doing a merger with SolarCity.
Now not everybody on Wall Street likes this idea. This by the way is a Tesla share price of the last two years, so you can see had you bought it in February 2016 you could have got it below $170. We’re not paying much more since that and in fact, we’re going back almost two years in the purchase price that we’re paying here. It’s what was around October 2014, we’re pretty much getting it at a similar share price today, but Tesla is doing this merger with SolarCity and what bothers Wall Street is the management of SolarCity are the Rive Brothers, Lyndon, and Peter, who are Elon Musk’s cousins. Now unless you know the Elon Musk story you might be a little bit concerned that this is perhaps a bit of nepotism. Elon Musk himself by the way is the chairman of SolarCity, but the way they look at it, the Musk boys and the Rive boys grew up together in Pretoria, they had their first businesses as kids.
In fact, they made the Pretoria news as teenagers when they opened an arcade or were in the process of opening a video arcade and couldn’t get a licence because none of them were over 18 and their parents thought it wasn’t such a great idea, so they weren’t prepared to sign for them, but these boys, Lyndon, Peter, Elon, and Kimbal have been friends, they holiday together, they are close to each other, they know each other, they’ve been business partners from all that time. In fact, Lindon and Peter made quite a lot of money out of the first business that Elon Musk started because they invested there too. So to see Tesla Motors, which is Musk’s company or one of his companies merging with SolarCity, if you know that as background and you understand that they’re a family and a very close family, it’s really no big deal.
Why does Musk want to do it, well when you listen to the quarterly conference calls he says that it’s because the next big opportunity for both companies is in batteries, is in solving the problem of storage. Now SolarCity is the biggest installer of solar panels in the United States. It’s an incredibly successful company in its own rights. Tesla Motors as you well know is the pioneer in electric motor vehicles around the world. In fact, between both of them, if they can combine their efforts into storage, putting it differently, into batteries and getting that technology to benefit from Moore’s law, getting back to the whole exponentiality thing, a guy called Moore in the 1960’s, he worked for a company called Intel, discovered through his research that when you get a technology that is growing rapidly, its capacity or its power will double every 18 months for the same price.
So we see Moore’s law at work at the moment in batter storage systems, which is one of the reasons why those of us who understand what’s going on in Silicon Valley are so angry with the South African government’s decision or apparent decision to continue to overspend in an old technology in nuclear when all it has to do is just have a look at South African exports and what they’re doing in Silicon Valley with renewable energy, being the Rive brothers and Elon Musk. This deal between Tesla and SolarCity, to get back to the pricing, Tesla’s 93,5 percent of the deal, so SolarCity is a very, very small part of it, but Elon is of the view that by merging the companies together it’ll give solar a good boost to go more into its area. It now is going to start manufacturing “Why” he says “Should SolarCity be manufacturing its own storage facilities, in other words, batteries when Tesla’s doing the same thing, etcetera”.
So there are many good reasons why that’s going to be one equals, well probably in this case, only two and a half because Solar City is very small compare with Tesla, but still it is an excellent opportunity given that the market is a little confused, Mr Market’s a bit confused and grumpy and not too happy about the way that the deal is being structured. I think the deal is being structured perfectly. I don’t believe that given that they grew up together, Elon Musk is going to screw over the SolarCity, his cousins who run that business and I think it just gives us an opportunity now at last to back South Africa’s greatest entrepreneurial export. So I hope that I’ve made the case there. It is however, still fairly risky and that’s why we are only putting, of the cash that we have at the moment, two thirds into Facebook and one third into Tesla, but Tesla’s a great addition to the portfolio, could be another Amazon for us.
Alec, an interesting question from Jenny, she wants to know if the portfolio will stand up to Donald Trump becoming US president, “I’m looking at investing in Vanguard S&P. I’d like to drip feed money into it over three or four months” and wondering if she should go now or wait until next year with the election coming up in November.
That’s a good question and that’s something, when we look at timing it always comes back to bite us. If you have a look at Tesla, timing in this respect or waiting for it actually worked in our favour. When I go back a little more to Facebook, unfortunately, trying to wait and trying to time the Facebook entry point has been a mistake. So better to do it the way we do it, don’t worry about the big story and Warren Buffett says that as well. He says “You can’t tell what’s going to happen in the big picture”. If you ask him what concerns him most, he’s worried that there’ll be a nuclear explosion in a US City for instance, he’s concerned about that. That’s what keeps him awake at night.
Elon Musk is similarly concerned that some crazy guy is going to blow up the world, that’s why his whole intention is to try and get mankind colonising Mars, so that at least mankind as a species will exist into the future and that really is, that’s the reason, the big motivation that he has for his whole business, the whole SpaceX business and the whole advance into space is based on that premise that maybe some crazy guy is going to blow up the world because we now have the reason to do it, but if you start worrying about those kinds of things you wouldn’t sleep at night.
So to worry about a Donald Trump coming in as president which clearly doesn’t look like the case, but this has been, in the last two years we’ve seen so many upsets, you can’t bet against it and certainly don’t have any bets in that presidential election, but if you buy shares over a three-month period, you will at this point anyway be able to offset both the Rand and Trump effect if you like. I think one of the mistakes we did make ahead of Brexit was assuming that Brexit was going to be, that the Remain camp was going to win because everybody said so. The betting suggested 27 times the odds for a Brexit Remain victory as against the Brexit Leave, so everything was in that way, and we didn’t follow our strategy of buying over three months with Barclays. Had we done that, we’d now be showing a fantastic profit on Barclays.
We bought all the shares in April instead of perhaps buying it in April, May, and in June after Brexit and if as long as you stagger your purchases, you take out the timing effect, well as much as you can and you also in that way offset the risk of buying at the wrong time. So that would be your idea of dripping in, absolutely fine. What would Donald Trump do to the stock market? He would certainly have, he’d scare Mr Market, but Mr Market of course is not what you’re buying into. Mr Market, when he’s scared, that is an opportunity for long-term investors when Mr Market is over the top enthusiastic that is the time that long-term investors need to be concerned.
We actually like it when Mr Market gets overly depressed because that brings more value to the table for long-term investors and if Trump were to win and if shares were to take a horrible knock, what we might do then is re-look at the portfolio and see where the greatest rebounds are possible, but when you look at this portfolio it’s very, very unlikely that any investor who owns Amazon, Facebook, Alphabet, Apple, is going to give up their investment just because a fellow like Trump and with some pretty good disturbing economic ideas would take over. Remember as well, that although the President of the United States is a very powerful person, he also has a congress that he has to get his ideas through. He can veto them, but they can veto him as well.
So we might just have four years of stalemate if the worst go to the worst, but the US economy has the right structure, it has the right constitution, it still encourages human endeavour, it is a bet on human ingenuity and one man becoming president isn’t going to change that. I certainly would not let that worry me on my investment decisions. So we’re happy with Tesla, we’re happy with Facebook, goodbye Novo Nordisk. The performance of this stock as you can see, we didn’t know and I guess neither did any other investor know what was in store for this company in theory and this is why we bought into Novo Nordisk and this shows you the share price from the time that we invested.
It has a roundabout a third of the world’s insulin market, fantastic business that it is because once you have an insulin analysed for you by your doctor, you are unlikely to switch the product to someone else so there’s a huge amount of stickiness, but one of the things that we didn’t really take into account and I think investors generally were called out on this one was that the future opportunity for Novo Nordisk was always going to be in the United States and the United States is moving very aggressively towards trying to address its healthcare costs.
We know Obama Care has been an unmitigated disaster but there are many other things that are happening in the US at the moment where healthcare costs are coming under increasing scrutiny and the farmer companies on the one hand are being taken on by the regulators and others and on the other hand there are lots of new developments, lots of new investments, big data makes research much easier. In the old days if you wanted to research a cancer drug for instance, you pretty much had to be very, very well-resourced and that’s why you needed long periods of exclusivity if you were to invent a drug like that, you’d have these banks of researchers who’d be looking into it. Today data or the ability to crunch big data takes the human factor out of that and gives many, many people access to this market.
We’ve also seen people coming at it or companies coming at it in a different way. Alphabet, Google, or Google’s parent company for instance, has one of its target areas in the healthcare sector where it’s pulling a long intention now to those of you who might have seen many years ago, there was a movie; I think it was called “The Impossible Voyage” or “The Impossible Adventure”. It was about these little guys who were shrunk and then put into someone’s body to go and attack a malignancy there so the person could live. It’s that kind of thing which is now, then it was science fiction, it’s becoming science fact.
All of these things are changing the medical industry quite dramatically and as far as Novo Nordisk is concerned it went into the United States with one intention from a pricing perspective, it’s prices have now been really, really squeezed and to the degree that it then started exposing some of the problems within this Danish company, their Chief Executive was fired, they’re now going to be retrenching thousands of people and it’s almost like the façade that was there for many years of Novo Nordisk, of great solidity has now been stripped away. Also the transparency levels for companies that operate in Europe are much lower. They’re under far less scrutiny than those in the United States and as we know the more scrutiny you’re under, the better you tend to perform.
Now that all of these chickens are coming home to roost and Novo is having some pretty unpleasant surprises and we think that generally speaking it’s time to depart. As you can see those of you who follow technical analysis, it’s well below the moving average and the moving average continues to go lower and that’s on very high volumes in these shares, so many of the long-term holders are, like us deciding to take their punishment and to move on and we’ve decided that Tesla and Facebook are much better investment opportunities than Novo Nordisk.
Indeed, my hero Warren Buffett, (and this is nothing personal Warren), but we also are of the opinion that Berkshire Hathaway is more of a bet on old style America, whereas the fourth Industrial Revolution is going to be giving disproportionate gains to new companies, exponential companies and hence we have sold half of our shareholding in Berkshire Hathaway and invested and will be investing that into both Facebook and Tesla. If you have a look at it, from a technical perspective again, the share price has done very little in the last year. It has also been trading below its moving average for while now. Berkshire’s such a big company, is not really much that you and think that’s going to move the dial aggressively on this one. Also a bit of a concern here, its biggest single investment is in Wells Fargo.
Wells Fargo has ejected its Chief Executive, this after the scandal where two million accounts were opened on behalf of people who didn’t even know that those accounts were opened for them. Reason was that within Wells Fargo the incentive programme was encouraging staffers to open a minimum number of accounts to get their bonuses. Now 5300 staff of Wells Fargo have been fired as a result of this and the CEO has taken early retirement after appearing before congress and getting a real roasting there, but the issue that concerns me is that if Wells Fargo, which has been a very good performing bank for some years, if this is part of the DNA that it has people who work there who are prepared to cheat to meet their targets and it has a managerial culture that incentivises people to cheat to do so, then the problems might run a bit deeper.
Buffett himself says that there’s never just one cockroach in the kitchen and in this case, Wells Fargo worries me. That might weight heavily on the Berkshire Hathaway share price for a while, so it makes sense to us, we had a very large position in this company to lighten that so that we can put it into more interesting exponential businesses. I hope that explains it to you, Stuart, anything on your side?
Yes, Alec a few questions. Deon wants to know where do you see Facebook’s future revenues coming from?
Well, Facebook has everything going for it. It’s moving, if you like, into the Google space, how Google makes its money and not a lot of people kind of understand that, is it gets publishers like us at Biznews to carry advertising and it takes a chunk and a big chunk of that money that, that advertising revenue generates. So if you want to advertise on the internet, your first port of call is to go through Google AdSense or Google AdWords, you will buy certain words, you will pay a certain amount for your advertising, it’ll appear on many websites and Google will take a share of that as its costs as it’s fee.
The website owner, like ourselves would also get a share of it, but what’s happening is that Google’s pricing is continuously falling because there is an infinite number of people who can create pages or there’s an infinite number of pages on the internet, so as you get more pages, you get more supply and people will get a better deal for their advertising. What Facebook is doing now is it’s moving into that in quite an aggressive way with Facebook, Instant with publishers. So publishers like ourselves, we would now publish some of our stories on Facebook within the Facebook environment and share in the advertising that gets generated from it. That’s a whole new area and a whole new competition for Google, but on the other hand and much more, much bigger competition for outside of that for old media for the newspapers and television and to a lesser extent radio.
So that’s the first area. The other area that cannot be underestimated is that Facebook has hundreds and millions, literally, of people about whom it knows so much and to whom it can now offer new services and the obviously service is in financial services. So if you can imagine a world, time where we would probably have Facebook well, here in the UK when you go to buy something under £30 in a Starbucks or one of the other fast food outlets, you know your coffee or small restaurant, you simply hover your credit card on top of the payment machine. Indeed, when you go on the Underground now you can use your use your credit card again just instead of an Oyster card which some of you might know that, that works, the Underground works.
That is one step towards a completely electronic society and the biggest loser in that area has to be the banks because the payment systems are very expensive and have been built on the basis of having to keep capital requirements etcetera. The big disruptors in that area are people like Apple, who have now have something called Apple Pay and Facebook, which hasn’t even moved into the area yet. You’ve seen M-Peza in Kenya and similar type of payment vehicles which you can use on your cell phone, that’s an area where Facebook is now moving aggressively and their potential from that field is so big that it’s hard to get your head around it. Exponential growth is in prospect for Facebook for a long, long time. I hope that answers that question Stu.
Thanks Alec. There’s another one from Matt. He says, you mentioned that the portfolio helps South Africans diversify against the Rand. If he were to emigrate, would this portfolio still work for him wherever he goes?
Yes, when we get into the immigration question, there becomes many, many other issues that are relevant here, but what we’re saying is that this is a portfolio for South Africans who want to be less exposed to the eccentricities of the economic decisions or economic policy decisions that are being taken by the ANC government. If you want to boil it down to the basics, that’s what it’s about. South Africa is about half a percent of global GDP, so if you can imagine that makes it, I think it’s one 27th the size of California just to put it into context. It’s a small country and it is like a cork in the ocean and although there are some good businesses in South Africa and Discovery, which I mentioned earlier, is an obvious example of this, you really don’t want to only invest in half a percent when you have the whole world to look at. What this portfolio does is it gives you immediately that opportunity.
If you were to emigrate you could either keep he portfolio going in South Africa through Webtrader or you could sell it and buy the shares somewhere else, or you could actually apply to export the shares through exchange control, through the reserve bank and for most private citizens there is very little exchange control that will block you. You just have to go through the processes, you just actually have to make the applications through the reserve bank, so no impact whatsoever if you were to emigrate, this is your asset, you would apply for the externalisation of your asset in a way that you would with any other asset and then incidentally Standard Bank have significant operation in the UK still.
In fact the biggest building in Isle of Man is owned by Standard Bank, so the company does have, although it sold out quite a lot of its trading businesses etcetera to the Chinese partners, Standard Bank still has many retail operations here. So if you have the portfolio I’m sure they’ll be able to find a way or help you to externalise that if you were to emigrate, but that’s not the purpose of this. The purpose of this portfolio is for South Africans who are staying in South Africa not to be exposed to deterioration in the economy of the country.
Thanks Alec, just a quick one from Dirk. He says he sold his Novo Nordisk and he wants to know between Amazon, Facebook, and Tesla, which one should he invest in. He doesn’t own any other stocks at the moment. I think he can only invest in one.
I’d split them, I’d just split it three ways. Keep it simple. It depends how much money you have. As long as you have enough money that isn’t going to make it onerous because of the dealing costs. In other words, if you only have like $500 then my breakdown would be; number one Amazon, number two Facebook, number three Tesla. That would be my choice. If you only had $500 I would go with Amazon, but if you have enough that will enable the size of the deal to be of such a size that you aren’t paying huge commissions proportionately, then keep it simple. The way I’ve gone is for two thirds Facebook, one third Tesla. Maybe in this case you could just follow our portfolio really, 50 percent Amazon, 35 percent Facebook, and 15 percent Tesla, that’s what my breakdown of those three would be and if you can please try and buy it in three different periods.
Thanks Alec, I see time’s flying, but there’s a question here from Jaco. He wants to know if you had to start a similar portfolio today from scratch, would it be any different or would anything be different.
I’m very happy Jaco, with the way it’s structured today, as where we are right now. Clearly I’d have been a little more cautious about Barclays, but Barclays in Rand terms is offering great value. Remember Barclays, the purchase there was on the basis that they would be selling Absa in South Africa or Barclays Africa and that they’re going through a turnaround as well and that they’ve got a really good High Street franchise in the UK. It’s just cheap, Barclays was a very, very cheap option, and it is one of those companies that, with the new management retention, I’m confident it’s going to perform in the long-term. Outside of that I’m quite happy, I’m actually very happy with the structure of the portfolio as it is. You said time’s flying, so let’s just fly through the rest of the slides if we could. There’s the Vanguard S&P 500, that’s the index for the US market.
As you can see in the last year, very little, it’s up about 5 percent. Technical analysts would be a little concerned that it’s below the moving average, but this is one fifth of our portfolio, very defensive positioning. Alphabet, by the way those are the founders of Alphabet, Sergey Brin and Larry Page, still pretty young, two of the richest people in the world and they’ve done it on this shared value concept, so they’ve made us better off, so why shouldn’t they be better off as well. It’s had a big jump in the last couple of days. As you can see it’s now comfortably over $800 and only came in the last few days. Alphabet reports its financials on Thursday. Those of you who like to follow these things, analysts are expecting $8.63 in earnings.
If it’s any more than that you would probably see yet another spike. If it’s any less than that the share price will probably come back, but Thursday after the US market closes is when Alphabet will be releasing its results. Amazon, there’s Jeff Bezos, the genius that he is and it’s been a bad decision not to buy Amazon any time since March 2016. It really has been a wonderful performer and it’s funny this one, when we bought into the portfolio first in December 2014 it took a few months to find its feet and in fact, in some point in time it looked like we were going to have an underperformer here, but the business model is unbelievable and I would suggest that you follow very closely the reports. We’ll have stuff on Biznews tomorrow morning when you wake up.
Amazon is reporting this evening. If it comes out with revenues anything more than $30bn you can expect the share price to take another very sharp improvement. I’m going to watching for the Amazon prime. I’m a member of this, it’s a fantastic service. You get lots of free music, you have free videos, and you get free delivery to your homes. I think you pay £89 a year for that privilege. The membership of Amazon Prime has gone from 44-million, two quarters ago to 54-million at the end of March to 63-million at the end of June. Now imagine 63-million people are paying you call it $100 a year and that’s just coming in through a subscription model. If that goes any higher in the quarterly results, it’ll be an even bigger bull point for Amazon.
Apple has done much better in the last little while as mentioned, it was just over $90, and I think it touched $90 earlier this year. If you’d bought in May, you’d have been a very happy investor. Unfortunately, we bought a little bit early, but it has bounced off a couple of times off the long-term moving average and it’s now moving in the right direction. The results coming out today after the market closes, we watch therefore anything about $1.66 in earnings per share. That will give it another kicker. One of the big bull points and one of the reasons why Apple has been moving well in the last few weeks has been the problems that it’s big rival, Samsung has had, Samsung 7 experiencing spontaneous combustion, etcetera, IBM, well, not a whole lot more to report on this one until the quarterly results come out.
It is a long-term bet for us; it is a company that has had huge investments in the past, in the old economy and moving those into the new economy. This takes time, but it is doing the right thing, the strategy is right and certainly for long-term investors, it is starting to make even more appeal. This is one that Warren Buffett keeps buying into and we would be very, very comfortable to be holding onto these stocks. Barclays, that’s the UK investment. As you can see it has a long way to go to get back to where it was even a year ago at 250p but it’s moving in the right direction after that terrible knock post Brexit and we do think that given the opportunities that the company has with its turnaround that Barclays is worth holding onto.
As far as the Pound is concerned, well that’s been depreciating even against the South African Rands, so that’s taken quite a bit of shine off the Barclays share price, but on the other hand it does appear as though once the Brexit story is settled in the next two years the Pound will at that point start recovering. There is lots of uncertainty on the Pound in that period, so in that time rather take the Pound out of the equation and just look at buying the stock and there it is, just closing off the portfolio for you. As you can see the annualised return now is at 29 percent, that’s in the 22 months, 54 percent overall, that’s in South African Rand terms and the Rand itself has been a big contributor to that with its depreciation from R11.27 to the US Dollar to R13.79 as at today. Stuart, that’s pretty much bringing us to the end of the portfolio wrap up for today, anything more that we need to conclude with?
No all good this side Alec, nothing else. Thanks very much.
Well, it’s been my pleasure once again and we have some new stocks, two allies and new stocks to look at. The idea of this portfolio please is it’s a long-term investment; the average period of holding is forever. I’m very happy with the portfolio the way it’s currently structured and if you have not come to the party yet, if you haven’t invested in these stocks yet and are thinking maybe now is the right time to do it, my strong advice would be to stagger it in over three months. So if you have, say $100 000 that you would like to put into this portfolio, that would be I guess, around well $100 000 is more than R1m, let’s just say you have R1m to use that, easier then the R1m you don’t have to ask for exchange control approval at the moment, you literally can give that to Standard Bank today and they will be able to convert that into Dollars for you.
You wouldn’t want to do that though, you’d want to shift it across one third, so R330 000 today and then allocating that according to the holdings again in one third at a time. So you take your R330 000, put it into the holdings as we have them here, you can do that all yourself pretty easy and then in a month’s time you take your next R330 000 and in the final months’ time you take your final R330 000. So just stagger it over three months that will take away much of the risk in currency, in getting wrong on the day that you’re buying in and also much of the risk in the actual share price itself. I hope that, that helps you to grow your wealth and look forward to being back with you next month.
Thanks Alec.
